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Continued: Schafer: Schulze's baby could turn into RadioShack

  • Article by: LEE SCHAFER , Star Tribune
  • Last update: June 17, 2012 - 10:35 AM

Richard M. Schulze reminded us 10 days ago that he is the founder of Best Buy Co. Inc., and it is still his baby.

In quitting the board of the struggling retailer, Schulze said he was mulling options for the 68.9 million shares of stock he controls. Scenarios range all the way up to a transaction that puts him back in control of the Richfield-based company.

Such pursuits place Schulze in a long line of company founders who can't quite let go of their creations. You heard that "Dick won't let go," that he is "flunking retirement," that "the only good option is to quietly retire, and he's already blown that one."

Schulze found himself in this position, an outsider at a company he started, by foolishly choosing last December to handle an allegation of inappropriate behavior privately with then-CEO Brian Dunn rather than confer with board colleagues or the general counsel. When that came to light, Schulze agreed to step down as board chairman in late June and from the board altogether next year. He abruptly cut that transition short by resigning on June 7.

Schulze may in fact have strictly emotional motives to push his own agenda now, at age 71 and 10 years removed from day-to-day leadership of the company. But his actions also are precisely what one should expect from a lifelong merchandiser who needs to protect a 20 percent stake in the company.

Right now, interim chief executive George L. "Mike" Mikan III is taking Best Buy on a course that will lead to a completely different kind of company than the one Schulze spent his career building. Mikan explained to investors last month that "my goal is to continue to shrink the company's physical footprint and substantially reduce our cost structure. Total square footage will go down ... but as we assess opportunities, our total storefronts may stay the same or even grow somewhat."

Mikan took pains to say his ideas are principles and not a fully baked plan, but the theme is clear: Drive down square footage, move away from the classic Big Box, increase total storefronts, and build up Best Buy Mobile stores. Schulze hears this and can only envision his electronics empire getting whittled down to something akin to RadioShack.

The goal of Best Buy's current small-box thinking is to avoid the fate of former big-box rival Circuit City. That chain closed its last store in March 2009, having failed at the business model that Best Buy perfected and that Mikan says no longer works.

But RadioShack is failing at the business model Best Buy seems to be adopting.

RadioShack once was what Apple stores are now, the place you went to get the latest new devices. As recently as 1998, RadioShack called itself the single largest seller of consumer telecommunications products in the world. A year later, its stock peaked near a split-adjusted $80 per share amid a boom for all things digital.

Since then, it has been nothing but a trail of tears for the company. CEOs came and went, including one in a 2006 résumé scandal. There was a plan called "Fix 1500" that fixed nothing but had the brutal outcome of more than 1,700 store manager firings and demotions. Then there were multiple rounds of layoffs, including an infamous episode in which RadioShack let some 400 employees go via e-mail.

The most recent reports haven't been that encouraging, either. RadioShack reported first-quarter comparable-store sales declines of 4.2 percent and a net loss. The worst category is consumer electronics, as sales of those products declined 24.1 percent from the same period of 2011. At a recent price of $4.17 per share, RadioShack shares have declined 81 percent over the past two years, and trade today well below book value.

Best Buy declined to comment on its strategy, but there are certainly many points of contrast with RadioShack. The average RadioShack store is 2,473 square feet, and Best Buy operates, at last count, 1,016 big boxes of 30,000 square feet or more in the United States.

But most of the recent strategic discussion at Best Buy has been about the company's small boxes, like the 1,200-square-foot Best Buy Mobile stores. The company opened 43 of those in the latest quarter. In Europe, Carphone Warehouse and Phone House stores average just 800 square feet.

In looking for new Best Buy comparables -- an international retailer focused on mobile phones and other electronics for the consumer in a small-box format -- there is really just RadioShack. There are lessons to be learned from Apple's retail stores, but their strong performance is powered by the overall Apple brand and product line. Not much is comparable to that.

From RadioShack's May annual shareholder meeting, you can see that its CEO has an optimistic-sounding turnaround plan focused on selling more mobile devices and accessories (as does Best Buy), improving multichannel execution (as does Best Buy), enhancing the customer experience in the store (as does Best Buy), expanding store-within-a-store concepts (as does Best Buy) and further cutting costs (as does Best Buy).

Schulze declined to make himself available for a conversation last week. But to skeptics who would ask what he proposes when the best strategic thinking at places such as RadioShack and Circuit City led to dismal results, he could respond that he is at least a merchant. Schulze was the only merchant on the Best Buy board of directors.

Anybody leading Best Buy faces a challenge, as lots of promising-sounding ideas have been tried in the past decade as retail companies struggled to reinvent themselves.

Again, a great example is RadioShack. The company took a stab at a uniquely branded mobile-only store, opening three PointMobl stores in the Dallas area in late 2008. This approach was different than Best Buy Mobile in that it was a stealth test of a new brand. RadioShack so completely masked ownership that consumers would have had no way of knowing that PointMobl had anything to do with RadioShack.

The PointMobl stores sold mobile phones, plans and accessories, tablets, GPS devices and other products for the well-connected mobile user, in well-trafficked suburban locations. But early last year, RadioShack quietly ended the test and closed its three PointMobl stores.

Dick Schulze likely knows all about that.

lee.schafer@startribune.com • 612-673-4302

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