RadioShack's Lesson: The Electronics Store Is Dead

Following the news that 2013 fourth-quarter sales were down by more than 20% from 2012, RadioShack  (NYSE: RSH  ) announced that it will close 1,100 stores in the United States. The stock immediately fell by 24%. RadioShack shares have been on a downward trajectory since 2010, when the stock price was around $20. Now the stock price is struggling to stay at $2, the company's sales are falling by around 19% a year, and investors should not be surprised. The concept of a specialty electronics storefront is obsolete.

Just ask Best Buy  (NYSE: BBY  ) , which has also been struggling with an outdated business model and sales which have been floundering for years. Unlike RadioShack, Best Buy and its stock saw a boost in late February when it announced that it had achieved a net profit in the fourth quarter of 2013, but this was not because the company gained sales; it was because CEO Joly had set a goal of cutting $1 billion from annual costs to try to save the unwieldy business. A closer look at Best Buy shows that revenue fell by 3% in the fourth quarter as the company watched its operating margin decline once again, and it cut nearly 1,000 jobs back in January.

The online world wins
Keep in mind that the losses for both companies occurred during the holiday season, when electronics sales are expected to be especially high and certainly expected to be profitable. They were -- just not for the old school brick-and-mortar retailers with outdated profit models. For the first time, online shopping sales surpassed $1 billion for the 2013 Black Friday, with e-commerce companies like Amazon  (NASDAQ: AMZN  ) and eBay profiting the most. The trend is expected to continue. Back in 2011 around one in five electronics sales took place online, and the number is expected to grow to one in three if it hasn't already reached that ratio (the full data is delayed by several years).

Consumer Reports surveys indicate that online electronics stores are steadily receiving higher ratings  than brick-and-mortar stores, thanks to their greater selection, ease of shopping, and a myriad of other factors that make the old electronics store unnecessary. Since the fall of Circuit City in 2009, the demise of the electronics store was evident. Today's online shopping options along with brand stores like Apple have taken their place. It is no surprise that while RadioShack stock has plummeted the share price of Amazon has grown, and it has shown a recovery from its 8% drop at the end of January. After all, Amazon's revenue grew by 20% in 2013 and its EPS rose by 21%. This growth was less than analysts expected but it was undeniably positive, just as electronics sales had an undeniable impact on the results.

A lost industry
Not only has online electronics shopping grown more convenient because of our tablets and smartphones, it has also become far cheaper. Why pay full MSRP at Best Buy or RadioShack when you can bring up Amazon, Crutchfield, Newegg or one of their newer competitors and shop for deals? Most electronics products are expensive enough to qualify for free shipping, and consumers can get their shopping done in minutes. No rewards programs can compete with those bonuses.

The slim ray of hope that electronics stores have is the lingering need for customers to examine certain products in person before buying them. At a certain point customers want hands-on experience with a game console or a TV before making purchase decisions. However, this experience is also available at many broader retail stores which have more reliable discounts (Target, Wal-Mart, etc.), which still leaves the specialty store without a purpose. Thanks to the growing trend of showrooming, in-store examination has been more frequently leading to online purchases rather than brick-and-mortar buys, so foot traffic no longer guarantees sales anyway.

Where will RadioShack and the other electronics stores go from here? A transition into a full e-commerce model is one possibility, although established online competitors will make this a difficult move. Diversification away from consumer electronics is another option for the coming years. Perhaps RadioShack, Best Buy, and friends should focus more on their consumer services, commercial electronics, and appliances to help prepare for the inevitable.

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