Amazon Should Buy RadioShack

RadioShack (NYSE: RSH  ) is reeling. Despite its clever '80s-themed Super Bowl ad, the company reported dismal fourth quarter sales figures and announced plans to close 1,100 stores. 

The chain is in real trouble and needs to shift its outdated business model in a more dramatic way than simply updating the look of its stores. RadioShack might not be able to do that on its own. If the chain were to partner with or be acquired by Amazon.com  (NASDAQ: AMZN  ) , however, it could quickly go from being a slowly dying '80s relic to an incredibly convenient physical location for the most successful online retailer.

How bad off is RadioShack?
In the fourth quarter, total net sales and operating revenues were $935.4 million, compared to $1.1 billion last year. Comparable store sales were down 19%, driven by traffic declines and soft performance in the mobility business, according to the a press release. Radio Shack lost $166 million in the quarter compared to a profit of $16 million last year.

"Our fourth quarter financial results were driven by a holiday season characterized by lower store traffic, intense promotional activity particularly in consumer electronics, a very soft mobility marketplace and a few operational issues," CEO Joseph C. Magnacca said.

Magnacca and the RadioShack leadership team have been looking for ways to stop the bleeding and have been conducting an extensive review of the chain's physical locations.

"The result of that review is our plan to close up to 1,100 underperforming stores. We will continue to have a strong, unmatched presence across the U.S. with over 4,000 stores including over 900 dealer franchise locations," he said.

Why would Amazon want this?
RadioShack is failing largely because compared to online retailers like Amazon it has terrible pricing and a much smaller inventory. That's partially because RadioShack has to pay for physical locations, but also because the chain lacks the buying power of its massive online competitor.

In the fourth quarter, Amazon reported a 20% increase in sales to $25.59 billion. That dwarfs Radio Shack, but still leaves the online retailer well behind the $128.8 billion in sales Wal-Mart (NYSE: WMT  ) reported in the fourth quarter. One of the ways Amazon could start to bridge that gap -- without opening huge box stores like Wal-Mart has -- would be to buy RadioShack.

While on the surface it may sound ridiculous, Amazon has been spending billions building distribution centers around the country. The company has also been investing heavily to figure out how to offer customers faster delivery. These methods have included the realistic -- adding Sunday delivery -- to the fanciful, like its much-reported research into using drones.

The fastest way to improve delivery would be to have small physical locations around the country (and the world) stocked with the wellpriced items that Amazon knows its customers want.

Amazon already knows what you want
In January I wrote about how Amazon is working on technology that lets the company package customer orders before the actual order is placed. In that story I wrote that the company had already filed a patent for technology that lets it get orders ready in advance of the customer actually ordering.

Basically, according to the patent, it involves analyzing customers' buying habits and having some orders pre-boxed and ready-to-ship before the actual order is placed. Let's say Customer Y buys toothpaste around every 40 days from the online store and Customer Q orders the same box of pens every three months or so. Both of those orders could be packaged, sent to a shipping warehouse close to the intended consumer, and ready to go for when the customer actually makes the purchase.

That technology, coupled with the company's extensive data on what products sell in what locations and details on what items customers pay overnight shipping for, would allow Amazon to operate incredibly efficient stores. Imagine a RadioShack that has what you want at a price comparable to what you would pay on Amazon?

It makes sense for RadioShack and Amazon
RadioShack is on a slow (though possibly accelerating) path to oblivion. There simply aren't enough customers willing to pay more for the convenience of shopping in a physical store to support the chain. RadioShack not only has to battle Amazon, but also has to fight with Best Buy (NYSE: BBY  ) (which sells almost everything a RadioShack store does) and other box stores like Wal-Mart and Target (NYSE: TGT  ) , which it competes with on a pretty large percentage of its product line.

It would be difficult (but not impossible) for Amazon to build a network of well-located small-footprint retail stores like the one RadioShack already has. The online retailer could likely acquire the money-losing chain at a favorable price and its ability to improve sales and traffic to those stores would be incredible.

Under Amazon, every inch of floor space in the former RadioShack would be optimized and the product line would not have to be limited to electronics. If hard-copy Stephen King books sell better in Maine and green tea sells better in Oregon, the stores could be optimized to stock those products. The physical Amazon stores could also process returns, help people operate their Kindles (like Apple's (NASDAQ: AAPL  ) genius bar), and generally put a brand that millions of people use already at a mall or strip mall in their town.

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