The Economics References Committee has spent the last three months trying to uncover the causes and consequences of the collapse of listed retailers in Australia – Dick Smith being the most notable in recent times – with receivers calling time on the business in February this year and 3,000 people out of a job.
The senate inquiry looked at:
· The conduct of private equity firms around corporate takeovers
The role of the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission in overseeing corporate takeovers
How appointing external administrators affected secured and unsecured creditors, including employees and consumers
How external administration affects gift card holders and people who have made deposits on undelivered goods
Remedy for gift card holders who can’t redeem gift cards once external administrators have been appointed. These could include making directors personally liable for refunds and forcing external administrators to honour gift cards.
Failure theories
Some commentators have laid blame squarely at the feet of Anchorage Capital Partners (ACP), which took over Dick Smith for $115 million in November 2012 and floated it publicly just over a year later for $520 million.
There has been speculation that ACP exerted enormous pressure on Dick Smith’s management team to hit sales targets and pushed them into making decisions, such as emphasising private label goods over well-known brands where margins were higher, the endgame being to exceed the float prospectus guidance and make the company more attractive to investors.
ACP defended itself in its submission to the senate inquiry, arguing that its ownership did not contribute to Dick Smith’s financial meltdown: “Publicly available information shows that such claims are misleading and factually incorrect.”
“When Anchorage’s involvement with Dick Smith ended, the company was in a strong financial position, had no borrowings, and had strong earnings momentum,” ACP said.
“We await the release of the administrators' report which we hope will provide clarity on how a company with such a strong balance sheet and operating momentum has ended up in this regrettable situation so suddenly.
“Given the administrators' report has not yet been released, Anchorage may seek to contribute further to the senate inquiry following the release of the report.”
There’s an excellent piece about this by Sydney Morning Herald business reporter Michael West, read this here.
Others have blamed Dick Smith’s collapse on relationships souring between the retailer and banks NAB and HSBC, after the company paid off unsecured creditors ahead of reducing its debts with the bank and made a series of snap decisions, including a massive write down of inventory in November 2015.
Gift cards
Gift cards will have been one of the main talking points during the inquiry, particularly after external administrators Ferrier Hodgson refused to honour them following Dick Smith’s implosion.
In its submission to the senate inquiry, consumer advocate CHOICE said it was concerned about the lack of protection for consumers with gift cards when retailers tank and the dearth of information available.
“Gift cards effectively translate the value of cash into a product, with far more limitations, terms and conditions and creating clear benefits for retailers and obvious risks for consumers,” said CHOICE’s submission.
“These risks are exacerbated in the case of a collapsed retailer where ambiguity and a lack of regulation cause problems and confusion for consumers. Reforms are needed to clarify consumer rights for gift cards.”
CHOICE recommendations include: a minimum of five years expiry; external administrators to honour all gift cards while the retailer continues to trade; customers being able to cash out their cards if the value drops below $10.
Several recommendations were directly specifically at large and medium retailers, aimed at giving consumers access their gift card records online and having the option of storing their details and funds from gift cards. The lobby group also recommended that the proceeds from gift cards sold by medium and large retailers be held in a trust account.
CHOICE said it received a steady stream of complaints about gift cards, which spiked when Dick Smith collapsed.
But the Australian Retailers Association (ARA) and Australian Merchant Payments Forum (AMPF) denied there was a problem: “There is no evidence of consumer detriment in this market segment” insisting “consumers are comfortable and confident in their use of gift cards.”