What Could RadioShack’s Bankruptcy Mean For Best Buy?

RadioShack (NYSE:RSH), a prominent player in electronics retail for more than 90 years, filed for bankruptcy earlier this year. While some competitors such as Circuit City vanished years ago, the company managed to stay alive by selling cords, esoteric technological parts, battery packs and adapters (niche electronics mostly). The shift of electronics purchases to online retailers caused all the damage to RadioShack and other similar retail outlet chains. Not only did their sales plunge, but these stores had become showrooms for their online counterparts. Consumers visited their stores to browse through products only to later order from an online seller of the same product (termed as showrooming). While some predicted Best Buy (NYSE:BBY) to go down the same line, it managed to wade through tough waters, thanks to the management’s turnaround strategy, Renew Blue.

It’s Not The End Of The Road For RadioShack

General Wireless, an affiliate of the New York based hedge fund, Standard General (RadioShack’s lender and largest shareholder), acquired about 2,500 of RadioShack’s 4,000 stores. General Wireless has entered into an agreement with Sprint to setup stores-within-stores at 1,750 of the acquired stores. While stores and marketing materials will carry the brand name of Sprint, the latter will only occupy one-third of the space in each store, leaving the reminder to RadioShack. The company aims to expand its distribution to catch up with its competitors and accelerate customer acquisition.

Opportunity For Amazon To Create An Off-Line Presence

Cost-effective and timely delivery has become a key battleground for retailers and there has been a huge rise in click-and-collect over home delivery (UK’s John Lewis estimates that collected goods account for 56% of its online sales ^[1]). Best Buy had earlier initiated a ship-from-store concept, which enables all its distribution centers, and not just the ones previously allocated to e-commerce, to handle online orders. To further reduce the barriers to making a purchase, Best Buy recently tied up with Curbside, a mobile shopping app which lets users shop from their phones and then pick up their purchases at a local retailer without getting out of their cars.

As consumers increasingly prefer to pick-up online purchases themselves, Amazon might also boost its offline presence. According to Bloomberg ^[2], the company is considering acquiring some of RadioShack’s stores to use as showcases for its hardware, as well as potential pickup centers for online customers. Irrespective of whether an agreement materializes between the two companies, it makes clear Amazon’s intentions to create an omnichannel shopping experience.

Best Buy’s Margins Could Come Under Pressure

An important part of Best Buy’s Renew Blue strategy is to capture customers who visit their stores for showrooming. With their price match guarantee, they ensure, by matching the lowest price, that such consumers would buy from the store itself, rather than going online. However, this has led to increased pressure on the company’s gross margin, which it currently offsets (partially) by cost reductions elsewhere.

If online retailers such as Amazon (one of its major competitors) setup their own stores, as discussed above, a sizeable chunk of Best Buy’s current footfall would be taken away. It’ll all come down to price when there is no other differentiation. Even if the shift away from Best Buy doesn’t happen, Amazon, due to an inherent low cost structure, can be competitive on prices, if need be. Unfortunately, Best Buy’s margins are already stressed and they don’t have as much room to lower prices.

One might wonder why Amazon hasn’t already setup its own stores if the omnichannel route is doing wonders for Best Buy. Maybe they were waiting for the right opportunity, like this one.

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– Margin Pressure?http://www.fool.com/investing/general/2014/07/02/can-rite-aid-and-walgreen-overcome-this-threat.aspx

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