3 Real Reasons For The RadioShack, Best Buy Death Spirals

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 |  About: RadioShack Corporation (RSH), Includes: AAPL, AMZN, BBY, MCD, SBUX
by: SA Editor Rocco Pendola

In this article, I will not pronounce brick-and-mortar retail dead. A place for it still exists.

As the world becomes more "social" through platforms such as Facebook and smart TVs, it, interestingly, becomes more anti-social. As a lover of cities and other urban environments, there's no doubt retail plays a key role in terms of vibrancy. If I may shamelessly promote past accomplishments and use my Urban Studies degree for once, consider something I wrote in the journal Environment & Behavior a few years back:

A popular theory in modern-day urban planning is that the existence of a neighborhood main street can help bring about a strong sense of community (Lockwood, 1997). Main streets - commercial corridors that tend to serve as neighborhood centers - are often designed to provide the sort of pedestrian-oriented experience thought to encourage the quantity and quality of social interaction necessary for a sense of community to emerge. This has prompted numerous architects and urban planners and designers to look to successful main street towns and city neighborhoods with main street characteristics as models for the development of brand new main streets and town centers and the revitalization of down and out main streets in cities, towns, and suburbs across the country (e.g., Hooker, 2004; Robertson, 1999; Southworth, 2005; Wolshon & Wahl, 1999).

For better or worse, retail serves as the cornerstone - the draw or the magnet - to facilitate the social interaction, and potential sense of community, most humans have basic psychological needs to experience. Whether it's a "main street," suburban town center or shopping mall, an outdoor mall or promenade or a Manhattan-style mixed-use neighborhood, retail anchors everything from high rises to a person's sense of place.

From this psycho-social standpoint, Facebook and Twitter simply will not cut it. At least not to the extent we need them to as emotional organisms. A need will always exist for gathering places where people are around other people and have the opportunity to talk to one another and share experiences. For better or worse, in America (and elsewhere) retail shops fuel this dynamic.

If you look around the above-mentioned environments (and follow the stock market), it's clear which types of retail settings thrive. The ones that have one or more of the following going for them:

  • You cannot get their product, practically speaking, over the Internet. Certainly, you could have something like it delivered or make it yourself, but, by and large, if you want a Starbucks (NASDAQ:SBUX) coffee or a McDonald's (NYSE:MCD) hamburger, you have to go to those places to get those things.
  • While Starbucks and McDonald's perfect it in their spaces, Apple (NASDAQ:AAPL) also expertly executes this characteristic. Thriving brick-and-mortar retail gives you a reason to spend time in their physical location. As places like Starbucks and McDonald's expand their offerings and enhance their atmospheres, they give consumers more of a reason to congregate, people-watch and linger. Of course, every Apple retail store in the universe is packed to the rafters with people who simply want to touch Apple products. Whether aspirational or cash-in-hand buyers, this is huge.
  • You sell a luxury or, in some other way, high-end or exclusive product that people either cannot get elsewhere or cannot have the same experience getting through a reseller or online. Upper-echelon retailers like Ralph Lauren (NYSE:RL), Tiffany (NYSE:TIF) and, to a certain extent, Nordstrom (NYSE:JWN) come to mind. These stores promote social status or something of a special, unique experience. Service also matters. Local bike shops will always thrive because they sell things chain stores do not, while providing the type of support chain stores typically do not provide after the sale.

It's obvious which companies have, whether consciously in the case of Apple, Starbucks and McDonald's or a bit less purposely like Ralph Lauren, Tiffany and Nordstrom, nailed these three points and all that they entail. Consider the following chart, courtesy of Yahoo Finance.

Click to enlarge
Click to enlarge

There's a reason why most of the stocks already mentioned in this article have performed so well over the last 365 days. I've outlined several of them. Plenty of reasons also exist as to why, in lock step, Radio Shack (NYSE:RSH) and Best Buy (NYSE:BBY) have tanked.

Fellow Seeking Alpha contributor Vince Martin makes a case for the former:

The bad news for RadioShack will no doubt entice RSH bears, who are fond of comparing the company to struggling Best Buy, or now-departed electronics retailer Circuit City. But it's not entirely clear that Monday's news is the beginning of the end for RadioShack.

Quarterly sales actually beat Wall Street estimates, with total revenue up 6% and same-store sales posting 2% growth. Same-store sales will be down for the year, but net revenue will still show a modest rise. Margins were hurt by the Sprint customer mix and higher discounts and holiday promotions. Still, the company was ... still profitable for the quarter ...

RSH's struggles of late do not stem from macroeconomic conditions or an inability to compete; they are, first and foremost, a management problem ... And while a struggling management team is a rare argument in the bull case for a stock, there is a sense that for RadioShack, there is nowhere to go but up.

Or down. One or the other, who really knows with these "value" stocks?

I agree with Martin, to a point. It's totally a management issue at RadioShack, just like it is at Best Buy. But it has very little to do, at least when you get to the heart of the matter (Don Henley!), with the bottom line. There's a reason why retailers have to discount to the point of near-extinction. It's because they never properly prepared for the way e-commerce, led by Amazon.com (NASDAQ:AMZN), pervasively permeates our everyday lives and dominates.

I'm convinced that the only reason RadioShack, Best Buy and similar sterile retail outlets continue to subsist is because of society's need to go out and do something. And we've been conditioned, particularly in America, to think that going out and doing something means heading to the store to buy stuff.

Maybe we'll shop at a RadioShack or Best Buy because of a discount or by happenstance, chance or default. But we're a heck of a lot more excited about being seen in Tiffany, relaxing in a Starbucks or chit-chatting with a member of the hipster Genius Bar over the somewhat suburban-clad Geek Squad employee. Very few memorable reasons still exist to walk into a RadioShack or Best Buy and actually look forward to the experience.

There's never a crowd in front of my cash cow of an Apple retail store on the Third Street Promenade in Santa Monica (unless they're lining up to buy a new iPhone). Same goes for the Starbucks and McDonald's. The masses are always inside. The entryways at most other stores along the stroll, however, remain congested as people choose to stop and chat outside rather than inside the nearest retail establishment. There's something to be said for that observation.

The minds behind Apple, Starbucks, McDonald's and other successful companies with rising stock prices have managed to draw people in. They lead by not only taking advantage of opportunities, but by seeing the future from creative perspectives. All you have to do is walk into a RadioShack or Best Buy to see what I mean. It's like spending your time in a bad airport, such as Chicago's Midway. It's sad to make that comparison, but even more pathetic that the nation's "best" airports provide a better overall experience than most chain retailers. (I think Pittsburgh started it all back in 1992, but others have stepped up including O' Hare and parts of San Francisco International). Your standard RadioShack or Best Buy has the sex appeal of a urologist's waiting room.

Where do they go from here? Even though they're not too big to fail, Best Buy, for certain, and maybe RadioShack, will likely not close up shop tomorrow. Again, they pretty much exist by default. We have a need to go out. We have a desire to secure a bargain. We drew the short straw in the family's annual secret Santa Claus. Whatever the case, they survive because, on some level, our society allows them to. It's almost akin to how the homeless guy on the Promenade makes it through each day with a full belly thanks, in part, to the gratitude of others.

If the RadioShacks and Best Buys of the world want to shed their present wretched existences, they'll need management teams ready to circle the wagon with more than memos to the media and howls about price checker apps and sales taxes. Instead, they have to start stepping out in front, not letting the competition dictate the terms of engagement and, once and for all and last but not least, innovating. Until RadioShack, Best Buy or one of their similarly-positioned counterparts show this type of forward-looking pluck, I will not touch their "value" stocks with your smart phone's quick response code scanner.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.