What Happened to its Economic Moat?
As you may have heard, RadioShack filed for Chapter 11 bankruptcy last week. As part of the restructuring, 1,784 stores will be closed, between 1,500 and 2,400 stores will likely be sold to General Wireless, and 1,750 will reopen as hybrid Sprint/RadioShack retail stores.
The saddest part is not that RadioShack filed for bankruptcy but the slow evaporation of its economic moat that caused it to do so.
An economic moat, coined by Warren Buffett, is what Michael Porter would call a competitive advantage – an attribute (e.g., brand name, pricing power, cost structure) that allows an organization to outperform its competitors. The wider the moat, the larger and more sustainable the competitive advantage.
In the 1970s, RadioShack had a phenomenally wide economic moat: it was THE destination for electronics hobbyists and tinkerers, whether it was to buy new electronics and supplies, to repair broken equipment, to get advice, or simply to hang out.
The company started as a specialized retailer that attracted ham radio hobbyists, but soon expanded its offering to hobbyist electronic products of all sorts, including accessories, DIY supplies, and even items like lie-detector kits.
RadioShack’s competitive advantage as the go-to place for electronics enthusiasts positioned it perfectly to tap into the growing number of computer hobbyists. It introduced one of the earliest mass-produced personal computers, the TRS-80, in 1977 – the same year that Apple incorporated.
Bill Gates coded the operating system for the TRS-80, Michael Dell saw his first computer in a RadioShack store, and Steve Wozniak relied on the retailer for parts while building the Apple I and II, proving just how pervasive RadioShack’s moat was by the end of the 1970s.
Unfortunately, the rise of the personal computer – which caused tectonic shifts in so many other industries – also fundamentally altered RadioShack’s customer landscape.
For one, personal computer and electronic product manufacturing was no longer the domain of tinkerers and hobbyists. These products were soon being produced by large companies, like Apple and IBM.
This mass production also pushed the price for these products down. Repairs – one of the things that kept customers coming back to RadioShack’s stores whether for parts or for knowledge – turned into replacements.
As a result, RadioShack was forced to become a regular consumer products retailer, selling first these new mass-produced computers and eventually mass-produced phones. RadioShack was then no different from any other Circuit City or CompUSA.
Over the past decade, online sales have stolen away the company’s market share and the introduction of expensive smartphones has eaten into its gross margins.
Facing a crisis, the company tried to rebrand its stores and its image in 2013. In last year’s Super Bowl, the company ran an ad in which Hulk Hogan, Cliff Clavin, ALF, and other nostalgic personalities tear apart a RadioShack store. The commercial ended with the phrase “The ’80s called; they want their store back.” The idea was to introduce brighter stores with new layouts and designs.
But the company didn’t have enough money to overhaul all its stores and revenue continued to decline. In the midst of a liquidity and solvency crunch, management needed to sell some of the company’s retail locations to generate cash. However, the company’s lenders (who were using the stores as collateral for their loans) declined the request. RadioShack had no other choice but to file for bankruptcy.
Watching that Super Bowl commercial now is fairly poignant. But really, the ad execs got the ending catchphrase wrong. The decade should have been the 1970s, and RadioShack should have been the one on the phone asking for their customers back.
Christopher Mims, technology columnist for the WSJ, had a great paragraph in his article today on RadioShack’s downfall:
“RadioShack was once a cultural phenomenon—a place with a unique geographic but also psychological reach, a hub of one of the many leisure-time activities Americans once enjoyed to a degree it’s hard to fathom now, in a time when apps allow those of us with more money than time to outsource even the minutest details of our lives. RadioShack, in turn, had no choice but to become a retailer, a place that sold electronics devoted primarily to consumption.”
Apart from the underlying comment about today’s consumption-driven society, that excerpt can also provide very useful advice to intelligent value investors: Seek out those companies with the widest economic moats, whose shorelines can withstand erosion from secular changes; but remember, competitive advantages do not last forever and business must continuously work to keep them.
It’s clear that after the reduction in the number of electronics hobbyists and the rise of mass-produced consumer electronics, RadioShack failed to adapt itself accordingly. Once the central location for those inventors and tinkerers who helped drive the technological revolution we enjoy today, it’s likely that most RadioShack stores from now on will only be visited in nostalgic memories.