Smiths City Group (NZX:SCY)

I am a shareholder in Smiths City Group, the New Zealand Stock Exchange listed retailer. It is a long established business that has had its ups and downs over the years, but generally it could be relied on to return a reasonable dividend. That changed recently with the suspension of a dividend off the back of reported losses. What's going on over at Smiths City?

I'm not happy with the direction the company is taking and I won't be changing my mind on that opinion any time soon. That's because it's been downhill for a while, at least 10 years or possibly longer. I put this down to one simple factor: they do not know what they are doing.

Harsh you might say. Possibly, but reading their latest Annual Report prompted me to make this post. The report, replete with typo's, has a schizophrenic feel to it; on the one hand talking about its 100 years in business and the next minute about all things fresh and new. The problem with the company is it has moved away from what it was good at to riskier business that it has never been good at. Don't they realise this and why go toward an area of business they've demonstrably failed at in the past?

If we look at Smiths City from the old days; it was a boring business that looked after the locals. They sold trade tools, hardware, appliances and some home furnishings. Included in that list was the auctioning and trading in secondhand goods. They were actually quite good at all this and Smiths was always the place for a bargain. What was Smiths not? They were not trendy, or fashionable, or up-market. Their brand is irrevocably linked to trade, blokes, bargain hunters. That's it.

Now what are they doing? Investing heavily in their on-line presence, and store fit-out, and overall branding trying to impress on customers that they are now good looking. Right, good luck with that one.

Much earlier they got rid of their hardware, a steady earner, I've lost count of the number of times over the years that I've been in Smiths amongst the tools to discover a father with his child buying tools for the first day on the job as an apprentice. Smiths has lost that loyalty amongst customers and is chasing dreams in Auckland, a notably fickle market, where Smiths can only be seen as dead naff.

Then they'd bought the Wellington business of LV Martin, a local appliance retailer, and re-branded it Smiths City. Do they not understand that Smiths is generally openly laughed at in Wellington while LV Martin is loved? Yes, Smiths are that stupid.

On-line presence is really not that important for Smiths. They used to specialise in locations where the locals have few options, buying online means waiting days or even weeks and when it arrives it will be damaged. Or just go down to the Smiths store and Bob's your uncle. This store does not have to be flash. So what do they do? They spend on flash fit-out everywhere.

The problem they're faced with is the amount of money required to prove they're now sexy. This is way out of proportion to what they'll ever make from actually being sexy, presuming they can actually reach that goal.

What they should be doing is rather simple. Remember what they're good at, and do that often. At the moment they've forgotten about it. Then add bolt-on acquisitions that are aligned and don't spend outrageously trying to tart things up. I'm thinking farm supplies, trade tools, builders supplies, maybe some agencies on valuable imported lines and so on. And get back to secondhand and even auctions to boot. Business in Auckland and everything stylish is a mirage.