Circuit City Runs Out of Fuses

Discussion
Jan 19, 2009

By Tom Ryan

Bankrupt Circuit City
Stores Inc., unable to find a buyer, said Friday it will go out of business,
closing its 567 U.S. stores and laying off its 34,000 workers. About $1.8
billion in retail inventory will be liquidated in sales lasting six to
eight weeks.

“This is the only
possible path for our company,” Circuit City’s acting CEO James Marcum
said in a statement. “We are extremely disappointed by this outcome.”

The electronics retailer,
in bankruptcy proceedings since November, had been in talks with two potential
buyers, but couldn’t reach an agreement with its creditors and lenders.
Some retailer observers saw Circuit City’s quick exit as a sign that that
the credit crisis will finally force the retail industry to right-size
itself after decades of unbridled expansion.

“We are incredibly
over-stored in many sectors,” Stacey Widlitz,
an analyst with Pali Research, told The New
York Times
. “If you don’t have the balance sheet to really weather
the storm for a couple of years, then that’s it.”

The 60-year-old chain
also faced stiff competition in recent years from Best Buy and Wal-Mart
as well as scores of online consumer electronics players.
But many believe a good number of Circuit City’s problems were self-inflicted.
These included buying cheap real estate leases in inferior locations and
a failed strategy to open smaller locations. Increasingly shoddy customer
service was most mentioned as its biggest downfall, marked by a move in March
2007 to fire its most-experienced – albeit higher-paid – workers.

“This company made
massive mistakes,” George Whalin, president
and CEO of Retail Management Consultants, told CNNmoney.com.

Circuit City’s demise
will put more pressure on the nation’s malls, already suffering from the
exits of large anchors such as Steve & Barry’s and Mervyns.

“It will bring to
market a glut of big box spaces across the country,” John Bemis, head
of Jones Lang LaSalle Inc.’s retail leasing team, told The Associated
Press
.

Regarding survivors,
Credit Suisse analyst Gary Balter believes Circuit
City’s demise will help Best Buy cement its position as the market leader.
But Ms. Widlitz believes the big winner will
be Wal-Mart because she believes Circuit City defectors were more likely
to shop Wal-Mart for its bargains.

“This is perfect
timing for them,” Ms. Widlitz said.

The closing
also puts a number of Americans out of work.

“It’s a pretty bad
way to start the New Year,” a 25-year-old cashier at Circuit City’s
store on Fifth Ave. in Manhattan told Bloomberg News. “I’m
undecided about staying in retail. I might go back to the Army.”

Discussion Questions:
How much of Circuit City’s liquidation was caused by internal factors
versus external factors? What implications does the exit of Circuit City
have for consumer electronics retailing in the U.S.?

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29 Comments on "Circuit City Runs Out of Fuses"


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Ryan Mathews
Guest
13 years 3 months ago

Circuit City made some wrong key choices early on and they finally all caught up with the company. As far as the industry is concerned, it has effectively become a universe of one–Best Buy. Wal-Mart will keep them honest on some product lines, but other than that they have an unobstructed clear shot at monopoly.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
13 years 3 months ago

My nearest Circuit City sits right next door to a shuttered Linens ‘N Things in a rather new retail center that includes a Lowe’s. And while Lowe’s isn’t in trouble, the traffic in that center will be severely diminished. More room for illegal workers to gather in the parking lot, I guess.

During the upcoming retail electronics settling-out, don’t overlook a successful, 34-store chain HQ’d in SoCal and with stores as far east as Georgia. One earlier comment mentioned them, but they deserve serious consideration for expansion. Hopefully some investors will see the opportunity.

Edward Herrera
Guest
Edward Herrera
13 years 3 months ago

I am a little surprised a company could be so lost. I never even considered Circuit City for my electronic dollars.

They had no destination segment that customers had to buy from them. They own a large amount of inventory but without tech support, I still don’t think the average customers will purchase. The same argument GM used about bankrupcy. Best Buy might be able to partner a tech contract purchase with the Circuit City purchase? Just a thought.

Craig Sundstrom
Guest
13 years 3 months ago

Not so many years ago we were bemoaning that big box stores/category killers and malls were killing off smaller local retailers and down towns (respectively), and now we have the manifestation of the “what goes around comes around” syndrome, but without the nostalgia, of course (no fuzzy memories of white gloves and cucumber sandwiches with these guys!) A Pyrrhic Victory indeed.

Ed Dennis
Guest
Ed Dennis
13 years 3 months ago

Circuit City did many things right but did lots of things wrong. The biggest problem was a lack of real management. The people entrusted with managing this business seemed to lack focus and spent all their time jumping from one silver bullet to another. They, like many other companies’ management teams, seemed to be unwilling or incapable of actually identifying and addressing problems.

They didn’t know what was wrong so they seemed to believe everything they were told by analysts and consultants (people who knew even less about Circuit City than Circuit City’s actual management). I believe this culminated when CC decided to fire anyone who actually knew anything about Circuit City’s business and the consumers who shopped in Circuit City.

We don’t need a long wake here–get them in the ground quickly.

Vahe Katros
Guest
Vahe Katros
13 years 3 months ago

How long has the handwriting been on the wall?

1. You face a tough existing competitor who has a clear value proposition and focus and your offering is me-too.
2. And you have to deal with new entrants with value propositions more aligned with key audiences and a lower-cost operating model.
3. At a time of economic problems, you throw the hail Mary, the ball is dropped, and you file for Chapter 11.

It will be interesting to see where the team ends up and see what they learned from this.

Dan Gilmore
Guest
Dan Gilmore
13 years 3 months ago

It seems amazing to me that there is no room for a real number 2 electronics chain–not sure what this means in the end. Will we see it in other categories?

But the bottom line is, most Best Buy stores are fun to go in to and look around. Circuit City stores, at least the ones I know, are not. They are small, with lousy layouts, much less merchandise, and half the time you can’t even figure out where to take your purchase.

Best Buy – fun. Circuit City – not fun.

Simple as that.

Rick Myers
Guest
Rick Myers
13 years 3 months ago

What no one seems to be talking about is poor financial execution. When you over-leverage your business and count on a category like plasma TVs to bring in big revenue and then not sell video game systems to go with these big TVs, you can expect to falter. Of course the firing of experienced employees also created a lot of bad will out in the market and ensured a less than positive experience in-store.

Most important to their demise was poor cash management and ineffective business strategy, in my opinion. Then also not being able to convert bids for the business into an actual sale. If the credit market were different, they would still be limping along.

Paul Righello
Guest
Paul Righello
13 years 3 months ago

The thought of only one major CE retailer scares me. I hope regional chains like Fry’s decide to expand nationally. They’ve given Best Buy a run for their money here in the SF Bay Area. While they are often lacking in service compared to BB, their pricing is superior and they carry far more products.

Bill Doran
Guest
Bill Doran
13 years 3 months ago

CC-wow. One has to scratch their head and say: “Huh?” Tuning up the customer offering in a chain of 567 stores, they coulda/shouda tested their offering changes in limited store tests. Either they didn’t test or they read the result wrong. Whichever it was, it was management’s fault.

Stephen Baker
Guest
13 years 3 months ago
CC has been struggling with change management for 10 years. DIVX, overconfidence, management distraction on CarMax, bad late 90s real estate, a late entry into music/movies and games (which drove customer traffic in the late 90s), dropping appliances, and firing commissioned staff are part of the laundry list of missteps. Firing everyone last year was a part of that failure but not a cause of their demise. Ultimately they failed because there was nowhere to get any financing to come out of bankruptcy. Their business was not materially different today than a couple of years ago and you can make a good argument that current management and initiatives like the city stores were moving them in a positive direction. The market and the industry wanted them to survive, it was the banking and finance system that failed them in chapter 11. If they had done chapter 11 in 2007 they would still be with us. As a final aside, I find all this hand wringing about the firing of their floor associates in 2007 absurd.… Read more »
Michael Redpath
Guest
Michael Redpath
13 years 3 months ago

I agree with the observations that Circuit City self-destructed through providing a poor shopping experience. I have marveled for the last few years that they have managed to continue to operate in spite of exceedingly poor customer service. It has been two years since I would set foot in a Circuit City store, having had a horrible experience that was resolved only through my threatening to go to the County prosecutor.

At the same time, there were folks at the service desk who were in the midst of even worse problems. Prior to that it had been a year or two since I went to the nearby Circuit City because they rarely had what I needed to purchase and the nearby Best Buy, Target, and Costco did.

Barton A. Weitz
Guest
Barton A. Weitz
13 years 3 months ago

Circuit City’s demise is mostly due to self-inflicted wounds–poor strategic and tactical decisions. For example, Circuit City relied on internally developed systems that were behind the state-of-the-art in inventory management. Circuit City was unable to differentiate itself through services and customer services. It was slow in providing assistance to customers, in designing and installing home entertainment systems and computer systems, and exploring international expansion. Its recent “unique benefit”–same prices in-store and from the Internet–was really a ho-hum.

Gene Detroyer
Guest
13 years 3 months ago
The competitiveness of the electronics industry is driven by mass product manufacturing that dramatically reduces the cost of the products as more units are produced. These results put downward pressure on pricing that is similarly experienced by the retailer and ultimately the consumer. With price becoming a driving factor, retail margins are squeezed. As retail margins are squeezed, the margin of error for a retailer also shrinks. In the case of Circuit City, they used up any safety in their margin of error with management decisions that would suggest that upper management had no idea what the retail business and the consumer was all about. I have been astounded by the decisions they have made. Certainly, Circuit City’s inability to reorganize or find a buyer was compounded by the current economic environment. Unfortunately, this will solidify Best Buy’s leadership. Yes, Wal-Mart will make some gains, but unless they commit to expertise on the floor and essentially build a store within a store, their gains will be limited. Online will make the biggest gains. Even for… Read more »
Bob Phibbs
Guest
13 years 3 months ago

Circuit City ran aground years ago for a lot of reasons. The real challenge will be to Best Buy and others as nearly $2 billion in CC’s current inventory is liquidated–drying up demand for months.

Phil Rubin
Guest
Phil Rubin
13 years 3 months ago
There are always internal and external factors and Circuit City is no exception. Everything is relative and whatever Circuit City did or didn’t do was relative to what Best Buy, Wal-Mart and Amazon did. From our perspective, customer marketing, Best Buy and Amazon (and Costco) did and do a far superior job in being relevant to their customers, engaging them and most importantly, getting them in the habit of shopping there. Wal-Mart of course has done this with pricing. Best Buy launched Reward Zone in 2003 and you’d think that at some point over the past 6 years Circuit City would have made a meaningful attempt to compete with it. If prices, service, location and merchandise are nearly the same, something like Reward Zone is a big tie breaker. When you factor in the way BB uses data–for communications and merchandising–it’s no wonder they are left standing. Yes Wal-Mart might do well but WMT is still a very different proposition than Best Buy, which is much closer to CC in terms of offering.
Dick Seesel
Guest
13 years 3 months ago

Blaming “the economy” for Circuit City’s failure is a cop-out. Certainly the current slowdown in spending and tight credit has its victims in the retail business, but many of these stores were weak competitors in the first place. In the case of Circuit City, surely their biggest mistake happened a couple of years ago, when they dismissed their most experienced and knowledgeable sales associates in a cost-cutting move. Their reputation for weak customer service–not a strong suit to begin with–never recovered. Surely the consumer electronics business is big enough for more than one national player (plus competitors like Walmart), but it takes better execution than Circuit City was able to provide.

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

I worked on-site with CC for almost 2 years and find this news very saddening. Having been in their trenches, I do believe that this was caused by bad executive decisions combined with an unprecedented retail climate. It all started when they took the commission away from salespeople…and it kept going from there.

That said, there is some amazing talent within their walls and they were doing some great things within their new store concepts. The problem is that they weren’t able to take some of these learnings and evolved strategies into the larger network of stores fast enough. Operational and cultural challenges prevented this and, unfortunately, new leadership simply wasn’t able to turn the boat around fast enough. My heart goes out to the people who are now affected.

Max Goldberg
Guest
13 years 3 months ago

Circuit City’s problems began internally and then manifested themselves externally. The stores never had a strong core story and shoddy customer service was the norm. Decision after decision seemed to be made for no discernible reason. Employees knew this and consumers did too. It was inevitable that the company would collapse, as it could not withstand any significant economic downturn.

Doron Levy
Guest
Doron Levy
13 years 3 months ago
The saga finally comes to an end and this was one heck of a tragedy. I suppose we could say the economy killed CC but I’m not so sure that is the root cause. The big bad hairy economy probably kicked the carcass around for a few months but didn’t actually ‘murder’ the vic. I like to look back at when the economy was great and everyone had credit and you could actually make a little money on plasmas and LCDs. I would say firing most of your seasoned front-line staff was the cause of death. Not to say there weren’t blows to the head way before that. But, with confidence, I can say that CC permanently damaged the one operational unit that actually brought cash into the till. Perhaps over-calculating the bull run was to blame for that directive. The customer shopping experience at CC was virtually non-existent by my observations and vendors immediately picked up on that. Unfortunately for Circuit City, the electronics retailing industry is hugely vendor-driven and dependent. I remember posting… Read more »
David Biernbaum
Guest
13 years 3 months ago

Circuit City was almost exactly the same as Best Buy, except that Best Buy does a better job of being who they are than did Circuit City.

Susan Rider
Guest
Susan Rider
13 years 3 months ago

Circuit City’s demise started a couple of years ago with a very bad decision. It wasn’t just the bad decision but it was the positioning of the decision in interviews and releases.

I think they also underestimated their model. The reason people go to CC or BB is for the expertise and advice. By letting go of anyone that knows anything and hiring new minimum wage people, they sent a message. Being in retail is like a chess game; every move must be strategic and well thought out or you get captured.

There is still a need for electronics retailing and right now BB gets it with the Geek Squad and well trained personnel. This is a lesson in taking the wrong steps and many should take notice.

Kai Clarke
Guest
13 years 3 months ago

CC’s demise will only cement BB’s, Wal-Mart’s, Target’s and Kmart’s position. Regional chains like Fry’s and Microcenter will certainly benefit. Most importantly, their bankruptcy will shift the model used for successful electronics retailing.

Club stores and mass merchants have already been increasing their CE space. Having a pure CE store is a difficult proposition. This is why we see more appliances, and other items at Best Buy. We will continue to see Best Buy diversify and start to become more like a hard goods retailer and less like a pure CE store. These models must offer the latest in electronics at competitive prices to the Internet.

Product, price, selection and great customer service are the Mantra of the successful retailer of today!

Brent Streit Streit
Guest
Brent Streit Streit
13 years 3 months ago
Bad decision making and management aside, CC definitely was part of the “over-stored” America problem. Upwards of 70% of the American economy consists of consumer retail spending. CC is just the canary in the coal mine. When I hear of retailers cutting cutting back credit limits and closing accounts, I think of a self-inflicted demise. This credit card ponzi scheme used to open an unimaginable amount of stores will bring down scores of retailers. Look for July of 2010 to begin the final meltdown when prime arms have there largest adjustment. If you think unemployment and the economy are bad now, just wait. Don’t be fooled by the TV “experts” who have been telling you it will get better in the next 6 months for the past three years. There is no such thing as a “service economy” and we can’t spend our way out of it now. Where is the recovery going to come from this time? The real estate bubble is $30 trillion dollars. Throwing a a couple trillion in a bailout is… Read more »
Ian Percy
Guest
13 years 3 months ago

I know it’s only anecdotal research but after 30+ years of consulting with organizations of all descriptions I’ve concluded that about 95% of all the problems and issues an organization faces are from self-inflicted wounds. I’d say it was 100% but no one would believe me. We need just a little margin so we can blame the market or someone else. The facts cited in this article are Exhibit 1 in the case of Circuit City. Unfortunately we are much better at seeing this self-sabotage in other organizations than we are in our own. And self-sabotage is alive and well in every organization.

W. Frank Dell II, CMC
Guest
13 years 3 months ago

The departure of Circuit City is typical of what can be expected in retail today. There is simply very little Debtor In Position (DIP) financing. This greatly reduces reorganizing retailers under Chapter 11. Couple this with a glut and growing supply of empty stores, reducing the value of leases.

Any time a retailers goes into bankruptcy, it is management’s fault. Typical reasons include over-extended expansion, weak merchandising and failure to change with the market, be it consumers, merchandise and/or competition.

My experience with Circuit City consisted of Out-Of-Stock and associates with very limited product knowledge. Why bother to make the trip?

David Livingston
Guest
13 years 3 months ago

I don’t think the market is over-stored but rather Circuit City was under-managed. Circuit City had been providing a horrible shopping experience for years. It’s as though they were trying to go out of business on purpose. The consumer electronics market will continue to thrive with the business distributed among better-operated retailers. Sure, there might be some down years but overall I think it will continue to be, just as it historically has been, one of the most fascinating areas of retail.

David Dorf
Guest
13 years 3 months ago

I wonder what will become of the CC website? Their e-commerce business has flourished, and I think their site is better than Best Buy’s and Walmart’s. The product comparisons, how-to articles, and customer comments have always been quite good. Unfortunately, one of their differentiators was the buy-on-the-web, pick-up-in-the-store. That obviously won’t work anymore. Perhaps it will go the way of CompUSA and be operated as a standalone business by someone else.

Mike Osorio
Guest
Mike Osorio
13 years 3 months ago

Circuit City is the poster child for mismanaged retail. Between an over-leveraged balance sheet, the insane decision to lay off their best staff and lack of a unique selling proposition, this retailer could not have been managed more poorly. It has been painful to watch them decline after an impressive growth record driven by compelling marketing and excellent service. It just goes to show that poor management and a board focused solely on short term leverage-based profits can kill any enterprise.

I do think that both Best Buy and Walmart will benefit from Circuit City’s demise as they split their customer base (low end and high end). There will always be room for well-run electronics retailers. This is a category with ever-new product categories and exciting product-driven marketing.

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