Year 12 IB Extended Essays 2017

high discounts and clearance sales given to those who bought “inactive” products from the

stores. This write down was equivalent to over $60 million worth of stock which was mostly

sold at a very low-profit margin or in fact a loss, further putting Dick Smith in unpreventable

debt with banks and suppliers.

These points further prove the fact that location had a large contribution to the decline of Dick

Smith.

The idea of expanding the store network of Dick Smith had some major attributes to the overall

collapse and failure of the company as a group due to restricted cash flow. The extensive

increases in costs associated with rent and further administration costs created a decrease in

positive cash flow seen in the years 2013 to 2015 due to the high payments to suppliers and the

inventory build-up (Figure 5). In order for the Dick Smith Group to continue with its expansion

plan, there was a need for a large financial commitment that would hinder its ability to be

financially stable, thus reducing the finance capabilities of the company with banks. These cash

flow issues led to an abundance of restrictions on the company such as the following:

-

Reduced credit limit

-

Placed on cash on delivery terms

- Placed the account on hold until payments were received - Required a bank guarantee to support the supplier account.

The desire for expansion of stores for Dick Smith was almost unachievable when the

comparison of store numbers to the company’s market share in the 2015 Financial year was

made. Dick Smith can be seen holding a small 9% of the market in the consumer electronic

market with a massive 394 stores whereas JB Hi-Fi (JB) held the largest share in the market

with 26% and half the number of stores of Dick Smith at a steady 187 across Australia (Figure

6). It is also shown that JB saw a yearly sales figure of $3.7 billion, more than double that of

Dick Smith. Thus, location can be seen as having a large role in the collapse of Dick Smith as

the higher costs involved in catering for the added stores was not justifiable with the sales

quantity or market share the company required to stay afloat.

Although Dick Smith was reporting profits in these years of 2013 to 2015, the financial

commitment of major banks was unjustifiable because of the company’s ongoing decrease in

market share amongst the major consumer electronic market (Elizabeth Knight, 2016).

8