Is the Proposed Circuit City Deal a Blockbuster?
To most everyone this side of Edward Lampert, the combination of one poorly performing company with another adds up to a really bad deal.
Evidently, Blockbuster CEO Jim Keyes counts himself among the Lamperteers who believe that zero plus zero adds up to something more than nothing. How else could you explain his company’s unsolicited $1 billion-plus bid for the struggling Circuit City consumer electronics chain?
In a letter to Philip Schoonover, chairman and chief executive at Circuit City, Mr. Keyes described the combination of the two companies as a “game-changing retail concept with a sustainable competitive advantage” that would enable the new concern to capitalize “on the growing convergence of media content and electronic devices. We would seek to differentiate products in both Blockbuster and Circuit City stores by offering exclusive content and content-enabled devices.”
Where Mr. Keyes sees opportunities, others do not.
“The world is littered with remnants of bankrupt retailers,” Michael Pachter, an analyst with Wedbush Morgan, told Reuters. “It’s a bad idea.”
“Blockbuster has not yet completed its own turnaround,” he added. “Circuit City has serious problems and I’m not sure if Blockbuster management has demonstrated it has the skills to turn those around.”
Discussion Question: What is your reaction to Blockbuster’s proposal to acquire
Circuit City?
While sales and traffic continue to decline for both of these former retail giants, the brand names have value. However, it will take a revolutionary concept for the combination of these two to work in the future.
Dan Gilmore does have a very valid point. SS Kresge morphed into Kmart. Woolworth’s morphed into Foot Locker. Dayton-Hudson morphed into Target. When John Paul Jones’ ship Bonhomme Richard was sinking, what did he and his crew do? They captured and boarded the enemy’s ship Serapis and made it their own.
Management at BlockBuster may feel the same way. BlockBuster’s operating model may be outdated, but Circuit City’s is not. Rather than accept the inevitable and retire, BlockBuster’s management have chosen to try and survive as something else. True, they certainly have their work cut out for them, but the idea is not as idiotic as you may think.
Every so often someone takes a position that few others understand. If everything was totally predictable, RetailWire would be a bore. Good thing for us that retail is so entertaining.
Both Blockbuster and Circuit City are holding on by a thread and yesterday’s announcement seems unusual at best. Usually a good merger creates a new company that is better than the sum of the two original firms. In this case you have Circuit City, a flawed operation that has made significant mistakes and Blockbuster, an antiquated concept that will self destruct over the next several years. It is hard to imagine what the new company will look like, what stores will remain and where the company’s merchandising will focus. New management and a new direction will be crucial to any potential deal success.
Several years ago, it was assumed that most big box concepts could prosper with two operators like Home Depot and Lowe’s. Today’s economy has proven that is no longer the case and, with the exception of Home Depot and Lowe’s, a true leader has emerged in almost every big box category.
Circuit City is not a category leader although Blockbuster does dominate its sector albeit a dying one. This move is perplexing at best and should make for an interesting show.
When I heard about this, the first thought that came to mind was ‘what the heck?’ I have some first hand knowledge and experience with Blockbuster and I can honestly say they are not ready to go on a shopping spree. The fact that it is Circuit City just makes it as funny as some of the movies is BB’s comedy section.
Has BB management not read any of the press releases about CC in the last 15 months? This is a company that is in serious trouble and needs a major internal overhaul from the stores up! Its one thing for a healthy company to buy a sick company and fix it. But when both parties are not well? BB needs to fix itself first.
I have a question. Where is BB getting the cash for this deal? It certainly isn’t coming from the tills. Don’t get me wrong. The idea has merit, but it has the wrong players.
As we have seen with Kmart and Sears, two dying companies do not make one young growth company. Blockbuster has an obsolete business model. Netflix proved you don’t need stores. The trend is on demand download entrainment over the Internet. Thus Blockbuster has a need to do something or it will go the way of the record/CD stores.
Circuit City also has a business model that is moving toward being obsolete. The majority of electronic purchases are research by consumers on the Internet prior to purchase. Now that we are in our second evolution of web site, from being an electronic catalog to providing customer service, the requirement for stores declines.
Note both business models are being impacted by the Internet. Combining these two companies will only extend employment for some executives.
My first reaction is that it has little chance of success. It is hard enough to turn around one struggling business and combining them would seem to increase the odds of failure, in my view.
Blockbuster faces a changing business model with the future likely in downloads. Circuit City has a different problem in that it hasn’t been able to compete effectively and really doesn’t offer the consumer any reason to shop with them. Their move to eliminate their experienced employees was the ultimate cost-cutting disaster and they still haven’t recovered from that.
It still amazes me how some people that have so much money can be so near sighted and shallow. I might imagine only that no one close enough to these individuals has the fortitude to tell the truth; or perhaps the ego mind simply won’t listen to reason. But in any case, this deal spells Lampert all over again.
This is like the Andrea Doria and the Lusitania going out to sea together!
Yes, there is a logical alignment between electronic content and technology, but both Circuit City and Blockbuster are mostly tied to yesterday’s delivery strategies. Based on the ongoing collapse of the CD business over the last few years, driven by consumers’ desire to download music onto their MP3 players or cell phones, it doesn’t take much imagination to see the traditional DVD business headed in the same direction. So the proposed marriage of two companies struggling with both a declining business model and their own individual financial problems does not look like a match made in heaven.
Aren’t there already a number of retailers that offer electronic gizmos and content together? I don’t see the core story of a combined Blockbuster/Circuit City differentiating itself from the competition. Electronics is a low margin business and content is slowly moving from brick and mortar retail to online retail. This merger seems more like wishful thinking than sound business.
Yes, it may seem perplexing as to why Blockbuster would make such a bold move. But, there could be some real synergy between these two companies since they serve the same consumer. The problem here is neither company is very well managed. Management at Circuit City has made far too many mistakes in trying to rebuild this once successful company. And they continue to operate the business at a loss. The same is true at Blockbuster.
I believe there is a place in the market for a strong number two consumer electronics chain behind Best Buy, but this deal won’t help make that happen. If these two companies actually do merge and end up being managed by any of the current senior management, the future for both companies is bleak.
I would think working for either of these companies and waking up to find out you’re part of the sum would not be a warm fuzzy thought. Neither business models seem to have aspects that the other could grow and, of course, neither left on their own seem to have prospects of growth and success.
It doesn’t matter. The objective here is how much money can be made in bonus and short options to put the deal together. What are the short term personal gains for the players pushing for the merger?
Mega Business is no longer about the perpetuity of the Corporation, or even the long term concerns of shareholders. It is about how much I can make now. Structure this deal with a 5 year payout based on success and watch everyone scatter.
Now we understand how privately held companies make money.
The only way that this merger would make any sense at all is if Lampert buys the resulting mess and brings it into the Sears-Kmart family. That would complete the circle.
Blockbuster can’t compete with Netflix, PPV and Comcast OnDemand. Going to the store to rent movies is like still using a typewriter. The fact that they want to buy Circuit City shows that they don’t understand today’s consumers, products or business models.
I had to laugh out loud (LOL for the younger readers) when Joel Warady wrote, “Add the two chains together, and what do you have? A monster chain, with a lot of real estate, and no foot traffic. Less wear and tear on the stores!” He’s got that right.
Enough has been said here about the flawed strategy and there isn’t much I can add.
If anyone has to be happy about the Blockbuster bid it has to be Mark Wattles. He’s been saying all along there is potential at Circuit City, but the changes have to be faster and bigger than the current board is doing.
I predict Blockbuster goes away and Wattles eventually gets the board turned over. Then we can start second guessing them as well!
Maybe if Jack Welch or another well qualified CEO were to take over, maybe. I’d be shorting both of these companies.
I’d give this shotgun wedding 12-15 months and with the current bankruptcy laws, re-organization has become liquidation and evaporation.
I think most commentators are missing a key point–the Blockbuster current model is clearly dying. Circuit City is horribly managed, but the model itself is not anywhere near as clearly dead.
So, if you are Blockbuster management, you can either just prepare for the end and just wind down the business over a few years, or try something to keep you alive. And low and behold, there is one alternative out there (CC) that may be had at a price for which you can come up with the cash.
Will it work? Probably not.
But if you are Blockbuster, it is better than certain death? I would think so.
I’d like to see some of the commentators who do not like this idea come up with a better strategy for Blockbuster. Are those ideas really better than trying to make CC work?
There is a difference between bad management (Circuit City) and a bad market (Blockbuster).
Let me play Devil’s Advocate. If Blockbuster buys Circuit, it gets Jim Keyes as CEO (very smart) and Keith Morrow as CIO (also very smart.) Combine smart management with a new business model for both BB and CC and you could have a combination that could threaten competition in movies, music, even books.
I think I know what Blockbuster is up to. They will eventually paint all Circuit City stores Blockbuster blue and yellow and change their logo to a sales tag with two capital Bs (for BlockBuster, of course, *not* to be confused with Best Buy).
I think one of the problems retail in general has is the feeling that everybody needs to be like the mighty Wal-Mart to succeed. In doing so some retailers are climbing out of their comfortable, and profitable “niche” holes they have created for themselves over the years. The subsequent reaction to a change in any formula is, of course, a different result.
As Blockbuster’s edge in the video business becomes dull, they may be hoping to boost their sales by expanding upon their niche. However, I don’t believe the Blockbuster formula will work for Circuit City, and vice-versa. If the two entities were to remain in their own separate niche markets, there may be some income increases, but it is unlikely that will happen.
Too many retailers have to rely on volume of business as an increase to income rather than on traditional segment share growth as in the past. More stores equal more sales. I think Blockbuster would be much better off by sharpening their own edge, perhaps by entering the digital download arena, maybe adding consumer driven electronics such as iPod and MP3 players, but certainly not by becoming an electronics super store.
The performance of each company clearly shows that neither has the brightest bulbs on the Christmas tree managing them. Misery loves company, so they might as well go down together. I’m sure their competitors are celebrating.
J. Baker employed this technique in the 1990s–buy a bunch of near-bankrupt companies and see if synergies could be created. When all was said and done, the answer was a resounding NO.
I personally think Circuit City is better off alone. The company has made some really awful mistakes over the past 18 months but could still recover. A merger with Blockbuster is not the solution, though…unless Blockbuster hopes to sort of dissolve itself. Who the heck needs all that useless real estate?
I am anxiously awaiting AutoZone’s entry into the upcoming feeding frenzy for Cicuit City–Makes as much sense as Blockbuster’s unsolicited bid! Let Wattles plan to change the board and CEO come to a realization. He has expertise in the Electronic’s Boutique that he was involved in. Only then will the shareholders get a chance to realize some gain from Circuit City’ poor operations.
And what will Blockbuster bring to the table? An innate knowledge of how to sell a computer or iPod to the consumer? NO! A sincere customer service concept? NO! The hope of selling a DVD when online downloading will be wiping out the industry in the near future NO!
A bad deal for all concerned.
I think this makes a lot of sense. People choose to visit Best Buy instead of Circuit City, and therefore the foot traffic in Circuit City is minimal. People choose to see movies via Netflix, iTunes, HBO on Demand instead of Blockbuster, so their foot traffic is down as well. Add the two chains together, and what do you have? A monster chain, with a lot of real estate, and no foot traffic. Less wear and tear on the stores!
There is also rumor that Microsoft wants to do a deal with Blockbuster, to have stores similar to Apple stores selling Microsoft products. Add this to the money losing partnership and you will see a huge chain, with some once great brand names, eventually bite the dust.
It’s tough out there. Other failing chains are to follow….
Admitting right up front that I am not smart enough to fathom the strategy here either–when this many experts agree so resoundingly, I get very nervous about our conclusion.
While I am not predicting slam-dunk success, let’s take stock of what the two companies have going for themselves. Real estate, high visibility locations, a young workforce, relationships with technology vendors, recognizable brand identities and knowledge of who they are–today. Some of these things CompUSA didn’t have.
I think a two part plan will come into play; rationalize what they own to become a slimmer, faster BlockCity, and then create something completely out of left field, using the management structure, or any of the elements spoken of earlier. Let’s not put a stake in this one yet folks, but wish them well.