Fixing RadioShack

This is the fourth in The Weekly, a series to be posted every Wednesday or so. Each will be a long-form, original piece that dives deeply into one topic. Each piece may be related to business, technology, gaming, design, entrepreneurship, economics, politics or any manner of other topics. The idea is to shed some light on something that at least a few people will find interesting. I hope that you’re one of them.

RadioShack has seen better days. But you knew that. For years, conventional wisdom has held that the embattled electronics retailer is among the walking dead of that sector, just one nail in the coffin behind joining Circuit City in the dustbin.

The Onion, America’s Finest News Source, or at least one of its better sources of satire, published a hilarious article back in 2007 where RadioShack’s CEO openly marveled at how the company remained in business at all.

The Onion’s characterization of then-CEO Julian Day is “quoted” as saying, “Have you even been inside of a RadioShack recently? Just walking into the place makes you feel vaguely depressed and alienated. Maybe our customers are at the mall anyway and don’t feel like driving to Best Buy? I suppose that’s possible, but still, it’s just…weird.” The article goes on to suggest that only a stream of countless RadioShack gift cards left unredeemed continued to sustain the company. “I’d like to capitalize on the store’s strong points, but I honestly don’t know what they are,” said Day’s characterization. “It’s like walking into your grandpa’s basement. You always expect to see something cool, but it never delivers.”

Of course, satire has roots in reality, and for RadioShack, it’s a reality that grows more and more grim. The last time RadioShack’s stock traded at valuations as low as today in unadjusted dollars was 1980. If you adjust for inflation, the $2.43 it traded at on September 4, 2012 would be less than 83¢ in 1980, with a $2.36 print in late July 2012 holding the inauspicious title of all-time-adjusted low for the company.

Where the numbers go from sad to scary is when you look at what that means for the company on a store-level basis. According to RadioShack’s 2011 Annual Report, the company had 7,309 locations worldwide. That would indicate the company is worth less than $40,000 per store. This includes some non-traditional locations such as mobile phone centers inside of Target stores operated by RadioShack, as well as international locations. If we strip that number down to just domestic, actual RadioShack locations, we lower the number of stores to 4,476, which still results in an abysmal $65,000 per store.

To make it clear just how horrific that number is, let’s take a look at the other end of the electronics retailer spectrum: Apple. Looking at just Apple’s retail segment in 2011 – so stripping out any money Apple made outside of its own retail stores – Apple made roughly $3.3 billion in profit over the course of 2011 at an average of 326.25 retail locations (averaged on a quarterly basis since the number of stores grew throughout the year). Given those numbers, each Apple store was responsible for more than $10 million of the company’s profit in 2011, or made the $65,000 each RadioShack is presently worth in 56 hours, including the time each night when stores were closed.

Although indicators like net revenue per employee don’t paint a pretty picture for RadioShack, the most distressing figures are surely their net sales and net income. Net sales have grown from $4 billion in 2009 to a little under $4.4 billion in 2011, which is positive until taking into account that net income has fallen in the same timespan from $205 million to $72.2 million. While it’s positive that the company has maintained profitability while competitors like Best Buy have sustained significant losses, it’s evident that their growth in sales is directly related to contracted profit margins on products. The company can only juice prices so low until they begin showing a loss unless other areas are addressed.

To return to the question proposed by The Onion, however, let’s look at the mix of products presently sold by RadioShack. 51.4% of the company’s revenues were related to mobile device sales in 2011, including postpaid and prepaid cellular plans, handset sales, residual income from cellular carriers and sales of eReader and tablet devices. 19.2% of sales are consumer electronics, including music players, computers, cameras, analog telephones, TVs and other electronic products not offered under one of RadioShack’s private labels. 0.7% of revenues are miscellaneous (potentially an allowance for gift cards not expected to be redeemed?), while the other 28.7% of sales fall under the “Signature” line, which encompasses a variety of RadioShack private labels including:

AntennaCraft (Outdoor Antennas)

(Outdoor Antennas) Auvio (A/V Cables, Televisions, Surge Protectors, Speakers, Headphones)

(A/V Cables, Televisions, Surge Protectors, Speakers, Headphones) Enercell (Batteries and Power Accessories)

(Batteries and Power Accessories) Gigaware (Computer, GPS and iPod Accessories, MP3 Players, Digital Cameras, Digital Picture Frames)

According to their 2011 annual report, RadioShack believes they offer a better alternative for electronics shopping than big-box stores like Best Buy or “Omni-Channel” retailers, a label presumably encompassing Wal-Mart and Amazon. Clearly, they’ve been successful in garnering mobile-related business, with mobile revenues now representing the majority of the business. Because the company offers access to all major carriers, RadioShack has positioned itself as an unbiased and trustworthy source for folks looking for the right mobile device.

Regrettably, this is a tough market in which to make money. RadioShack must compete with the corporate stores of its own carrier partners, as well as countless authorized resellers and increasingly manufacturers of devices themselves. It’s no coincidence that RadioShack’s profits have thinned as more of their business relies on growth in mobile.

The company seems to realize its dilemma, which is why so much of their retail space remains dedicated to electronic cruft. After surveying several stores, I discovered that mobile phones are often located in the front left of the store, but represent perhaps 10-15% of the typical store’s shelf space. This doesn’t include the space dedicated to mobile accessories, which is roughly the same in size. However, it’s a bit mind-boggling to realize that the amount of space dedicated to surge protectors is just slightly smaller than either of these areas, and the area dedicated to cords more generally dwarfs the mobile space. These items have one thing in common: high margins. Even if RadioShack sells less gold-plated audio cords than it does cell phones, these kinds of accessories remain the company’s profit engine. However, the sun may be setting on that portion of the company’s business if the fortunes of Monster Cable, the largest proprietor of such overpriced cords, serves as an example. Monster’s stock has retreated nearly 80% over the past five years as stores like Amazon began to offer affordable private-label alternatives and bargain sources like MonoPrice became more widely known.

A simple question emerges from the data and trends: What is RadioShack’s purpose for being in the 21st century? Not so long ago, RadioShack was far from the butt of a joke. The store was a mecca in the 1970s for computer enthusiasts and build-it-yourselfers, carrying all the capacitors, resistors, fuses, wires, breadboards, soldering irons and other equipment needed to build various gadgets. It was one of the few places customers could find early personal computers and instructions on how to program them.

RadioShack carried the banner of the computer revolution into the homes of millions of people who otherwise would have been left with no access point to a brave new world. Today, the heart and soul of what once made this retailer great is kept in a small middle aisle, mostly divided into a few thin drawers on a multi-sided cabinet. In my experience, most RadioShack employees have little to no expertise when it comes to these “hobbyist” items and often seem surprised to discover the components cabinet even exists when asked for assistance.

The time could not be more ripe for RadioShack to revive their do-it-yourself offerings. Several present-day movements suffer from the same basic challenges faced by early personal computer enthusiasts.

DIY computing has resurfaced in a decidedly smaller form factor, care of the popular Arduino chipsets that can used to control any number of fascinating, build-it-yourself devices. Everything from remote-controlled robots to self-flying quadricopters, Twitter-powered pet feeders, self-driving lawn mowers, homemade vending machines and more are being developed by enthusiasts and powered by Arduino.

Many people would love to have the chance to create 2D objects and patterns on a level not possible with the kind of tools you’d find at a hobby store. The extreme precision and spectrum of materials possible with laser cutters and CNC machines offer a huge array of possibilities, and it’s easy for users to create the files necessary to power such devices on their home computers.

3D modeling and printing may be an even bigger market. Many people are extremely curious about 3D printing but lack the know-how to model objects themselves. Even more lack the ability to 3D print objects themselves. Homebrew options such as Makerbot offer a glimpse at the future consumerization of 3D printing, but print over too small an area, at too high a cost and with too much inaccuracy for most users to put up with. Commercial models that offer multiple colors, improved accuracy and larger workspaces are far too expensive for home users, coming in at many tens of thousands of dollars.

RadioShack should be at the forefront of each of these fields, offering the materials necessary to build great things, augmented with an array of highly profitable services in stores. I envision a future RadioShack dedicated to two goals. The first, to serve as the best resource for mobile phones and tablets, is already the company’s top priority and provides consistent mainstream traffic and a sizable, if not particularly profitable, revenue base. The second is to serve as a creation center for hobbyists, picking up where the company left off when it lost its way several decades ago.

The company should have a number of creative kiosks on site, featuring a number of delightful projects users can create themselves, as well as the tools to design them. Most importantly, the company can offer laser cutting, 3D printing and 3D scanning services on site. The first two would be offered on a per-minute basis, while scanning would be a flat rate based on the size of the item and accuracy required.

Currently, creators in need of these kind of services have one of two choices: either send a file to a company far away and wait for the final product to be delivered or purchase the equipment themselves. RadioShack could offer a solution to regular people, and the tactile nature of an in-store experience would be a huge advantage over online providers thanks to the unique and personal nature of projects.

The company would face almost no competition in these pursuits, and would be unlikely to face any in the near future.

The size of the company’s average store fits perfectly with this simplified concept if the clutter of off-brand Xbox controllers and calculators with reams of thermal paper are left by the wayside.

Its number of stores suddenly becomes a strength instead of a liability, allowing the company to meet people where they are while offering a service not available elsewhere. No longer would customers skip by RadioShack on their way into a big box store.

It’s easy to test out before risking the whole company on such a bold endeavor, too: convert a few stores in markets like Austin and San Francisco particularly suited to this kind of overhaul and see what happens.

Already, RadioShack has taken some tentative steps in the right direction. RadioShackDIY.com offers some examples of Arduino-powered projects in association with Wired, Instructables, PopSci and Popular Mechanics. Hobbyists are encouraged to submit their own projects to be featured. Arduino chipsets now occupy space next to the parts cabinet in the back of most RadioShack retail stores. But creation is simply not a high priority in the company’s marketing at present. That enthusiasts armed with the knowledge of what they’re looking for can once again find it at RadioShack is a significant improvement, but it’s damning that the company has done little to kindle these flames themselves.

RadioShack can be great again. Stores like Home Depot and Lowe’s grew so large so quickly because they empowered people to improve their own homes, and provided the tools with which to do so. Thankfully for RadioShack, it doesn’t take nearly the square footage of a home improvement warehouse to make an equal impact for the new generation of enthusiastic creators. The necessary parts are small, and offering the kind of machinery on site that creators only dream of having at home will drive consistent traffic from creators simply happy there’s somewhere they can go to turn their dreams into a reality. Expanding the concept into free classes for kids and teens can help reignite the spark that drove the computer revolution in the 1970s, as well.

Taking leadership in this maker revolution will additionally have a positive effect on RadioShack’s mobile device sales: just as many customers turn to Home Depot to solve their basic hardware needs because they assume a staff well-versed in every aspect of remodeling a home can surely help them find the right screwdriver, even customers that never use the creation services on site will have an improved impression of RadioShack staff and feel comfortable they’ll truly know which device is best for them.

RadioShack stands at a crossroads: it can settle with the prospect of ever-tightening margins and increased competition and wager it can beat out the pricing of stores like Walmart that can afford to take a loss in mobile and make up for it elsewhere. Or, it can change the game it’s playing: offer those mobile services but give people a reason to believe it’s truly a premium experience, while expanding into a new market that promises to explode in the same way the personal computer market did so many years ago. As for those surge protectors and cords? Well, I know of a cabinet near the back of the store where those can go.