No place for jingoism in Woolies' sell-off of Dick Smith

Entrepreneur Dick Smith has been very vocal in the past few days about the prospect of his namesake retail business falling into “foreign hands”. Despite him selling the electronics chain to Woolworths two decades ago, he has threatened to “trash the brand” if some foreign outfit tries to buy it.

The argument he is peddling is spurious at best. The principal issues appear to be that profits will be skimmed off to some distant land, national pride will be irrevocably dented, and some Aussie battlers will find themselves slaving away in the employ of absentee masters.

It is very unclear why he and the more alarmist chunks of the popular media place so much importance on the shifting national identifies of existing businesses. Similar handwringing occurred with regard to acquisition of Foster’s by SAB Miller.

Perhaps it reflects Dick’s own background as a business owner - someone who derived their income from the “surplus” or profits of the firm - as he is fixated on that small part of the financial impact of business operations. But for almost all stakeholders in the firm, and the overall health of the economy, the question of the location of the major shareholders (and principal decision-makers) should be of little importance.

Consider the specifics of a sale of the Dick Smith Electronics concern by Woolworths. The division currently consists of 433 stores across Australia and NZ (we’ll get back to this Trans-Tasman dimension in a second), and made $1.8 billion in sales last year.

The economic and societal impact on Australia of these operations is most heavily felt in terms of employment provided and the firm’s transactions with a variety of parties up and down its supply chain. The firm employees approximately 5000 staff, which likely corresponds to in excess of $250m in wages paid out per annum. That remuneration flows through the economy as spending, savings and taxation with all the typical multiplier effects.

So too Dick Smith Electronics pays money out to landlords, governments at various levels, to supply chain participants (local and foreign), and to other ancillary service providers. In fact on the $1.8b in sales last year (across the Australia and NZ operations), after all these outgoings, the “earnings” to owners of the firm (the residual “surplus” or “profit” extracted by Woolworths) were a paltry $20m or so.

That is the only part of this large economic “pie” really on the table for any foreign suitor. If Dick Smith Electronics were sold to a non-Australian entity, they would be buying the right to extract such profit, but also taking on the role of paying the wages bill, and maintain the income streams to the other parts of the Dick Smith sphere of activity.

The firm would still pay taxes, rents, and provide consumers with access to products. The firm might remit profits offshore, but it’s just as likely said profits would be reinvested in Australian in an attempt to improve the business and its performance.

This is hardly a case of “selling the farm”. Unlike acquisitions of some manufacturing or technology based firms, in retail there is very little scope for relocating key value-generating activities offshore. And unlike extractive industries or agriculture, resource scarcity is not really in play. Mr Smith has chosen one of the least impactful foreign investment scenarios to bemoan.

There is also one clearly irreconcilable contradiction in the position Smith takes on foreign ownership: how to view outward foreign direct investment.

If the logic says Aussie interests are hurt by inward investment (e.g. by acquisitions of local firms by big bad foreign folks), then surely any instance when an Australian firm expands offshore is similarly deleterious to the host nation. Why didn’t Dick Smith come out in defence of New Zealand’s citizenry when his namesake firm made their imperialistic entrance into New Zealand? How can we stand by and allow Westfield to buy up the shopping centres of distressed US property moguls? Where was the concern for Swedish audiologists when Cochlear stormed into Sweden and bought Entific back in 2005?

Perhaps Dick Smith sees our outward investment as more benevolent, or at least, in our national interest. That was the logic of mercantilist trade policy, and too often public debate on foreign ownership takes a similarly jingoistic and naïve position. We need to recognise that ownership only generates a residual right to profits. The all important economic activity that drives prosperity is pretty much blind to who is at the end of that pipeline. And typically we should be too.

A version of this article first appeared on Andre’s International BS blog.

Andre Sammartino does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.