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On March 27, Grupo Gigante announced it would be purchasing the approximately 250 outlets of RadioShack México for a total of US$32 million dollars from RadioShack Corp. the owner of the electronics specialist chain in the United States and elsewhere. Grupo Gigante previously had partial ownership of the retailer in Mexico but sold its stake in the joint venture in 2008 in the context of a challenging macroeconomic outlook.
RadioShack’s struggles, ultimately leading to bankruptcy and the closing of thousands of outlets in the US, are well-known. In recent years the retailer found itself with an overburdened geographic footprint and an underdeveloped internet retailing presence. RadioShack México, however, operates a smaller network of stores in a retailing environment in which internet sales are still nascent. This gives the chain a chance to learn from its US mistakes and develop a proactive strategy of e-commerce investment and controlled outlet expansion before the market dynamics in Mexico evolve, in contrast to the reactionary position the brand adopted in the US.
One of the criticisms of RadioShack’s US strategy was that it had oversaturated the country with outlets. RadioShack used to boast that more than 90 percent of Americans lived or worked within five minutes of a RadioShack outlet, but in recent years, especially in light of the increased importance of internet retailing, the dense network of outlets became excessive and expensive. RadioShack’s CEO acknowledged this problem in an earnings call in 2014, citing the example that there were eight stores within five miles of his home outside Fort Worth, Texas. In 2013, before RadioShack began closing stores in earnest in the US, RadioShack’s density was much lower in Mexico, at just .23 stores per hundred thousand people, compared to 1.6 in the US. In contrast to its US counterpart, RadioShack México has a much smaller geographic footprint and correspondingly lower real estate and outlet operating costs. RadioShack México’s stores are therefore an opportunity for the business, not a burden, especially considering the shopper preference for store-based retailing in Mexico.
One of RadioShack México’s competitive differentiators is that it uses a much smaller store format than its main competitors, which include not just other specialists like Best Buy but increasingly also players from other channels. Variety stores like Elektra and department stores like Liverpool also favor larger formats and have increasingly expanded into the consumer electronics and accessories market.
Source: Euromonitor International
RadioShack’s smaller format impedes its ability to draw consumers to its brick and mortar stores on the basis of product variety. Unlike in the US where compact stores like RadioShack and spacious outlets like those of Best Buy alike struggle to bring consumers through the door in the face of the broader product offerings of online stores, variety is still a viable strategy for consumer electronics specialists in Mexico because internet retailing remains underdeveloped. RadioShack also has difficulty competing on price, where the main challenges come from players in other channels like department stores, who can use discounted electronics to drive traffic and increase sales of higher margin merchandise, and internet retailers like Linio, who do not need to cover the cost of having physical stores.
RadioShack’s best strategy is to win on convenience. The store network already exists, and could realistically be expanded further in Mexico before running into the oversaturation difficulties the brand saw in the US. The store’s small format allows it to operate efficiently and compactly, particularly important for urban areas.
But perhaps RadioShack México’s most substantial advantage over its US counterpart has to do with internet retailing. A widely-cited factor in the decline for RadioShack in the US was that the store-based retailer could not compete with internet retailers, something that was critical considering falling traffic to physical stores. In Mexico, however, internet retailing accounted for just 9% of all consumer electronics sales in 2014, compared to 33% in the US. Internet retailing of consumer electronics is projected to grow quickly in Mexico over the forecast, but store-based retailers will remain the dominant channel through the next five years.
Source: Euromonitor International
There are a number of reasons that internet retailing lags in Mexico. While some younger and more affluent consumers increasingly shop online, most shoppers in Mexico remain distrustful of the internet channel. Concerns about the safety of internet financial transactions and complications in the shipping process make ordering online too risky to convince shoppers to sacrifice the benefits of the in-store experience. Furthermore, use of financial products is relatively low in Mexico, meaning much of the population does not have access to a method of payment that can be used for internet purchases. In 2014 for example, there were just 20 personal credit cards per hundred people in Mexico, compared to 90 in Brazil and 170 in the US. Because of these factors, RadioShack México’s network of stores will remain much more relevant, at least for now.
The Mexican retailing landscape is changing, and RadioShack México has a chance to benefit. The network of stores in convenient locations is an advantage in a consumer environment that favors store-based, and the retailer could easily introduce an order online, pick up in store policy as way to gain internet share and facilitate alternative payment methods. Internet retailing is growing but is still not fully developed, giving RadioShack more time to develop itself as an omnichannel retailer in Mexico. While RadioShack was caught flatfooted in an evolving US retailing climate, with the acquisition of the Mexico unit Grupo Gigante has the opportunity to develop RadioShack México before the market passes it by.