Circuit City Proves Penny Wise and Pound Foolish

Discussion
Jan 17, 2008

By George Anderson

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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Robert Chan
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Robert Chan
14 years 3 months ago

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.

Doron Levy
Guest
Doron Levy
14 years 3 months ago

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.

Laura Davis-Taylor
Guest
Laura Davis-Taylor
14 years 3 months ago

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!

Mark H. Goldstein
Guest
Mark H. Goldstein
14 years 3 months ago

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.

Carol Spieckerman
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Carol Spieckerman
14 years 3 months ago

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.

Bill Kennedy
Guest
Bill Kennedy
14 years 3 months ago

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.

Dick Seesel
Guest
14 years 3 months ago

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.

Mark Lilien
Guest
14 years 3 months ago

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.

Bob Phibbs
Guest
14 years 3 months ago

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.

Andrew Gaffney
Guest
Andrew Gaffney
14 years 3 months ago

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.

David Livingston
Guest
14 years 3 months ago

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.

Don Delzell
Guest
Don Delzell
14 years 3 months ago
I agree with many of the “plans” outlined already, as well as the general sense that the task may simply not be feasible. Having said that, if the financial and emotional will exists, here’s my shot at a possible road map back to relevance for Circuit City. 1. Identify a competitive positioning with the potential for acceptable levels of stockholder return on investment. 2. Clearly articulate the systems, processes, culture and people needed to deliver that positioning. 3. Do a comprehensive inventory of the current systems, processes, culture and people. Spare no one, hide nothing. 4. Create a roadmap to close the gaps between what currently is and what is needed. 5. Make the process completely open and completely visible to all current employees: make them a part of becoming clear about where the company is and where it has to go. 6. Involve representatives from all levels, groups and organizations within the company in developing the specific action plans to effect the changes outlined. 7. Involve the entire company in monitoring progress toward those… Read more »
Brian Anderson
Guest
14 years 3 months ago

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.

Patrick Nixon
Guest
Patrick Nixon
14 years 3 months ago

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….

Kimberly Uecker
Guest
Kimberly Uecker
14 years 3 months ago

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.

Mel Kleiman
Guest
14 years 3 months ago

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.

Mary Baum
Guest
Mary Baum
14 years 3 months ago
It’s going to depend a lot on how much flexibility John Harlow has to do the right thing: 1. Publicly apologize to the people the company so insultingly laid off–and to the customers of the company–for thinking so little of both groups that the company could easily save a few million bucks by cheapening the customer experience. 2. Rehire the ones who would come back, generally for more money than they were making when they left. 3. Start a comprehensive performance-improvement program that brings every store employee up to speed on products, services and best practices. When you show your people how to succeed and that they make a difference to the organization, they’ll make a difference to the customer. Customer satisfaction leads to better sales and margins, which leads to a thriving, ongoing culture of growth. I realize that may not be good enough for Wall Street–witness Apple stock going down $9 after Tuesday’s MacWorld keynote introducing some very solid products but nothing earthshaking–and it isn’t a plan to liquidate the assets of a… Read more »
Mark Burr
Guest
14 years 3 months ago
Even when Circuit City had their so called ‘experienced staff’ the experience wasn’t so great. Bottom line is that there are too many choices where to buy this ‘stuff’. Consumers are no longer willing to put up with the experience described best by Dire Straits as “We gotta install microwave ovens, Custom kitchen deliveries, We gotta move these refrigerators, We gotta move these color TVs.” Consumers today research on the net, know more, and buy well. They expect help when they need it and they expect an excellent experience in their purchase. I recently purchased a wide screen TV for Christmas. I have to admit, which is unusual for me, that I researched, waited, learned and then finally purchased it. I learned the most from the staff at my two local Costco stores. Would I have expected that? No. But it’s the truth. Neither Best Buy, Circuit City, or any local merchant had the knowledge or–in the end– the product that I chose. There are too many choices, too many products and even the unexpected… Read more »
Max Goldberg
Guest
14 years 3 months ago
There are many options for consumer electronics shoppers. If Circuit City does not meet their expectations, consumers will go elsewhere. For a number of years CC has been beaten by Best Buy (not that BB has the greatest customer service either). Without a point of differentiation how will CC compete? While rebuilding its sales team with knowledgeable, customer friendly associates it could try to work with manufacturers to be the exclusive outlet for select products. Though, with its declining sales numbers, manufacturers would probably be unwilling to comply. It could offer a special customer service package with each high priced unit sold (after all, in Feb. 2009 all TVs must be digital or have a converter box). It could give away the converter boxes and allow the millions of consumers that have coupons from the government to spend the $40 on other items in the store. It is unlikely that CC can survive without new management and a strong point of differentiation that will bring consumers back to its stores.
Joel Warady
Guest
Joel Warady
14 years 3 months ago

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.

Craig Sundstrom
Guest
14 years 3 months ago

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?

William Passodelis
Guest
14 years 3 months ago
Circuit City may be in difficult financial standings, however retailers seem to be forgetting service as a part of their business. When most people go to shop at electronic stores, home improvement stores, or mid tier department stores, they are often in need of help and advice, and do not simply want a cashier! The lesser paid staff may be excellent but the trend to cost savings in this area may become problematic for these stores. Wal-Mart sells on “price” and that is their stance. Similar for the other discounters. Other format stores will never be able to compete that way and therefore they need to add value in other ways for their customers. Knowledgeable staff and sales associates should be appreciated and built into operating structure and costs, for other formats. You have to feel for the retailers –in general– because price is becoming SO important to the general public – for everything. It will be a shame if we end up with one retailer in all of these categories– We will ALL pay… Read more »
Michael Rowland
Guest
Michael Rowland
14 years 3 months ago

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.

Michael Tozour
Guest
Michael Tozour
14 years 3 months ago

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.

Paula Rosenblum
Guest
14 years 3 months ago
I know I am very late to this party, but I just had to throw in my 2 cents. The root problem was a TERRIBLE decision to accelerate the commoditization of flat screen TVs. Circuit City lowered the prices of those TV’s by almost 40% overnight (from $1800 to $1100). Not surprisingly, they sold a ton of them (including to me), and equally not surprisingly, the lost a lot of money on them. To quote the dear departed John Fiore, “They made great time, but they were completely lost.” Then that same management team made the decision to fix the problem by eliminating 3400 of the company’s most talented workers. I believe that decision was driven by the idea that “we don’t need specialists, we’re selling commodities.” But the truth is, they MADE the items commodities. In the meanwhile, Best Buy stayed the course of customer-centricity, and their earnings have also stayed the course. Going back is not easy, and this might be the worst possible time to give it a go–given the way the… Read more »
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