Category: General Finance

Why the Internet did not kill RadioShack

See the original article posted on Fortune Insider here>>

Although the electronics retailer is the latest victim in the rise of e-commerce, several other missteps led to its demise.

We’ve seen the downfall of many bricks and mortar stores over the last decade, including Borders, Circuit City, and most recently, RadioShack — to name just a few. As e-commerce continues to rise, it’s seemingly becoming more difficult for traditional stores to stay in business.

It’s true that online shopping has significantly grown over the last 10 years. Even in the last year, we’ve seen a noticeable uptick. According to the U.S. Census, total e-commerce sales for 2014 in the U.S. were estimated at $304.9 billion, which is a 15.4% increase from 2013. However, plenty of bricks and mortar stores are still healthy. Is it fair to blame e-commerce for every store closing and bankruptcy?

As a U.S. bankruptcy judge on Tuesday said he would approve a plan by the electronics retailer to sell 1,740 of its stores to the Standard General hedge fund and exit bankruptcy, it’s worth taking a closer look at why RadioShack failed. E-commerce wasn’t the only culprit. One big mistake involved poor strategic decisions over its financials. Feeling undervalued, the retailer bought back $400 million in stock in 2010 when its net profit was $206 million. It did something similar in 2011 when its net profit had declined to $72 million and it did another buy back for $113 million. In the end, it spent more than $500 million trying to push up the stock price.

However, the company didn’t make enough money to finance the buy back and had to borrow money, which increased its debt-to- value ratio and left RadioShack vulnerable to a declining profits. Rather than buying back so much of the stock and taking on debt, it should have accepted the valuation, closed a few inefficient stores and avoided bankruptcy.

Another significant mistake was its decision to change its product market strategy. In prior years, RadioShack was known as the place to go for hard-to-find parts and components needed to build things. It also had knowledgeable staff who could help customers with high-level customer service. Customers were willing to pay higher prices because of this additional value. After all, there is a difference between getting helpful information in person and trying to explain an issue via the phone, an online chat, or a Google search.

When RadioShack changed its business model to sell finished products like laptops and phones, it lost that competitive edge. Customers could get those finished products from many other retailers and e-commerce sites at lower prices. And a higher-level of customer service wasn’t needed for those products.

While it’s too late for RadioShack, its demise offers some important takeaways for other bricks and mortar stores:

Find a competitive edge. If you offer a unique product, like RadioShack did with selling specialty components, don’t disregard that strength.

Be aware of price sensitivities. A big challenge for bricks and mortar stores is that they have to pay for overhead whereas online retailers don’t, allowing them to charge lower prices. Customers are more likely to price shop for larger and more expensive items, especially ones readily available online like phones and tablets. They tend to be less price sensitive about small and specific goods like the components previously sold by RadioShack.

Focus on customer experience. A big draw for RadioShack was its knowledgeable staff. When it moved to selling finished products, the need for that staff — and consumer willingness to pay higher prices — disappeared. Many people still value talking to a real person.

Looking ahead, it won’t be smooth sailing for traditional stores. But it won’t be all doom and gloom either if they can learn from the mistakes of retailers like RadioShack.

Andrey Malenko is the Jon D. Gruber Career Development Assistant Professor of Finance at the MIT Sloan School of Management.

MIT Sloan Investment Conference 2015: Investing in a Brave New World

This Friday will see the annual MIT Sloan Investment Conference take place, after months of dedicated organization and careful planning. Part of the Sloan finance tradition, this student-run conference brings together influential individuals in the finance and investment world today to debate and discuss pressing issues in their areas of expertise.

We have themed the conference “Investing in a Brave New World”. More than six years after the financial crisis, the investment world today has fundamentally changed from the one many of us in grew up in. This has been driven by cheap money, new regulations, and the impact of technology. The aim of the conference is, therefore, to take stock of all things new in the investment world today, and anticipate what the new landscape has in store for us.

 We are honoured to have a group of incredible speakers to take the stage and guide us through the day, including Carson Block (Muddy Waters), Ben Golub (BlackRock), Megan Greene (Manulife), Jean Hynes (Wellington Management), Martin Mannion (Summit Partners), Howard Marks (Oaktree), Vikram Pandit (TGG Group), Tom Speechley (Abraaj), and Eric Wetlaufer (CPPIB). Our very own Professor Robert C. Merton will also make a presentation on his latest research. With 10 speakers scheduled from 8am to 6pm, the conference will be packed to the brim with content. We invite you to check out our website for the agenda: www.sloaninvestmentconference.com

Organizing such an event is no easy task. In fact, some of the relationships and planning began over one year ago in the lead up to the 2014 conference. Venues were negotiated for and booked, speakers were reached out to and enthused, and tickets were marketed and sold – and are still selling, for those interested. It was thanks to a committed team of individuals, who are passionate about finance and the opportunity to meet some of the most influential minds in the industry, that the conference has come together so seamlessly.

 It should be clear that the MIT Sloan Investment Conference is a must-attend. The insights, speakers and networking opportunities are amongst the best the conference has seen to date, and we hope you are free to enjoy the spectacle.

 Brian Liston is a Master of Finance candidate at the MIT Sloan School of Management

Unfunded State and Local Healthcare Benefits, the Elephant in the Room?

Last week Bob Pozen, a Visiting Senior Lecturer here at MIT Sloan with a distinguished background in government, business and education gave an eye-opening lunch talk. The topic was “Other Post-Employment Benefits” or OPEBs—which is accounting jargon for the liabilities governments incur for retiree healthcare.

Here’s what he found:

“The 30 largest American cities had over $100 BILLION in retiree healthcare deficits in 2013, as estimated by the Pew Charitable Trust. In that year, New York City showed the most serious retiree healthcare deficits at $22,857 per household. The retiree healthcare deficits of the States were even larger in 2013 — a total of $528 BILLION according to the credit rating agency Standard & Poor’s.”

How have such enormous liabilities gone largely under the radar? One reason appears to be lack of transparency in how they are reported. Governments are not required to fund those liabilities, and in most places they don’t appear on balance sheets. (That omission will be corrected if GASB, the government accounting standards setter, prevails.) OPEBs also lack the constitutional protections of pension promises. That means cities like Detroit that run into financial trouble may find a way out of those obligations. In most places though, taxpayers will foot the bill unless benefits are renegotiated.

You can read more about OPEBs and Bob’s suggestions for how to address them at:

Real Clear Markets – “Unfunded Retired Healthcare Benefits are the Elephant in the Room

Boston Globe – “Boston Must Rein Retiree Health Plans