The Shack is built on a 20th century business model. The numbers don’t work to make survival possible. I say this with some regret as a former store manager and district manager (’87-’96), but it’s true. Here is a little history about a once-great company that is playing out its final act.
(By the way: I can’t get used to the magnificently uninspired decision to force the Radio and the Shack together into one long string of letters. Call me inflexible, I guess.)
Charles Tandy: It’s All About Margin
Charles was an entrepreneur from the beginning. One of his first childhood forays into business was purchasing leather scraps and reselling them as belts and other accessories. He bought the materials cheap and made a nice markup on each sale. That evolved into the high gross-margin Tandy Leather hobbyist store.
Charles realized that he could make a killing by identifying other high-margin retail businesses. He stumbled upon Pier One Imports in San Francisco, and realized that this was a similar model. Low-cost goods from Asia provided opportunities for huge markups and profit. He bought the company and built it, realizing great success and fat profits along the way (Tandy eventually spun-off Pier One).
When he looked at Radio Shack’s business, which had been a Boston-based small chain catering to amateur radio enthusiasts, he saw yet another opportunity to buy low and sell high. He bought the chain and built it on a high-margin model that catered to electronics enthusiasts. They were at the forefront of the consumer electronics market and the PC revolution, coming to market with the clunky TRS-80 that some loved, many loathed (WD40 to cure keyboard-bounce!), but that deserves a place in history.
How Much Margin?
Most of the stuff we sold when I was there carried gross margins in the 60% range. This meant that a smaller store doing $500,000 in annual sales generated about $300K to cover payroll, rent, advertising, general administrative expenses and money back to shareholders. With those margins, there was plenty of cash to go around. Tandy and successors also made big manager pay possible at the store level with generous profit-based pay plans. It wasn’t unusual for a small-store manager to make $60 – 70K or more in the 80’s – good money for the time. It kept people motivated to sell.
Here is a typical sale from when I started in 1987: A customer would walk in the door and say, “I want to be able to record one cable channel on my VCR while watching another. What do I need?”
Out came the pen and paper to sketch and explain how to do it. Each line on the page meant cash in the drawer. Take a look at the diagram (you can double-click to get the full effect) to see what I mean. A competent sales person could turn this into a $50 transaction. Easy! But that was then.
It was also easy to create big sales when new technology first hit the scene. Do you remember the $999 camcorder? It was a big deal when the prices dropped to $799.
Some customers also loved the separate audio components. A Realistic STA-something matched to a pair of walnut-cased Mach Two speakers with 15-inch woofers and a linear tracking turntable could rattle the windows! If big and wooden wasn’t your thing, there was always the solid metal Minimus-7. Nice!
How about the Radio Shack brick phone?
This bicep-curl beauty sold for $1,500 when it first came out. And that didn’t include the charging stand and AC power adapter. I sold two on one transaction to the New York City Police Department. $3,300 of the taxpayer’s money went in the drawer that day.
Reach into your pocket and grab your smartphone. How many apps, both standard stuff that came with it, or free or cheap downloads, are now handled by this device? They used to represent a sale to Radio Shack. Here’s a short list: camera, camcorder, voice recorder, calculator (standard and scientific), pedometer/exercise monitor, stopwatch, timer, alarm clock, clock radio (or wake up to Pandora, anyway)…Did I forget anything?
Oh, yeah, landline phones and all of the wires and jacks they used are fading, too. Who wants a phone number tied to a place (and the bill for it) when your cell number connects right to you?
How about that big cable and switch sale? The bad old days of that scenario are over. Now your cable box has a four-channel DVR, blank recording media is a thing of the past, and one cable (HDMI) connects everything. Can I borrow a blank VHS tape?
That day-in-day-out business of the Shack is a thing of the past.
The obvious ones are Best Buy and Amazon. Don’t forget about Lowe’s and Home Depot for everythingcables and wires. How about Guitar Center for audio cables, mixers and that whole segment?
Cell phones? Visit wireless row in any mall. Between in-line stores and kiosks, many either company-owned by the carriers (e.g., Verizon, Sprint, AT&T), or specialized and highly-competent dealers, there are just too many places to buy and upgrade for Shack executives to claim this as a strength and company-saving strategy.
Is There Hope?
In a word, NO. The gross margins that made low sales-volume stores viable are not there anymore. There is no such thing as an exclusive in a connected world where anyone can buy anything at any time from anyone else. That extreme – we could say perfect – competition just doesn’t make it possible. Unless a business controls the whole channel, from creation (with heavy emphasis on innovation and intellectual property protections) to manufacturing to distribution (think Apple), and has something special that everyone wants and nobody else has, free markets will not allow outsized profits. Even Apple is having to fight off Samsung and Google. It’s accurate to say that Radio Shack does not belong on a list with those organizations.
Radio Shack might hang on for a few more years if it can create an inspiring shopping experience characterized by outstanding customer service and knowledgeable people. That’s a big if, though, as the margin isn’t there to support and retain such talent.
The 80’s wants their store back. I think they are going to get it.
If you haven’t seen it, David Letterman hit them hard on March 5th. I think the calculator warmer is an idea worth exploring.