By now, almost everyone in business will have heard news of the demise of Dick Smith Electronics and the imminent wind-up of Masters Home Improvement. Whilst the failure of neither business should come as much of a surprise in hindsight, it is instructive from the perspective of a business owner to consider exactly what may have caused these two behemoths to fall, and the lessons that can be learned and applied to our own businesses.
Simon Downes from Canstar identified the immediate catalyst, if not the underlying cause: “The problem is not enough [people] went there. That’s what killed it — they didn’t get people through the door.” His comment was in reference to Masters’ malaise, however can be equally applied to Dick Smith. As mentioned in their ASX Announcement regarding voluntary administration, Dick Smith’s “sales and cash generation in December were below management expectations, continuing a trend experienced during 2Q2016”. Translation: despite slashing prices and doubling down on advertising spend, not enough people walked through their doors and made a purchase.
Whilst the catalyst is obvious, the underlying reasons require more thought. Why did not enough people walk through the doors of these major brands to make them viable? It’s impossible in the space of one article to determine and cover every factor that contributed to each individual situation, but there is one common factor that stands out: a failure of both organisations to define or understand their target market and effectively service its needs. Both Masters and Dick Smith are guilty of this critical misstep, although in slightly different ways:
Masters’ mistake was in failing to understand the needs of their target market. They attempted to import Lowe’s American model into Australia, assuming it would work here without putting nearly enough thought into it. As CBA analyst Andrew McLennan correctly pointed out in this WSJ article, Masters aggressively rolled out new stores before making sure customers wanted to buy what it was offering.
Defining the target market for big-box hardware stores, and understanding their needs, should be a fairly simple task. Briefly:
- The target market is DIY’ers
- This market is overwhelmingly comprised of males aged 25-60
- In general males in this demographic prioritise product range, ease of locating products, experienced staff and price over the aesthetics of the store
Instead, Masters created much more spacious and attractive stores (13,500m2 on average compared to Bunnings’ 8,000m2), filled with non-DIY products such as appliances and kitchens, with confusing store layouts, relatively inexperienced staff and higher prices – completely the opposite of the needs of their target market. One only has to examine some of the feedback from a recent Canstar survey to see the common complaints:
- “Staff can be very vague about products and where they are in the store”
- “Staff unhelpful and don’t know their products”
- “Customer service is poor. Not as helpful or available as Bunnings.”
LIMITED RANGE AND POOR LAYOUT
- “Can’t find items, as they are not in a sensible order. Too many products that are out of category for a hardware store.”
- “The store layouts are terrible and they don’t feel like a proper hardware store.”
- “Range is rubbish overpriced and not really a hardware store where you can get real tool which will last a lifetime and not need to be replaced every six months or year so you come back and spend more money.” (ouch!)
- “Not as good a range of products and brands as Bunnings.”
If Canstar can extract this information via a simple customer survey, one has to wonder how the Masters executive team failed to do so for more than 6 years. It’s an inexcusable failure of management, particularly when dealing with such a large, entrenched competitor and putting at risk billions of dollars of shareholder funds.
Dick Smith’s failure was not so much a failure to meet the needs of their target market as not even bothering to understand who their target market was or to meet the needs of any market at all.
One only has to look at the divergent fortunes of Dick Smith and Jaycar over the years to understand Dick Smith’s failing. When Jaycar was founded in 1981 it was essentially a carbon copy of Dick Smith; in fact its founder was Gary Johnston, one of Dick Smith’s first employees. After Dick Smith sold a controlling interest in his eponymous business to Woolworths in 1980, he encouraged Johnston to open his own store, which he duly did.
Jaycar stuck to its successful formula, and is reportedly now worth $500m. Dick Smith, on the other hand, radically changed its business model to become another player in the crowded consumer electronics market, rather than continuing to cater to the hobbyists which formed the backbone of its customer base from inception.
Fast forward to now and it’s clear to see the effects of Dick Smith’s long-term lack of strategic direction. Its current product range is a puzzling mishmash of electronic components, technology, consumables and – most recently and strangely – home appliances. This latest shift in strategy was proudly heralded by former CEO Nick Abboud in August 2015, when he announced that “coffee makers, toasters and vacuum cleaners” would be introduced into Dick Smith Stores. Its obvious lack of strategic direction around product range naturally translated into confusion amongst consumers, causing many shoppers to avoid its stores in favour of competitors whose range was more clearly understood.
This lack of direction was not only evident in Dick Smith’s product range but also its slogan. Until recently its slogan was “talk to the Techxperts”, harking back to the days when they carried a comprehensive range of electronic products. However, this slogan struck a discordant note in light of its comparatively small technology range and many out-of-category products, as well as the lack of technical expertise amongst its staff.
In short, no one knew exactly what Dick Smith Electronics was, least of all its management team. It was only a matter of time before this confused, directionless enterprise failed.
The Lesson for SME Businesses
The lesson is clear: you MUST be able to clearly define and intimately understand the needs of your target market at all times. This knowledge should be regularly refreshed and drilled into every staff member in your business, and should inform every aspect of your business strategy. In addition, never just assume that you know your market and its needs; take the time to regularly ask your potential, present and past customers for their opinion.
Some important questions to ask (depending on who you’re asking) include:
- What made you decide to use our business?
- What do you think we do well?
- What do you think we need to improve?
- Why did you decide to go elsewhere? (in the case of those that no longer do)
Use this feedback to critically examine all aspects of your business. As the old saying goes, if you don’t look after your customers, someone else will!