Tablet Business

At RadioShack, a history of hits and missed chances

During nearly a century in retailing, RadioShack has reinvented itself time and again as the American consumer moved from primitive radio kits to ever-sophisticated audio equipment, CB radios, and then computers and wireless phones.

But now the Fort Worth-based consumer electronics pioneer finds itself tethered to a bygone era, with its 4,000 company-owned stores as much a burden as a benefit, its website delivering only modest returns in this cyber age and competitors — from behemoths like Amazon.com and Wal-Mart to wireless providers — attacking on all fronts. The company warned recently that bankruptcy could be near if it can’t secure new financing.

Just nine years ago, RadioShack enthusiastically opened its new $200 million headquarters, a complex of 900,000 square feet situated majestically on 38 acres on the banks of the Trinity River. With a 500-seat cafe, an open floor plan and a fitness center, it was supposed to help propel the chain to greater entrepreneurial heights.

Interactive: Tracking RadioShack’s rise and fall

But even as consumer electronics boomed with radically new inventions at every turn, the retailer with a national footprint is struggling for oxygen. Sales have dropped 33 percent since 2005, when it recorded net profits of $267 million, compared with last year’s loss of $400 million.

Observers cite numerous reasons for the steady decline, including missed and squandered opportunities.

“Call it death by a thousand cuts,” said Ed Fox, who teaches marketing at Southern Methodist University’s Cox School of Business. “RadioShack is left with all these stores and not much differentiation” from big-box rivals and category killers like Best Buy.

“And the market for hobbyists and do-it-yourselfers has evaporated,” said Fox, a West Point-trained engineer-turned-professor. “Unlike the first small computers that arrived as kits, you simply cannot open most consumer electronic devices and work on them.”

RadioShack’s very name is both a blessing and curse, still carrying strong national brand recognition yet profoundly anachronistic in this age of digitization and cloud storage, not to mention smartphones that combine the functions of numerous separate devices.

With each new app, RadioShack is deprived of yet another opportunity to sell a product. In January, a blogger named Steve Cichon reprinted a 1991 RadioShack ad, noting that nearly everything being promoted at that time can now be performed with his Apple iPhone.

Apps have replaced a calculator, a computer, a camcorder, a CB, speed dial, a portable CD player, a scanner, an answering machine and a tape recorder. All would have cost $3,054.82 in 1991 dollars, the equivalent of $5,100 today.

Only two items couldn’t be replicated by an app — a $79.95 radar detector and a $149.95 Optimus three-way speaker with a massive 15-inch woofer.

Not mentioned are the radios, cameras, timers, MP3 players, flashlights, video games and GPS devices for which there are apps.

At the company’s shareholders meeting in June, a retired executive named Bernie Appel stood up to defend the retailer’s embattled new chief executive, Canadian-born Joe Magnacca, calling him a gifted merchandiser who should have been hired years earlier instead of number-crunching types who trimmed costs to maintain profits but didn’t adequately update the stores or product lines.

Magnacca, who energetically unveiled hip new concept stores after being hired in February 2013, appears to be the best-equipped executive to lead the chain in years, Appel said.

But none of his predecessors have faced such grave challenges from a hypercompetitive marketplace that changes at Mach speed. The company lost $235.7 million in the first six months of 2014, while same-store sales tumbled nearly 17 percent.

“Joe Magnacca has all the right skill sets and experience,” said Len Roberts, who succeeded longtime CEO John Roach and served as the top executive from 1999 to 2005, when RadioShack owned an enviable chunk of the wireless business. But, Roberts added, Magnacca “inherited a compromised brand and a very short liquidity runway.”

RadioShack’s lenders, who have extended $250 million in second-lien term loans, declined to approve Magnacca’s plan to close as many as 1,100 underperforming stores, limiting closures to 200 a year and escalating the financial crisis.

The impasse might be overcome if a major shareholder, the New York hedge fund Standard General, can line up new investors and buy Magnacca time to carry out his turnaround plan. The company said its cash balance had dwindled to $30.5 million by Aug. 2.

But are the chain’s problems bigger than the liquidity issue?

Bradley Thomas, chief retail analyst at KeyBanc Capital Markets, said RadioShack wouldn’t be in such a credit predicament if it hadn’t paid out $300 million in dividends from 2004 though 2012 and spent $1.7 billion buying back stock over the past decade.

Then there was the loss of lucrative residual payments that carriers made to RadioShack on two-year wireless phone contracts it sold, a model that Roberts crafted a decade before. Under CEO Julian Day, RadioShack received lump settlements from two major carriers to end the payments, which had brought more than $100 million to the chain’s bottom line, at virtually no cost.

When Roberts created the residual model, the big carriers were without their own extensive network of brick-and-mortar stores and needed RadioShack’s huge network of about 7,000 stores, at one time second only to the Walgreen Co. in number, Thomas said.

That’s no longer the case. Verizon, AT&T, Sprint, T-Mobile and smaller players have numerous company-owned stores in most markets, and RadioShack’s rivals among authorized dealers fill in any gaps. And with competition high, margins on handsets are low, about 20 percent.

‘The Technology Store’

The odd part is that RadioShack is operating in perhaps the fastest-growing segment of retailing — consumer electronics.

It’s all the more poignant because under iconic former CEO Charles Tandy, RadioShack established itself as the go-to store for personal computers, having mass-marketed in 1977 the first fully assembled unit — the TRS-80 — beating out Apple and Atari for market share for several years.

Tandy, who bought the small electronics chain in the 1960s and added it to a conglomerate that had started with a leather goods retailer co-founded by his father, approved an initial production run of 1,000 computers — for use in stores if they didn’t sell. More than 100,000 sold the first year; Tandy died suddenly in 1978.

Later, RadioShack — carrying the moniker “The Technology Store” — would become the first to mass-market an early cellphone.

“This is the retailer that sat at the heart of the electronics revolution and had many paths to glory, most of which it took,” Steven Davidoff Solomon, a law professor at the University of California at Berkeley, wrote last week on The New York Times’ DealBook blog . “Yet, in what should be a Harvard Business School case study, it executed them badly.”

The chain phased out computers at RadioShack in 1993 and, instead of concentrating on its core strengths, the company made ill-fated forays into new retail concepts, Computer City, Energy Express Plus for batteries, McDuff appliance stores, Video Concepts and the Incredible Universe megastore.

“None of these worked, and all were either closed or sold off by the late 1990s,” Solomon said.

“RadioShack could have been Best Buy. It could have been Amazon. It could have been Dell. The paths that RadioShack could have taken are numerous. Instead of choosing one, it chose them all, walking away from its place as a hobbyist’s dream.”

Tandy Corp. was punished by Wall Street decades ago for being overly dependent on the CB radio boom. SMU’s Fox said the company made a similar strategic error by pushing heavily into wireless without keeping the contracts with carriers that paid residuals, or a percentage of the customer’s monthly cellphone bill.

“Providers are willing to lose money on phones to tie up contracts,” Fox said. “Having sold the residuals didn’t do RadioShack any good, and it was left selling a product that carriers are giving away.”

Perhaps toys, even coffee beans, might have proved more profitable in the long run, he suggested.

It seems impossible to return to its bread-and-butter business selling extremely high-margin house-brand parts, accessories and batteries.

For those, KeyBanc’s Thomas said, a consumer no longer needs to go to RadioShack. “You can go on the Internet — Amazon — or to Apple stores for Apple cords. If you are not a price leader, and RadioShack is not, you are going to be in trouble in the long run.”

With the Internet, checking prices has never been easier for consumers.

And RadioShack has been a cyberlaggard, recording the third-biggest Web sales decrease in a decade, from $65.1 million in e-commerce in 2003 to an estimated $51 million in 2012, a 21.7 percent decline, according to Internet Retailer’s Top 500 Guide.

Stefany Zaroban, the industry publication’s associate director of research, said online sales rose to an estimated $52 million last year, a modest 1.9 percent increase over 2012.

Would RadioShack’s fortunes be different if the company had learned to be a competitive online retailer 10 years ago?

“Possibly,” Thomas said. “The retail industry as a whole is about companies finding new ways of distributing goods. And this is even more pronounced in consumer electronics than anywhere else.”

New ideas

Fox said RadioShack’s biggest headache — 4,000 company-owned stores — might be its salvation if it can figure out how to repurpose them.

“Right now, they are like a network of Shell gas stations when everyone is driving an electric car,” Fox said. “Where they go from here is anybody’s guess. It’s not the most sunny analogy, but you have to think of Kmart. When Ed Lampert bought it, he realized he could sell a quarter of the stores for the value of the company.”

Magnacca is not without ideas. The CEO is working to see a return to private-label brands; collaborating with tech developers to bring unique products into stores; connecting with the growing Maker movement of tinkerers; and developing RadioShack’s relationship with Apple. He has rolled out Fix It Here, a mobile-device repair service available at about 500 stores, with plans to expand to 750 this fall.

Noting Magnacca’s introduction of cellphone repairs, Fox said the chain’s sprawling network could set aside a section of each store as an Apple-like “genius bar.”

“It could be a place where its staff can help people use devices, having a ‘genius bar’ 10 minutes from your home rather than having to drive [long distances] to an Apple Store,” he added. “I couldn’t see why they couldn’t give it a shot — it’s where convenient counts. It’s a service that RadioShack could provide and something people would be willing to pay beyond their subscription price.”

‘Too little, too late’

Mark Kazmer has a different perspective on RadioShack than analysts and consumers do.

The 52-year-old owns a RadioShack dealership with his wife in Spearfish, S.D., and said he has been approached to buy two company-owned stores in the state.

His business is blessed by its location in a college town (Black Hills State University) that’s too small, at 10,700 people, to attract specialty rivals.

And Kazmer has learned how to compete with the town’s Wal-Mart. His annual sales hover around $1 million but dropped to $900,000 this year — not because of competition or brand image but because of a freak blizzard in early October that killed hundreds of cattle and set back the agriculture-based local economy.

Kazmer was among the first four franchisees to sign up for RadioShack’s new dealer program, which sells goods to participating stores at the corporation’s cost but takes a 5 percent royalty on sales, including on merchandise bought wholesale elsewhere. Kazmer said the program works for him but would not make sense for franchisees who combine, say, a True Value hardware store or another operation where the RadioShack sales are 50 percent of total revenue or less.

Kazmer said he’s enamored with Magnacca’s tech-savvy concept stores and with the company’s Super Bowl ad, which showed a slew of 1980s celebrities discovering that RadioShack has changed. He might incorporate some of the concept store’s ideas if they don’t cost him $100,000 to remodel, he said.

The plain-spoken South Dakotan is taking a wait-and-see approach to the offer of acquiring two company stores. He may be watching to see where RadioShack is headed.

“My take on RadioShack is that it’s too little, too late. They lived with an outdated position for too long.”

SMU’s Fox said RadioShack’s current crisis shouldn’t obscure its enviable longevity.

“With the exception of Walgreens, they had at one point more stores than anybody,” the marketing professor said. “No question about it, for a company that never sold anything people had to have, to go nearly 100 years as a retailer is pretty impressive.”

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