A lot has been written about the collapse of Dick Smith MKII. Mark-I failed in the hands of Woolworths, and Mark-II now in receivership. A successful Mk-III is now out of the question.

The major question raised has been on how the private equity firm Anchorage Capital Partners might have done some black magic on Dick Smith to convert their $115m acquisition from Woolworths into a $520m listing on the ASX within just 15 months. Black magic, or financial wizardry indeed. Getting a 450% improvement in valuation within 15 months cannot be a result of a 450% improvement in ‘real revenue’ or ‘real profit’.

Notwithstanding how Anchorage managed to convince investors to spend $520m on buying shares in a reborn Dick Smith, there is one void not being addressed in recent reports of the company’s demise. That of the business model of Dick Smith.

What did Dick Smith actually do to earn revenue? It is in the consumer electronics retailing business. It is the same business of competitors including JB Hi-Fi (today worth $2 billion), electronics franchises of Harvey Norman and The Good Guys.

Retailing of consumer electronics is a tough, low-margin game. Those retailers must sell the “brands” like Samsung, Apple, LG, SONY and Sonos in order to bring customers to the store. But brand owners allow small profit margins to retailers. Usually around 15%, leaving little room for discounting to customers. A 15% margin has to cover any competitive discounting, pay staff wages, store rent, interest on holding stock etc.

Once the customers are in the store, higher profits can be made through the sale of ‘generics.’ Supplementary generic products carry fat profit margins. Some as much as 80%. The customer who buys a Samsung TV earning the store a margin of as little as $50 say is encouraged to buy a $100 cable to connect the TV to a Blu-ray player that makes $80 profit for the business. But if no Samsung TV is sold, a cable is unlikely to be sold. It is a host-beneficiary sort of game.

The trouble with the business model is the insatiable growth of online sales of brands and generics. Dick Smith and its competitors have all tried so-called online sales via their websites, but these are subsidiary (not core) to their real physical presence stores.

No doubt pure-online vendors like Kogan are laughing-out-loud because they do not pay rent to Westfield and other landlords. For Kogan, online is the do-or-die business model. Their only challenge is to get customers who are willing to wait a few days for delivery. Walk-in-walk-out customers seeking instant gratification of getting their hands on the product are still out there. But it is a declining lot. The more consumers get used to buying online with slight delays in delivery, the more challenges Dick Smith (if it is re-re-born) and its competitors will have in future.

It is not inconceivable that some brands will eventually kill retailers by opening their brand owned stores, like Apple has done. There are not many brand CEOs or boards courageous enough to say today “the Apple store model would never work for us.” It works for Apple and will work for Samsung, SONY (both have already done it) and the rest too. Brand stores are in reality showrooms in the true sense of the word. Showing off nothing but the range of products of their brand – and no competing brands in sight.

What if customers could order brand-name products and receive delivery within 24 hours?  Is this possible? Indeed, it is. Australia Post will not be the one to do it, but new – yet to be started – agile pure delivery channels will. In fact, it is a revision of the old Just-in-Time (JIT) business model used in Japan for decades. It is a hybrid “drop shipping” formula where stock is held not by the vendor making the sale price but by a warehouse operation holding stock for every vendor within miles. In Australia, the actual physical delivery from warehouse to home is still being refined.

Going back to Dick Smith and it is business model, it is hard to see how it could have survived once you stripped away the financial black magic done on its books. Getting a better discount than say from JB Hi-Fi will always play a role to attract customers, but pure discount is not a long lasting business model.  When major shopping centers have 2 or 3 retailers selling the same consumer electronics there is no real added-value to the customer. It is not price, and it is not convenience.

Investors who have blown $520m on buying shares in Dick Smith MkII would have been better off waiting till Kogan lists on the ASX. Why? Because it is a business model makes more sense than financial gymnastics on balance sheets and profit and loss statements by PE firms.