Once viewed as a haven for technology nerds, RadioShack Corp. has quickly become one of the most prominent retail locations for wireless products, services and accessories. Analysts have reported that the retailer accounts for as much as one-fourth of all gross customer additions for its wireless partners Verizon Wireless, Sprint PCS and prepaid reseller TracFone Inc.
RadioShack noted that wireless sales were up 16 percent year over year in the second quarter, and that it expects sales to grow more than 8 percent annually over the next two years.
That prominence has increased over the past several weeks as the company-which claims to have a retail outlet within five minutes of where 94 percent of American’s live or work-signed deals to operate kiosks for a pair of high-profile clients that should increase that presence even more.
RadioShack last week penned a multi-year agreement with Sam’s Club to operate wireless kiosks in 542 Sam’s Club locations across the country. The kiosks offer products and services from Sprint PCS, T-Mobile USA Inc. and Cingular Wireless L.L.C., as well as wireless accessories. Sam’s Club reported more than $150 million in sales last year from its kiosks.
RadioShack said it will provide a turnkey solution that leverages its own infrastructure in the areas of design and construction, distribution, merchandise selection, store operations, hiring and training, but noted there would be no RadioShack branding evident in the Sam’s Club locations. RadioShack announced a similar deal with Sprint Corp. last month to operate Sprint PCS-branded kiosks in about 500 shopping malls across the country.
“Our agreement with Sam’s Club is powerful confirmation of our retailing services strategy, whereby we leverage our own internal infrastructure to operate small-box retail operations for other companies,” said Leonard Roberts, chairman and chief executive officer for RadioShack. “Sam’s Club members will benefit from our proven wireless know-how. And we benefit by adding another sales channel that we believe will ultimately bring us an increased share of the wireless market and greater sales and earning potential.”
RadioShack noted the deal with Sam’s Club was made possible through its acquisition of certain assets previously owned by Arizona-based Wireless Retail Inc., which had been operating the wireless business in Sam’s Club. RadioShack added that existing Wireless Retail employees who have been working at Sam’s Club became employees of RadioShack.
Due to the initial ramp-up in working capital associated with the agreement, RadioShack said the combined impact to capital expenditures, inventory and receivables will result in a drop in year-end free cash flow from its previous guidance of $72 million to between $30 million and $40 million. The company increased its sales guidance for next year and added that it expects a favorable earnings contribution from the Sam’s Club agreement beginning in 2006.
RadioShack’s multi-year agreement with Sprint calls for RadioShack to develop, deploy and operate Sprint-branded kiosks in about 500 shopping malls across the country following a 10-month test program involving 10 Sprint kiosks.
The agreement is similar to the latest deal with Sam’s Club in that it calls for RadioShack to provide Sprint with a turn-key retail solution that leverages its own infrastructure as well as RadioShack taking responsibility for all development, implementation and maintenance for the kiosks, as well as the daily operations. RadioShack will also employ associates working at the Sprint-branded locations.
While RadioShack opens itself to some financial risk in such arrangement, the company said it has done extensive research on the kiosk models and found that they fit in well with RadioShack’s expertise in the technology retail segment.
“We have been looking at the model for some time, and asked ourselves if we could provide the service for someone and make money with it,” explained James Grant, senior director of investor relations for RadioShack. “Wireless is a segment that we have traditionally done well in and is a segment that fits in well with our core operations. We’re not looking at branching out into apparel, but we do know wireless.”
The retailer also noted that the deal with Sam’s should expand its presence to a broader audience, which could translate into growth for its more traditional outlets.
“Sam’s is a different channel for us,” Grant said. “It’s a high traffic location with customers that don’t usually shop at RadioShack.”
Analysts have been generally supportive of RadioShack’s greater presence in the wireless retail space, noting it broadens the locations where customers can purchase products and services and has proven to be a successful model.
“Buying a wireless phone and service is a complicated and expensive proposition for many people,” said Adam Guy, director of Compete Inc.’s wireless practice, who added that customers can spend in excess of thousands of dollars over the life of a wireless contract. “RadioShack has shown it knows how to sell phones.”
However, carriers need to make sure that the financial models of such alliances are in line with their expectations, Guy continued. “Wireless adoption is pretty much saturated at this point with most of the new growth coming from lower value customer segments,” Guy warned. “Carriers that adopt these outsourcing models are in many cases going to be paying higher incentives to salespeople than they do in company-owned stores and in many cases not getting a high-value customer in return.”
RadioShack also acknowledged that its non-RadioShack-branded kiosks likely will cannibalize some sales from its traditional outlets, but said its trials showed those levels to be acceptable, and that the Sprint brand attracts a higher-value customer.
While the RadioShack model has signed some big names to its kiosk program, not all wireless carriers are ready to hand over their sales operations to a third party.
Verizon Wireless, which also offers service through RadioShack locations, recently announced that Circuit City would begin offering Verizon Wireless products and services exclusively through a store-within-a-store model in more than 570 retail locations across the country. Circuit City noted that Verizon Wireless would operate the locations and take responsibility for the employees, inventory, displays and signage. As part of that deal, Circuit City is dropping T-Mobile USA products and services.
