Smartphones Aren't Smart for Everyone

At the height of the high-definition TV upgrade cycle, you could walk into just about any store and buy an LCD unit. Even Home Depot was selling TVs. The glut of units on the market pushed the likes of consumer electronics superstore Best Buy (NYSE: BBY  ) to dizzying heights as it became the go-to retailer, but the glut also ruined prices (well, not for consumers), and margins were trashed. LCD glassmaker Corning was left wandering in the wilderness for a few years.

A disconnect on trends?
We're seeing a similar trend now with smartphones, and my guess is we'll have similar outcomes. The question is: Who will be the winners and wanderers?

By now we're familiar with how Best Buy hoped to get struck by lightning twice last year as it doubled down on 3-D and Internet-ready televisions, only to get burnt by having an excess of inventory on hand as supply far exceeded adoption of the technology. So it's turning to smartphones for salvation.

Size matters
From a dedicated section in its big-box stores, Best Buy is spreading a small-format Best Buy Mobile concept store that has about 1,500 square feet of space. That's significantly smaller than the 38,000-square-foot stores the consumer electronics king typically prefers. It went from having just 74 Best Buy Mobile stores at the beginning of its fiscal 2011 first quarter to 198 by the end of its 2012 first quarter. It opened 21 new mobile shops in the first three months of this year, compared to just three of its big-box stores.

Best Buy is focusing on doing what's working for it right now, with computing and mobile phones the only segment of any size seeing growth. Getting big by going small is another trend that's become fashionable, but the near-5% jump in comps seen by the mobile segment last quarter (when every other sizable one saw declines) was primarily due to smartphone sales.

Spreading like kudzu
RadioShack
(NYSE: RSH  ) is also gambling that smartphones will resurrect a moribund business. It dumped T-Mobile service in favor of the more broadly popular Verizon (NYSE: VZ  ) line of phones, and runs more than 1,400 wireless kiosks inside Target (NYSE: TGT  ) stores. Virtually all Target stores should be home to a RadioShack kiosk by now.

It's the same story with Wal-Mart (NYSE: WMT  ) , which is opening stores-within-a-store on the fourth wall of its mega-boxes, which typically also features a restaurant, a salon, or a banking outlet. In my local superstore, it's taken the place of the retailer's failed gaming venture.

But you can already buy a Verizon phone at one of that company's gazillion stand-alone wireless stores or mall kiosks. Same with AT&T (NYSE: T  ) , Sprint (NYSE: S  ) , and T-Mobile. You can get cut-rate phones from any number of Boost Mobile or MetroPCS stores.

Static on the call
Despite Best Buy's decision to go all-in on small-footprint mobile shops, I'm not convinced it's a long-term winning strategy for it or any of its imitators. RadioShack may actually have made the smarter move by not investing in any expensive real estate to spread its phone concept, and Wal-Mart has the luxury of rotating as many ideas as its marketers can come up with to try out what works on that fourth wall.

Yet with everyone pinning their hopes on a wireless solution, the only thing this explosion of retail outlets will do is further commoditize an already weakening trend. Watch out it doesn't blow up on their financial statements.

The Motley Fool owns shares of Wal-Mart, Best Buy, and RadioShack. Motley Fool newsletter services have recommended buying shares of The Home Depot, Best Buy, Wal-Mart, and AT&T. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey owns shares of Best Buy but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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