Circuit City Proves Penny Wise and Pound Foolish

When Circuit City made the decision last March to lay off 3,400 of its most experienced sales associates because they were making too much money (earning $14 or $15 an hour), many people believed the move defied logic. Why, after all, would a company already struggling to keep up with the competition intentionally weaken the part of the organization that dealt directly with consumers?
At the time of the layoffs, Circuit City CEO Philip Schoonover told Reuters that the move would “deliver improvements in our selling, general and administrative expense rate while maintaining appropriate investments to drive our key strategic initiatives such as digital home services, multi-channel and home entertainment.”
(See RetailWire 3/30/07 – Circuit City Gives Best Paid the Boot)
Nine months in, the concerns expressed about the move now appear prescient as Circuit City reported holiday sales that were 11.4 below the same period in 2006 when the pricier employees were still on hand.
Peter Cohan, a management consultant and professor at Babson College, told The Associated Press that Circuit City “violated a basic principle of good business” when it made the decision to let the workers go.
“They (executives) were so focused on cutting costs that they failed to take into account the real value of good salespeople,” said Mr. Cohan.
Dean Baker, co-director of the Center for Economic and Policy Research, said Circuit City management’s publicly admitted willingness to get rid of higher paid employees brought about an unwelcome cultural change inside the company. “Why would workers have the incentive to put in any extra effort?,” he asked.
The change in attitude among the chain’s employees hasn’t been lost on consumers who AP reports have made disparaging observations online about the company and the shopping experience.
Discussion Questions: How does Circuit City fix the situation created by the company’s decision to go with less experienced store staff? Does the same management team that made the decision to lay off 3,400 workers have the credibility within the organization to lead it out of the current hole its in?
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25 Comments on "Circuit City Proves Penny Wise and Pound Foolish"
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To start with, they should get rid of the CEO and the chief operating guy–that will cut a lot of costs right away. Then, hire some season managers who are willing to get paid based on performance; mostly in customer satisfaction, employee retention and then sales. Of customers and employees are happy, sales would take care of themselves.
So where does Circuit City go from here? A while back when news of this broke, I firmly stated in a post that CC better have a darn good recovery plan for this. That never materialized and CC customers and shareholders are paying the price. CC management has probably done irreversible damage with this as no one will look at them as a solution for long term employment. They need to change things from the top first and then they may have a chance of rebuilding their credibility in retail. I don’t like being a naysayer and most situations have a solution but I honestly feel that CC is in a huge amount of trouble and it will take massive strides to build goodwill between front line staff (the most important in retail) and corporate.
When we discussed this issue at the time of the layoffs, many predicted this exact thing would happen. And what did Best Buy do when this took place? Put an even heavier focus on providing better service to shoppers…and it showed. It’s very unfortunate, as Circuit City once shined in the minds of consumers as the CE retail brand with the best customer service.
Having once worked on the brand, I do think that there is a way out–but it will be a huge and complex task. They are going to have to get pay levels back up, re-focus on training in a focused and innovative manner and make the stores a desirable place to work from all angles. They could find some key inspiration from brands doing this well but it’s a crap shoot regarding if they have the leadership and internal wherewithal to pull it off. There are a lot of folks in Richmond that will be on board, so for their sake I hope so!
Circuit City needs to be the anti-Best Buy. They need a culture, a vive and a reason for being. As Best Buy continues to expand (as they will) and all others continue to fail (CompUSA), the category is looking more like crafts, with Michaels being so dominant. Circuit City is like JoAnn Stores (yikes!!).
Whacking staff was strange but if there was an associated reason, like prices will always be 5% less than Best Buy or “we are pumping up our customer services department” it might have made a lot of sense.
Circuit City needs to find a reason to exist in a blue, Best Buy world.
Circuit City has ceded any customer service edge it had and, with the industry’s dirty little margin secret revealed and rolled back (the sham known as extended warranties from which Circuit City derived a disproportionate amount of its revenue), Circuit City’s best hope would be to focus on categories that they can “win.” Perhaps home theater qualifies since it is a complex, mass-unfriendly sale; however, back to the lack of qualified customer service,they would do well to embrace third party support, and lots of it, in order to ramp up quickly within targeted departments.
This is either a company who is so against the ropes, they just did the extreme to avoid extinction, or another example of allowing Wall Street to drive the cart.
I described the move on RetailWire last March as a “lowest common denominator” approach to hiring and as a move that might hasten the demise of a retailer who wasn’t “best in class” in the first place. The question now is whether the same team that made the decision can reverse it, with the company’s financials in an even shakier position. The “Firedog” concept (Circuit City’s answer to the “Geek Squad”) isn’t a solution if the in-store expertise is weak to begin with.
Home Depot made a similar mistake by ridding its payroll of its highest-paid and most experienced associates. However, they still had the market share, financial strength and time to correct their error. I’m not convinced that the current Circuit City management has the same luxury even if they recognize the misstep.
When Circuit City made the layoff announcement last March the stock was $17. Today it’s less than $4. Their problems go MUCH deeper than personnel management. They hired John Harlow yesterday as their new COO. He is from Deloitte and A&P. If Circuit City can turn itself around this year, they should get the Platimum Award For Retail Achievement. It will not be easy. The margin problems for home electronics are murder.
You get to do slash and burn once and supplement a new culture. If that can be nurtured, you get the sales. If not, you fundamentally killed the roots of the company. Look for them to be bought out or end up like CompUSA. It’s not the economy, it’s the management.
I was very impressed with Circuit City’s recent advertising campaign. I think they have done the best job of any major retailer in tying a cross channel message together in a sensible way for the customer.
Their new head of marketing, Peter Weedfald, comes from Samsung where he did some great branding work, so I wouldn’t write off Circuit City just yet.
Beyond their obvious challenge of rebuilding after the short-sighted decision to lop off their most experienced salespeople, they also have a long way to go in differentiating from Best Buy. Firedog feels like a cheap knockoff of the Geek Squad and every email marketing campaign I’ve seen is solely focused on discounts rather than unique merchandise or a value proposition.
Circuit City knew full well there would be negative results from the firings. However, Circuit city is broke and spiraling towards bankruptcy. They had no choice. It’s not like they had bottomless pockets to keep paying people.
It’s really nonsense to talk about fixing problems that are so far gone. Just like it is futile to talk about fixing Sears and Kmart. Time to move on to the next subject and let the bankruptcy courts and liquidators handle this one.
If your CEO cannot articulate the basic principles of Activity Based Management (ABM), employees will never achieve or sustain activity cost improvement. Leadership ability is always the lid on an organization or individual. Leadership develops daily, not in a day. You have to work at it, learn, and invest in your leadership development. Leadership is complicated. It has many facets: respect, experience, emotional strength, people skills, discipline, vision, momentum, timing, and the list goes on.
However, in the case with Circuit City just like The Miami Dolphins the entire leadership team needs to be replaced (my opinion). The issues at Circuit City encompass more the P&L issues. They have or are close to have lost their brand identity.
Circuit City has one way out and that is to differentiate, and they do have a plan of sorts. Electronics has become a commodity. Selling accessories and services drive the bottom line. They need to trade off their aging real estate for small boutique formats and go after the XYZ generation. They should become the Starbucks of electronics…a place to hang out not just shop. The market will follow the “in crowd” because after all, we all want to appear cool. They need to adopt the UPS hiring model and go after a young energetic sales force. Pay top dollar but limit benefits and move the best and brightest up fast. If they can go out on the limb and form some strategic alliances with up and coming developers they may crack some first to market technology. Bad news doesn’t get better with age. They need to act now….
This reminds me of the old computer tech anecdote “my computer turned off by itself and now won’t switch on” where it turns out the caller contacted tech support during a power outage (true) and ends with tech support recommending the caller box up the machine and return it because they are “too stupid to own a computer” (not true). Perhaps this management team should just close up shop–they’ve already given away the game.
It takes years to build a culture but just moments to destroy it. Now Circuit City has to rebuild, and to do that there are three things that need to happen.
1. Identify what that culture (brand image) will be and why it should exist, not only from a customer standpoint but also from an employee standpoint.
2. They need to put in leadership that will have the respect and confidence–first, of the employees and second, of the customer.
3. They need the strength to survive.
Number 3 is the short straw but the other two are not easy.
Continental Airlines was able to do the above…so there is hope.
Circuit City serves no need in the marketplace. With Best Buy, Wal-Mart, Target, Costco all selling similar product, and Circuit City not wanting to invest in knowledgeable salespeople, Circuit City is an example of a retailer that completely lost its place in the market. If the chain were to cease to exist, other than the employees who work there, not too many people would miss the retailer.
How should they fix the problem? They shouldn’t. They should follow the lead of CompUSA, call it a day, and close their stores. If they want to recreate themselves as an Internet-only business, they should manage to stay alive for awhile, but their retail strategy does not look as if it will ever allow them to rise from their current low point.
Was it really last March already…and they’re STILL around?
As for the executive suite: they pulled a solid 1% vote of confidence–ONE PERCENT!! (and I think we all can guess the names in that group)–what more needs to be said?
As a current CompUSA employee, I can understand a bit of Circuit City’s situation. I think that CC ought to go back to the basics and ask themselves–
1. In the “good old days” what were we good at?”
2. Was “what we were good at” taken away from us by BB, et. al.?
3. If so, it’s time to reinvent and fill a niche that needs to be filled. What can we do?
4. Failing to find a niche…put the company and employees out of their misery.
The best thing that happened to CompUSA is that “Slim” bailed and killed it (more-or-less). Call it the creative destruction of capitalism. CC is in a unique position. The demise of CompUSA does leave a hole on the East Coast. A full blown tech store, based on the Fry’s model would fill a hole that CompUSA forgot existed. Just a thought, but not only my opinion.
Circuit City will have to replace leadership with an extensive organizational redesign. They need to reinvent culture and only something as cataclysmic as the wholesale turnover of leadership will allow for that to happen. This in turn will re-energize staff and middle management as they trust the BOD to make good decisions and make appropriate adjustments to decisions that were erroneous.