Stuck in the middle.

in Money by Anthony Fensom
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The bargain basement sale of Dick Smith Electronics along with the demise of mainstream retailers such as Darrell Lea and Allans Billy Hyde has sounded the alarm on “middle ground” pricing.

By changing itself under Woolworths’ ownership from a specialty outlet for hobbyists to a general electronics retailer, the Dick Smith chain saw profitability slump as it came under pressure from JB Hi-Fi at the low end and Harvey Norman and others at the upper range of pricing.

Despite fiscal 2012 sales of $1.5 billion from its 325 stores, Dick Smith posted a net profit of only $25 million, with a 1.6 per cent profit margin.

After more than 30 years of ownership, Woolworths sold Dick Smith in September 2012 to private equity firm Anchorage Capital Partners for just $20 million. The sale price was $4 million less than it originally paid entrepreneur Dick Smith, and required a $420 million write-down by Woolworths.

With the collapse of other “middle of the road” retailers such as Borders, Clive Peeters and WOW Sight & Sound, are retailers better placed to focus on the upper or lower end and ignore the middle?

Offer value to customers

The short answer is no, according to at least one marketing consultant.

“Being in the middle isn’t a bad position providing you offer value,” says Peter May of Xavca Pty Ltd. “It can be a sound marketing strategy providing the cost base, product quality and service levels support that price positioning.

“If you have an image of selling quality products then they may not be priced at high end, boutique prices, but they may still be good value for money and you can still earn a reasonable margin, provided they’re priced accordingly.”

Selling a lemon at a premium price does not make for a happy customer or sustainable business, while selling a quality product at below cost price is also a good way of going out of business.

Understand market changes

Pricing strategy can be driven by a number of objectives, ranging from gaining new customers and market share, improving turnover or just generally supporting product positioning.

In the case of Dick Smith, its decline was due to a structural shift in customer demand, according to May.

“Dick Smith’s main failure was in adjusting the product offering rather than its image. The credibility that Dick Smith had established as an electronics-savvy company serviced by ‘nerdy’ staff and stocked with ‘nerdy’ bits and pieces could surely have been maintained by understanding what its customer base was moving to in terms of products and services and how best it might satisfy that demand.”

He suggested the usual marketing tools of focus groups, customer surveys and studying larger market retailers would have benefited Dick Smith in adjusting its product range and marketing strategy.

Dick Smith’s new chief executive, Nick Abboud, aims to curb discounting and boost gross margins, seeking to match JB Hi-Fi’s 5 per cent profit margin. His three to five-year turnaround plan stipulates improved markdown management, changing the merchandise mix, more private label products, better layouts and new locations.

“Dick Smith was known for having the best and biggest range of accessories and over the last couple of years that’s been removed,” Abboud told the Australian Financial Review. “That’s where the margins are and that will drive foot traffic, and then it’s an opportunity to get that cross-selling across computers and televisions.”

Being stuck in the middle can be a good place at times – if the price is right.

This article represents the views of the author only and not those of American Express.

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Anthony Fensom

Anthony is a communication consultant at BWH Communication and a freelance writer with 15 years' experience in the stockbroking and media industries of Australia and Asia. He is a regular writer on business and other issues for publications in Australia and Japan. He consults on communication strategy to businesses ranging from private enterprises to professional service firms and publicly listed companies, with a particular interest in entrepreneurship in all its forms.

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