Lessons from RadioShack: To Stay on Top, Figure Out What Got You There
http://knowledge.wharton.upenn.edu/article/where-radioshack-went-wrong/ Feb 10, 2015
RadioShack, the struggling 94-year-old electronics retail chain that filed for Chapter 11 bankruptcy last Thursday, may have a fighting chance to recast its business model and thrive again under the banner of wireless phone services company Sprint. Fort Worth, Tex.-based RadioShack plans to sell 2,400 of its 4,100 stores to an affiliate of hedge fund Standard General, which in turn plans to sell 1,750 stores to Sprint. In an unrelated move, e-commerce giant Amazon has also shown interest in buying some RadioShack locations.
Lawrence Hrebiniak, Wharton emeritus professor of management, was not as optimistic about RadioShack reversing its fortunes. Sprint “is not the strongest partner,” he said, because it, too, is having trouble with stiff competition from Verizon and other phone companies. The Sprint partnership will essentially mean “a store within a store” at RadioShack locations, he pointed out. “RadioShack’s strategy is more of trying to save itself by sharing space with Sprint and hoping that if Sprint does better, it can pick up some pieces and some incremental profit on the way. But it’s going to be hard.”
In its latest quarter ending November 1, RadioShack posted its 11th consecutive quarterly loss of $161 million on sales of $650 million, which were 16% lower than those of the comparable quarter in the previous year. In the past year, the company’s stock price has eroded 95% to 13 cents; last week, the New York Stock Exchange delisted the stock after its market capitalization fell to $28 million, well below the minimum requirement of $50 million, and a far cry from levels of $3 billion eight years ago. The company has some $43 million in cash and $1.4 billion of debt.
“The kids today haven’t even heard of RadioShack … [and they] are not electronics buffs … running around and building CB radios.”–Lawrence Hrebiniak
What Went Wrong?
RadioShack’s road to bankruptcy was hastened by failed attempts last year to stop the bleeding by shuttering 1,100 stores. Salus Capital Partners, which in December 2013 lent the company $250 million, opposed that plan, arguing that it would undermine the collateral against its loan. Now, RadioShack has tied up $285 million in bankruptcy financing from another lender, DW Partners, to recharge its business. That financing plan, as well as the deal with Standard General, needs bankruptcy court approval.
RadioShack had been faltering well before the Salus episode. Over the years, the chain gradually lost the distinction of being a popular hangout for hobbyists and electronics enthusiasts, who were attracted by the parts, manuals and catalogs it carried. Along the way, it refashioned itself as a retailer of cell phones and later failed to adapt to online retailing, losing market share to Best Buy, Apple and Amazon. Cheaper and easy online availability of electronic parts also severely eroded its reputation as a place for electronics hobbyists.
According to Hrebiniak, RadioShack erred in sticking with its own operating system for its computers and not partnering with the likes of IBM or Microsoft. “It tried to compete, but it was a strategic error.” The company also thinned out its focus across several product lines, and entered the cell phone market when the devices had already become a commoditized product with low profit margins, he said. “They focused on computers, batteries, audio, video — it was messy. Even workers get confused if you are changing your commissions all the time.”
“RadioShack’s strategy is more of trying to save itself by sharing space with Sprint and hoping that if Sprint does better, it can pick up … some incremental profit on the way.”–Lawrence Hrebiniak
RadioShack also failed to adapt when its markets began changing, Hrebiniak noted. “Many people who were hobbyists had less leisure time and so they weren’t buying as much,” he said. “Customers changed — the kids today haven’t even heard of RadioShack … [and they] are not electronics buffs … running around and building CB radios. They are into gadgets, music and iPhones.”
Dahlhoff cited another casualty as RadioShack tried to keep up with the changes in the electronics industry by constantly altering its offerings. “With that, they gave up their service orientation of having skilled and trained employees on all things tech,” she said. “They lost their focus, and in the end it was an undifferentiated business … and having so many stores, it is hard to make large-scale changes happen.”
The Silver Lining
Despite its woes, RadioShack still has a lot going for it, according to Dahlhoff.
“[RadioShack] still has a lot of brand equity; it is an iconic brand,”she said. But the company faces a tough road ahead, she added. “They have to remodel their stores and rebrand. [The Sprint partnership] will give RadioShack a place to live on and figure out what that brand will be in the future.”
If RadioShack wants to take advantage of the store traffic that comes into Sprint stores, it will have to decide on what it can offer those customers, said Dahlhoff. “It will be difficult to offer to two different segments — the RadioShack segment and the Sprint segment,” she added.
The company also has to understand the associations people have with its brand and what it means to them. “This may vary a lot, including across age groups, since RadioShack has been around for so many decades and has changed a lot over time,” Dahlhoff noted.
According to Hrebiniak, the lesson from RadioShack’s story is clear. “If you are on top of the world, determine what in terms of strategy and execution got you there and what you can build on in terms of your core strengths to continue going forward,” he said. He cautioned against diversifying haphazardly. “If everything is important, nothing is important.”
“[The Sprint partnership] will give RadioShack a place to live on and figure out what [its] brand will be in the future.”–Denise Dahlhoff
Over time, even long-time RadioShack patrons got confused. A caller from Seattle to the Sirius show said that as a teenager (he is now in his mid-40s), he used to go to RadioShack regularly to buy kits and books, but hasn’t visited one in recent years. “I don’t even know what they sell anymore,” he said. “The last time I went, it seemed like a mini Best Buy.”
Does RadioShack have a future? “RadioShack would have to do something exciting to make themselves look good, to make them appealing to the younger generation,” said Hrebiniak. “I don’t see that. Of course, anything is possible, but it is going to be a stretch. They have to do it quickly; they are bleeding money.”