Why Dell Needs RadioShack

CEO Michael Dell says it's time to "go beyond" phone and Internet sales. Could this brick-and-mortar electronics retailer be the answer?

Michael Dell is ready to consider some fundamental changes to the business model that made his namesake company famous and, more recently, troubled. That's the takeaway from an Apr. 27 e-mail he sent employees. After years of selling only via phone and the Internet, Dell told his troops that "the direct model has been a revolution, but is not a religion…. We will continue to improve our business model, and go beyond it, to give our customers what they need."

So here's an idea to consider: Why not buy RadioShack (RSH)? It sounds nuts, I know. How would buying an 86-year-old milquetoast retailer with moribund growth help Dell's (DELL) nascent turnaround effort?

At least on paper, this merger could plug some of the strategic holes that have appeared in Dell's approach in recent years. Obviously, RadioShack's 4,000-plus stores would give Dell a meaningful retail footprint, filling a critical need, given that more than 50% of all PCs sold in the U.S. are sold at brick-and-mortar stores.

Hard to Break In

And the stores could give Dell a way to finally make a dent in the market for consumer-electronics such as music players, TVs, and the like. (To me, the clearest proof that Dell had grown far too confident in its model was the belief that it could get mainstream consumers to buy expensive TVs online without being able to see the actual picture! It just doesn't make sense.)

Clearly, a RadioShack purchase would be hugely risky. Despite Apple's (AAPL) remarkable success with stores, the history of PC makers getting into retail is a dismal one. It means assuming heavy fixed costs on real estate and requires a different set of skills—one that Dell's management team, even with a host of new faces, doesn't have (see BusinessWeek.com, 3/2/07, "Dell's Doubtful Turnaround"). And it's hard to break into an already crowded market. Just ask Gateway (GTW), which closed the last of its Gateway Country Stores in 2004. "I'm not sure the market needs another 4,000 stores aggressively selling PCs," says NPD Group analyst Stephen Baker.

And RadioShack comes with plenty of baggage. The company has been losing market share to big-box retailers like Best Buy (BBY) and to online sellers catering to the consumers who eschew the big markups on the electronics—cables, batteries, connectors—that have long been RadioShack's bread and butter. Also, RadioShack is having the most trouble selling precisely the kinds of products that are most important to Dell. It has never been much good at selling PCs, and is struggling to sell TVs and cell phones and cellular service packages.

Taking a Multipronged Approach

Nor would RadioShack come cheap, thanks to cost-cutting by CEO Julian Day since he took the helm in July. While sales fell 14.5%, to $992 million, in the first quarter, earnings quadrupled. "The stock looks really expensive to us," says Michael Souers, an equity analyst with Standard & Poors, which like Businessweek.com, is owned by the McGraw-Hill Cos. (MHP). With the stock up from $16.49 on Dec. 21 to nearly $29 now, Souers thinks Dell would be buying at a near-high.

Indeed, Dell gives no indication it's headed down this path. For now, it appears to favor a multipronged approach. It has opened a Dell store in Dallas and had planned to open up another store outside of New York before recently deciding to postpone the project. Mostly, the industry buzz is that it will ink deals with other retailers to sell its wares, especially overseas, where its market share is generally far below the 20%-plus level in the U.S.

As unlikely as a RadioShack acquisition may be, none of the analysts and industry insiders I spoke to on this were willing to shoot it down completely. Every one of them paused to think, invariably calling it an "interesting," "compelling," or even a "promising" concept. "Maybe initially it looks harebrained," says Roger Kay, founder of Endpoint Technologies Associates. "But if you look more closely, it could be a way for Dell to participate in retail without having to deal with the likes of Best Buy, with their aggressive terms, and without having to fight for shelf space with Hewlett-Packard (HPQ), Apple, Acer, and Gateway." Another Dell watcher, a well-known Wall Street stockpicker, doesn't expect Dell to buy RadioShack but says the idea isn't ridiculous, and that it represents the kind of radical departure the company needs to consider. "Dell really needs to do some out-of-the-box thinking [to improve sales to consumers]. That's the point," says the stockpicker.

Dealing with Retailer Distrust

Buying its own stores (probably a better solution than building its own; I just don't see the Dell crew being able to pull it off the way Apple has) may be one of those radical ideas. Dell has always based much of its thinking on cutting out the middleman. This would enable them to stay on that course. Also, Dell doesn't have the kinds of stand-out products that would give it a clear advantage over products from HP, Gateway, or other PC makers on store shelves. And it wouldn't have to overcome the distrust of retailers. Even when Dell made a brief foray into retail in the early 1990s, it often undercut partners by quickly offering better prices over the phone, recalls NPD's Baker, who worked for Staples (SPLS) at the time. "They'd poach our customers," he says.

Given Dell's low-innovation approach, don't expect a raft of Apple-esque products that by themselves warrant a trip to the Dell store. Rather, Dell would need to meld its logistical and operational skills to create in the physical world what it did so brilliantly in cyberspace in the 1990s—create some kind of new shopping experience. Maybe it could meld Dell's build-to-order capability, where you go into a store and get help to design your own perfect machine with actual hardware, rather than on a screen on an electronic kiosk. Then, you could go back a few days later to pick it up or have it delivered to your home.

Then there are customer service challenges. Dell clearly has some making up to do with consumers angered by faltering phone support in recent years. Developing a network of competent staffers at nearby stores could be a powerful, if expensive, way to win them back. For illustrative purposes, let's consider a prospective customer: me. I'm in the market for a new desktop PC. I'll probably end up buying online, but wouldn't mind getting a look at my ultimate choice before I do. And while I have no idea where Dell's nearest kiosk is located, there's a Radio Shack just a mile away. In the past, I've only gone there to buy cables and other tech paraphernalia. But if the store also served as a Dell showroom, store, and service depot, when I run out of patience with phone support, I might well be drawn in.

Harmonic Brand Convergence?

Hold on, you say: Why buy a chain that's about as exciting to most consumers as a trip to the dry cleaner? No doubt, RadioShack stores aren't nearly as swank as Apple's stores, but then, that's the point. Dell's typical customer isn't Apple's typical buyer. I've always thought that Dell's marketing approach over the years has been to build a kind of anti-brand, designed for everyday folks who just want a good deal. (If you want to sell to the techno-sophisticates, the Dell Dude would not be your first choice as pitchman.) Well, that's RadioShack, ain't it? I'll leave it up to the marketing pros to figure out the details, as my only spur-of-the-moment idea—"the Dell Shack"—doesn't quite have the gravitas they'd need. Still, it seems to me there could be some harmonic brand convergence here.

And Dell could clearly afford it. RadioShack's market capitalization is less than $3 billion, compared with $57 billion for Dell. They both earn roughly the same amount at the end of the day. (RadioShack posted net margin of 6.4% last quarter; Dell's was 6%.) On the other hand, the operational risk is high—especially for Dell, whose largest acquisition was PC boutique manufacturer Alienware last year. RadioShack has 40,000 employees, compared to 65,000 to Dell, so it's not nearly as small an undertaking as RadioShack's market cap might suggest.

So could this deal actually happen? Dell wouldn't comment, and RadioShack didn't return my call before press time. And I haven't got any money riding on Dell doing this deal. But it's exactly the kind of radical idea Michael Dell should be considering as he strives to turn around the company that bears his name.

Before it's here, it's on the Bloomberg Terminal.