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UPDATE: Radio Shack Pulls Out of Blockbuster

11 Jan, 2002 By: Joan Villa

RadioShack has pulled the plug on its test of consumer electronic s kiosks within Blockbuster stores.

After six months, a $10 million investment and a buildout of "RadioShack Cool Things" boutiques within 130 Blockbuster locations in four markets, the electronics chain says the test failed to produce an adequate return on investment, according to c.e.o. Leonard Roberts. "There are more cost-effective ways to extend our reach," he adds.

While the two companies will still meet to discuss results and possible future alliances, RadioShack will not continue with a planned $200 million to $300 million investment that would have put the mini-stores in all 5,000 domestic Blockbuster outlets.

Blockbuster executives, however, characterize the test as a success that is leading them to actively explore and develop a narrow selection of consumer electronics, including deals with name-brand manufacturers, for a national roll-out this year.

Through Blockbuster's own forays into DVD hardware and the RadioShack pilot program, chairman and c.e.o. John Antioco says, "we were able to gain valuable insights in a very cost-effective manner that will enable us to establish a profitable program selling select consumer electronics that complement our core business."

The most popular selling products from the test were DVD and VHS players, mobile phones, surround-sound systems and accessories like cables and connectors. But even outside the pilot locations, Blockbuster fashioned several DVD player offers in the fourth quarter, most tied to free rentals, that "exceeded expectations," adds senior v.p. Karen Raskopf.

"We're confident we can make this a profitable business model for ourselves," she says. "The capital investment [RadioShack] made for fixtures and store inventory was predicated on a larger space and a much larger assortment of products than we're going to do going forward."

Details of a hardware roll-out are still in development, with some stores getting end-caps or full-fledged areas depending on their location and overall square footage, she adds.

The test stores—in Las Vegas; Austin, Texas; Tulsa, Okla.; and Norfolk, Va.—"are going to continue as RadioShack awhile longer while we figure out what to do," she says. "When the RadioShack signage comes down I wouldn't be surprised to see those locations remain with that space carved out as we continue to develop that program."

The concept will hinge on Blockbuster's ability to tie hardware into the rental experience, says

analyst Barry Sosnick, who covers both Blockbuster and RadioShack for Fahnestock & Co. He believes Blockbuster has fared well with offers such as one on Thanksgiving Day that awarded a free Philips DVD player with the purchase of a $199 52-week DVD rental card.

"If you want a free DVD player it locks the customer into renting at Blockbuster," Sosnick notes. "What this, in effect, does is decrease your need for marketing, advertising and promotion, because that's one customer you don't have to induce to shopping in your store because that customer is already committed."

He says problems with the RadioShack test ranged from a different customer demographic for the two retailers—RadioShack skews toward an older male, while Blockbuster captures a female and younger customer—to widespread theft problems from the boutiques.

"When RadioShack is saying it can't generate return on investment, that indicates that the high margin items were not necessarily selling well," he observes. "The question becomes, why RadioShack couldn't be effective inside Blockbuster when Blockbuster can be effective without RadioShack."

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