Circuit City’s Week of Turmoil
By George Anderson
The week began for Circuit City with the announcement that a shareholder, Highfields Capital Management, had made an offer to buy the company with the intention of taking it private.
In a letter to the company, the Boston-based firm expressed its unhappiness with Circuit City management’s ability to get the company turned around.
Yesterday, Circuit City announced it was closing 19 stores, five regional offices and a distribution center at the end of the month in an attempt to improve operating performance.
Circuit City’s chief executive officer, W. Alan McCollough, said that a company analysis made it clear that “it no longer makes financial sense to keep some of the stores in those markets open.”
According to an Associated Press report, the 19 locations generated $170 million in sales last year.
Moderator’s Comment: Will taking Circuit City private improve its chances of getting its business turned around? What needs fixing at the consumer electronics
chain?
Further awful news for Circuit City was a plane crash of a company jet in Colorado yesterday. All eight people on board lost their lives. Our sympathies
go out to all those who lost loved ones and/or valued co-workers in this accident. –
George Anderson – Moderator
My sympathies go out to the families of those Circuit City employees, too.
Cargill, Subway, M&M Mars, Bertelsmann AG, Bechtel, Publix Super Markets, IKEA International, FMR Corp. (the parent of Fidelity Investments), Seiko Epson, Amway, DHL Worldwide Express, Virgin Group, Rosenbluth International, Penske, S.C. Johnson & Sons, Enterprise Rent-A-Car, Hallmark Cards, Borden, McCain Foods, Hyatt, National Amusements, Purdue Farms, McKinsey & Co., LEGO Company, and Domino’s Pizza. All of these companies are private, and from the looks of things, are doing quite well.
United Parcel Service was private until a few years ago, as was Goldman Sachs. Levi Strauss, once private, went public only to go private again.
Circuit City may be evaluating what other private companies have, and that is the variety of reasons for obtaining a listing and going public are often cumbersome and can drain resources, rather than inject them. It’s often no picnic.
Obviously, the most prevalent is access to ‘low cost’ capital. Unfortunately, the reality of the marketplace is that equity capital is not low cost. Plus, all shareholders, whether sophisticated or not, want a return on their investment. This return is expected either by way of appreciation or dividends, and can add many layers of support to an organization.
Additionally, owners of many private companies may also see going public as a means of providing liquidity to the owners and a means of achieving ownership succession. But, as I say, the ongoing costs of going public can be an unpleasant surprise to private company management. Decisions which could be implemented quickly and cheaply as a private company require a board of directors’ meeting or a full shareholders’ meeting with the attendant cost of notices and circularization. Interim financial reports must be prepared and circulated to shareholders and news releases of material events must be prepared and disseminated.
Perhaps Circuit City wants to regain some “nimbleness” in a market segment of constantly changing technology advances and needs to better focus on that without the prying eyes of shareholders, quarterly calls to the street, and the press. I’ll say this, though, my vote goes to Circuit City for the most helpful web site, best pricing, and best store locator among the group of BestBuy, CompUSA, and Tweeter.
This is another “financial” based potential transaction and not one that will improve the management of Circuit City. Closing more stores and taking all the cash out of the business is not a positive for the chain or the industry. Progress in turning around this business has happened in fits and starts over the past couple of years but the marketplace, both consumers and the vendors, all have a vested interest in keeping CC alive. Vendors are reluctant to put all their eggs in a Best Buy basket and consumers consistently view CC as the number one competitor to BB. That said, it is undoubtedly time for CC to show some progress. They have been falling behind BB for years. Circuit at first failed to adjust in the mid-90s when content (music, software, video games and movies) began to be a key piece of the electronics business. Their commissioned sales focus led them to miss that opportunity and they also failed to press home their advantage (they were busy founding CarMax and trying to develop the DivX video biz) at that time when Best Buy was flirting with bankruptcy. Without the near death experience to make them rethink their business, they stayed on the same traditional CE track while Best Buy really reinvented how electronics were sold. Today, Circuit is behind in the content businesses that drive traffic and behind in offering customers the in-store experience they expect. It will take time to remake a chain as big as Circuit City and there are some positive signs (strong sales of digital TV last Christmas among them) but they remain saddled by old real estate, lack of traffic and merchandising that is still focused on the big ticket sale.
I still like the flexibility, nimbleness and quick response traits of a privately held company. I also like the fact that that private company can better focus on the long view without the pressures of the view from “the street”.
A few years back, Circuit City spent hundreds of $millions developing a proprietary version of DivX, which failed because their manufacturer partner was asked to deny access to the product to Circuit City’s competitors and was unwilling to do so. It’s widely thought that these $millions were taken from the remodel budget, because remodels were basically halted during that period, giving an advantage to Best Buy and other competitors.
At about that time a Mexican investor offered $8 a share for the stock, which was then valued at around $6. Circuit City rejected the offer, and the next day their executives voted themselves significant additional stock options.
Changes were taking place on the sales floor, too. Circuit City decided to discontinue appliances, even though they had their own credit business. When they authorized a $2k credit line for a customer wanting to buy a $1k refrigerator, the customer spent the remaining $1k on other stuff. Best Buy and MWard continued to carry appliances, and even WM is adding them now.
The sales floor was further degraded when the commission system was replaced with hourly wages, and anyone averaging over $12 per hour for an entire year was automatically fired.
Now there is little debt, some cash in the bank, and decrepit stores with declining sales. But, some estimate that a new offer as high as $19-$20 per share will be made. The problem, industry watchers agree, is Circuit City’s management. As soon as they’re purchased, current management will be gone, with a close look at their overly-generous stock options.
I believe that Circuit City needs to stop focusing on the small stuff and focus more on what makes them money. They bring in computers and such in which they lose 2% per sale — that’s not good business. That requires a massive amount of attachments which is quite hard to come by with hourly based employees who have no incentive to sell attachments. (It’s also harder because most people already have USB cables for printers from previous purchases).
I also think that taking employees off of commission was a terrible idea. They now lack the knowledge that commissioned salesmen did, they lack solution help (basically they let you walk out of the store when you will have to come back to get more stuff because what you needed wasn’t in the box), and they lack the overall customer service that they once had. I could go in to CC and get my questions answered and get help within 5 minutes and be satisfied. Now that they aren’t on commission, they have no incentive to sell or know their products, so they lack knowledge. I believe for financial sake, they should revitalize commission pay rather than take it away. Possibly a lower percentage than the older spiff commission pay would be a smart idea and drive sales and lower costs.
I think if CC wants to compete with BB, they need to match them — meaning appliances and all. It seems as though, since 2000/2001, the company slowly started going downhill. If it is, they should consider if what they had before worked, so maybe they should go back to it and enhance that instead of rebuilding a bad show.