The issue with RadioShack (NYSE:RSHCQ) is not just its old stores, but the old electronics that it still carries, and that's a bigger problem than what new stores can solve.
Its Super Bowl ad tried to portray a newer image of the company, but RadioShack continues to stock traditional electronic devices such as cameras, camcorders, and even batteries for hearing aids inside its many valuable storefront properties. Old-time electronics items have been increasingly shelved in the warehouses of Amazon.com (NASDAQ:AMZN) and other online electronics retailers to be shipped directly to customers, who are now more likely to buy them conveniently online.
To be fair, RadioShack is nevertheless a company with more than $4 billion in annual sales . The company supplies a wide range of conventional electronics and accessories, and some of the stuff still sells. However, there has been little sales growth at RadioShack over the past five years, and there have even been sales declines in some periods. The company's current level of sales, although it remains relatively large, has not translated into better profitability, which is partly due to cost overruns. Operating costs sometimes increased faster than RadioShack's sales, and other times costs continued to go up even when the company's sales fell. The problem is further exacerbated by the overhead of managing an inventory of such diverse merchandise at each store.
Because of the company's shrinking profits and earnings losses over the years, total shareholders' equity shrank to $394 million at the end of September 2013 from over $1 billion at the end of 2009. Without a turnaround in operational efficiency to generate healthy earnings, sooner or later RadioShack may see its equity depleted and eventually be out of business. With larger peer Best Buy (NYSE:BBY) also struggling to maintain its sales, the outlook for electronics retailing at bricks-and-mortar stores is nothing but discouraging. By selling generic and commoditized electronics, physical stores are inevitably at a disadvantage to online outlets that offer convenient shopping, ease of purchasing, and competitive pricing.
To remedy this inherent weakness, brick-and-mortar retailers have to find a way to compete with retailers on the Internet on different ground. One thing that online merchants can never have is face-to-face interactions with their customers. Meanwhile, physical store operators, especially RadioShack, which has manageable retail space at each of its store locations, have the opportunity to provide in-person sales consultations. Should sales people at RadioShack be trained to be sales consultants, they could offer value-added services to assist customers with the buying process. However, few customers need to consult with anyone to select a camera or hearing-aid battery. The products that RadioShack ultimately decides to sell determine how it can best leverage this potential sales-consultation ability.
Thus, RadioShack may want to consider changes to its current merchandise mix that mostly consists of what everyone else also offers, namely cell phones, common electronics, accessories, power and battery supplies, etc. With the right products to sell, RadioShack wouldn't have to spend on Super Bowl ads. The company might also be able to save some money on remodeling and reconfiguring its stores, which if carried out would likely add to its current cost overruns.
Although the changes may result in discontinuation of some of RadioShack's current offerings, a good starting point would be for the company to retain its current Do-It-Yourself program, which reflects the idea of providing sales consultation to customers who are shopping for technically challenging products. However, the product lines within the company's current Do-It-Yourself program may also need to be redesigned so the company can focus on products that can deliver the most value through sales consultation.
So the task for RadioShack is to try to replace its usual and familiar electronics and accessories with new products that will better fit with a Do-It-Yourself program supported by sales consultation. Despite the challenge that physical stores face in the age of e-commerce, there's still a market for in-person services, especially at easy-to-access smaller stores such as those operated by RadioShack.
The key is to offer products and capture ongoing consumer demand for all things mobile, which offer connectivity. This is not just mobile phones, but rather a wider range of consumer products related to the so-called Internet of Things. For example, home security camera systems, which have Internet connections and wireless controls and monitoring, have been rising in popularity among homeowners. However, installing such a system often requires a certain degree of technical know-how, and it would be advantageous for RadioShack to offer sales consultation in a nascent business like this.
Other products within the confines of the Internet of Things present similar opportunities for RadioShack, including Wi-Fi enabled home-use smart thermostats and readable smoke detectors such as those from Nest Labs, a home automation company recently acquired by Google (NASDAQ:GOOGL).
It's up to RadioShack to decide if it wants to transform itself from one of the many electronics retailers into a unique electronics sales and consulting service company. As more Internet-connected devices come to the market, a new RadioShack with an early position in the connected-device market could see abundant sales growth with higher margins.
Jay Wei has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.