That silly Super Bowl commercial with Hulk Hogan and Alf was absolutely right: RadioShack (RSH +0.00%) is stuck in the 1980's. The iconic electronics chain is trapped in an era before Wal-Mart Stores (WMT 0.71%) and Amazon.com (AMZN 1.97%) changed the retail landscape completely.
RadioShack is in deep trouble because it is following a retail game plan that belongs in the 1980's. RadioShack sells electronics and paraphernalia through small, old-fashioned stores in shopping centers and on main streets. The chain depended on customers who didn't understand their technology and needed help with it.
It also depended on an old-fashioned retail environment in which RadioShack was the only place in town to get electronic gadgets or help with them. That retail environment is as dead as Hulk Hogan's wrestling career.
How RadioShack paid for that Super Bowl ad: it isn't funny
Efforts to make RadioShack into a smartphone sales outlet which competed with the Verizon store failed. On Sept. 30, 2013, RadioShack reported a diluted earnings per share figure of ($2.71). The chain was certainly in trouble and it needed help.
So what did the geniuses at RadioShack do? They adopted a classic piece of 1980s-style promotion: they spent a fortune on an elaborate Super Bowl ad. That strategy, of course, is pure 80's; it worked for Apple back in 1984, but it obviously didn't work for RadioShack in 2014.
To make matters worse, that Super Bowl ad and Hulk Hogan's paycheck were probably financed with debt. RadioShack took on $835 million in loans, mostly from GE Capital, in an attempt to refinance $625 million worth of debt to finance an overhaul of the company.
Just two days after that crazy Super Bowl ad aired, The Wall Street Journal reported that RadioShack plans to close 500 stores over the next few months. That is probably the biggest retail meltdown since Circuit City imploded in 2009.
How Wal-Mart Killed RadioShack
So how does Wal-Mart fit into this picture? Simple: Wal-Mart is now RadioShack's biggest competitor. It sells virtually everything that RadioShack does, but at lower prices and at more convenient locations.
Wal-Mart has also changed Americans' shopping habits by training customers to go to one place for most of what they buy. Customers naturally pick stuff up at Wal-Mart because they know the giant retailer will have most items at a good price.
This enables Wal-Mart to move a vast amount of merchandise and generate incredible amounts of revenue ($475.11 billion trailing annual revenue on Oct. 31, 2013). There is no way a smaller retailer like RadioShack, which had trailing annual revenue of $4.09 billion on Sept. 30, 2013, can compete with that.
Those who don't go to Wal-Mart go to other stores such as Costco and Target, which do pretty much the same thing that Wal-Mart does. Then, of course, there's Amazon.com, which is essentially an online Wal-Mart that offers one-stop shopping and convenience on your tablet or your smartphone. eBay, Amazon.com's competitor, is even more like Wal-Mart.
The online retailers pose a direct challenge to RadioShack. Why go to RadioShack when I can sit down at my computer, order the cell phone case I want, and have it delivered to my house in couple of days?
Is RadioShack's future retail's future?
Okay, is it possible that RadioShack might turn things around? I suppose. RadioShack has hired former Dollar General Corp. executive John W. Feray as its new CFO, which makes it seem like RadioShack might try to become the dollar store of electronics. The problem with that strategy is that the Shack will face intense competition from dollar-store operators like Family Dollar and Dollar General, as well as drugstore chains like Walgreens. The small-box retail market is already saturated, and entering an overcrowded arena is never a successful strategy for a struggling retailer.
The strategy seems like a desperate one, but RadioShack is in a desperate situation. Its stock was trading at $2.23 a share on Feb. 6, 2014. RadioShack has to do something just to show investors and customers that it's still alive.
What's truly frightening is that other retailers could soon follow RadioShack's path with mountains of debt, store closings, and tiny share prices. Best Buy, J. C. Penney, h.h. gregg, and Bed Bath & Beyond seem likely to fall into the same trap. These companies cannot compete with Wal-Mart, and now, like RadioShack, they are having to compete with both Wal-Mart and Amazon.com.
