December 27, 2007
Circuit City Blows Another Fuse
By Tom Ryan
Sometimes the tide doesn’t float all boats. Despite soaring demand for flat-screen TVs, videogames and GPS gadgets, Circuit City last Friday reported a much larger third quarter loss than analysts expected, partly due to weak sales of accessories and warranties.
The consumer electronics retailer reported an adjusted loss of $105.2 million, 64 cents a share, for the quarter ending Nov. 30, missing Wall Street’s mean estimate for a loss of 31 cents a share. Revenues dropped 5.6 percent on a comparable store basis.
The company also said it expects a ‘modest’ loss from continuing operations for its fiscal fourth quarter. Analysts had been forecasting a profit of 56 cents a share.
The announcement – its fifth straight quarterly loss – contrasted sharply with Best Buy’s report earlier last week that third quarter earnings soared 52 percent.
The shortfall was blamed on drastic cost-cutting measures implemented earlier in the year and poor real estate.
Circuit City this spring fired 3,400 of its most experienced sales clerks, replacing them with lower-wage help to trim costs. But the downgraded sales force apparently led to weaker sales of higher-margin accessories, product warranties and installation and repair services. The labor cuts followed earlier missteps, including eliminating commissions and imposing a zone system on sales clerks that kept them from following customers around the store.
Circuit City CEO Philip Schoonover told analysts during a conference call that the company underestimated the financial impact of cost-saving initiatives on sales. “Our current focus is to rebuild our selling culture,” he said.
Russell Jones of Alix Partners told The New York Post, “It’s a shame, because a few years ago customer service had been one point where Circuit City had a potential advantage over Best Buy.”
But Deutsche Bank’s Mike Baker said the company primarily suffers from bad floor plans at its 400 oldest stores, many of which are in unattractive locations.
“These lead to weak sales per foot, necessitating a lower cost structure, meaning that Circuit City must sacrifice customer service,” he told Business Week. “This then leads to share loss.”
But while Circuit City is moving its stores to better locations, Goldman Sachs Matthew Fassler believes the retailer is taking on too much debt in doing so.
“The company is betting that its new units will produce before its existing stores deteriorate to untenable levels, and, moreover, that its problems reflect poor real estate, as opposed to being endemic to the core of the organization,” he said. “We view this as unwise.”
Mr. Schoonover, who came from Best Buy in 2004, told analysts, “These issues are primarily self-induced and are within our control to improve.”
Discussion Question: Why do you think Best Buy is performing so much better than Circuit City? Can Circuit City replicate Best Buy’s success or do you they need a truly differentiated strategy?
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Circuit City has to have the most myopic management team in the retail industry. They used to have a fairly good sales staff, but they fired them all and hired “low wage” replacements. This put them on par with Wal-Mart, which generally offers the same products at lower prices. Then they came up with their expert installation and repair teams. A day late and a dollar short. Now they have built new stores that manage to blast hip hop all over the store from the automobile radio section which by itself forces me to shop elsewhere.
These people are spending too much time with consumers that don’t put anything on the bottom line. They try to draw kids in with deals on CDs and DVDs–Wal-Mart is usually cheaper and you don’t have to be there on Tuesday to get the good price.
My advice to anyone is to stay away from Circuit City. Wall Street agrees as their stock has dropped from a little over $20 a year ago to under $5 today. Yeah, find me management who can cost me 75% of an investment in one year and I will show you an organization about to implode.
It looks like Circuit City is about to make the same mistake other failed retailers have made. They think they can continue to be successful being a poor operator if only they had newer and prettier stores. It’s simply a matter of class and Circuit City doesn’t have it.
Kmart is another example. It doesn’t matter where they open, how much decor they put into the store, etc. It will only end up being a nice looking ghost town in a good location not doing any business.
I was in a Circuit City recently. I didn’t pay much attention to location, its decor, or its layout. What I remember most was the disheveled looking salesman who had a strong tobacco odor about him. That pretty much summed up the Circuit City shopping experience.
For decades, American shoppers were spoiled. They had multiple choices in each major retailing segment: 3 different national chains for office supplies (Office Depot, Staples, Office Max); 3 different national bookstore chains (Barnes & Noble, Borders, Books-A-Million); many conventional department store chains (Dayton Hudson, Marshall Field’s, Macy’s, Lord & Taylor); 3 national catalog retailers (Montgomery Ward, Sears, J.C. Penney); 2 national upscale grocers (Wild Oats and Whole Foods), etc. As the years go by, it’s clear that the competitive field is narrowing to 1 dominant player per retail category. At the moment, for big box electronics and appliances, the chosen player seems to be Best Buy. Because electronics and appliances have awfully low margins, the need for perfect execution in every way is more significant. Circuit City’s margins are falling, which makes its struggle even more urgent.
The accounting executives at Circuit City didn’t take enough consideration into the nature of the types of products the company sells.
This past year, Circuit City fired its most experienced sales clerks, replacing them with lower-wage help to trim costs. At this stage, when consumers are purchasing new technology high ticket items, the chances for “selling” are much greater when the consumer can obtain the right information and knowledge at the point of purchase.
It happened to Kmart and it happened to Eckerds and the list goes on. The only one that seems to have come back from the dead is Penney’s. Maybe there is a lesson to be learned there.
You can put lipstick on a pig but all you have is a pig with lipstick.
My most recent visits to Circuit City have resulted in the distinct feeling that nobody in management understands what a shopping experience should be or could be in the stores. As a consumer, it’s just too confusing. From store design to customer interaction to merchandising basics, it’s clear they need to rethink everything. There are so many talented retail consultants out there…perhaps Circuit City board of directors should hire a few of them and listen to their suggestions.
As well, a shopping experience research project and some shopper segmentation work seems like a no-brainer to me.
The number Circuit City has to be concerned with is 3400. That number led to all the other numbers that they put up this year. 3400 experienced associates let go before the crucial season. I really don’t understand what was behind that decision. Cost cutting is fine and dandy but not at the expense of sales and customer service. Consumers have obviously responded with their dollars and decided to shop Best Buy which has trained associates.
Can someone on the inside explain why CC did go that route? I’ve gone through the numbers and even spoken to some of their suppliers and no one knows the justification for gutting the sales force right before Christmas. 3400 is a number that should be tattooed on every CC executive when they release 4th quarter results and the stockholders should be the ones to do it!
Circuit City management got a short boost in stock value by firing its best sales staff. The firing of 3400 “highly paid” workers to hire lower paid ones was an ill advised and near sighted move. The “offer” for staff to regain their jobs (after 10 weeks!?!) at lower pay was bizarre and insulting. This action created many problems, including customer/consumer mistrust of the store entity itself. Did they believe that there would be no backlash to the simple disposal of a high quality, first line of customer contact? Customer service and sales product knowledge are key in the consumer electronics arena.
Read the blogs and the comments on various web sites. The top management of CC was just not thinking clearly when making this decision. I wish them luck, but this move has backfired in so many ways that it may be impossible for them to pull out of their retail death spiral.
I was in a Circuit City recently with the intent of buying a bookshelf stereo. I asked the only salesperson I could find for help. He was unable to assist me, as it was “not his department.” No effort was made to have someone else assist me other than the clerk pointing to the salesperson he said could help. That clerk was helping someone else at the time–so I waited 10 minutes before I decided to leave.
I purchased my stereo later that day on the web, where I found excellent product information and competitive prices. I have not been back in a Circuit City since–and do not expect I ever will, given that they will probably be extinct before long. I suspect my experience was similar to many others since the mass firings. The only thing of value to a customer, that differentiates one specialty retailer from another, is customer service–particularly in a world of commodity products–and it seems that has been eliminated from what Circuit City offers.
You can evaluate the strategy of downgrading the sales team by looking at other retailers who have done the same. Home Depot is an example of a retailer that imposed requirements on stores to have 50% part-timers and implement wage bands with maximum pay rates. This was a change to a sales team that was primarily made up of tradesmen who cost more money and offered great expertise to the customer. The result was…well, let’s not kick an ailing horse.
As a shopper, I try and try to shop at a new and convenient Circuit City near my house, but usually end up buying at Best Buy because I cannot get the info I need from the CC team and there is no confidence behind the info I extract. The largest controllable expense of a retailer also seems to be the largest contributor.
The conclusion is clear.
Everyone looking for a retail turnaround story has a common theory; first place to start is to cut costs, regardless of what the real problem is. This strategy doesn’t work for every situation, as CC has found out–the hard way.
An Equity Research report from Bank of America Securities summed it up: “We are not convinced that management’s urgency is sufficient to deal with some very dramatic declines in the operating business and the balance sheet.” On the other hand, replicating Best Buy may not work for CC as their problems are different.
Instead of focusing on cutting costs or on opening new stores, they should be focusing on improving productivity of their existing retail space. A significant portion of their traditional 34,000 square foot format is wasted or underutilized.
Demographics of consumer electronics customer changes very fast; they should be focusing on identifying their most valuable customers and understanding their purchasing habits, not just at Circuit City but elsewhere too (panel or survey data should help here).
I also think their checkout counters are extremely inefficient; I have seen customers walk out from the checkout on more than one occasion. On the other hand, the much smaller Apple Store has an innovative approach; sales associates equipped with wireless credit card scanners with receipts emailed to you.
The store relocation plan for CC may be a very good move if supported with a detailed study of trade-area demographics. The smaller 20,000 square foot format is also a great idea, since the productivity is pretty much the same as the inefficient 34K format.
All in all, CC may still change their game in ’08 if they realize that their problems are different from their competition’s and they will actually have to use some creativity to solve them rather than using canned approaches.
Circuit City firing their trained employees was in a word–dumb. The only reason to go to CC or Best Buy is for selection and knowledgeable sales people, otherwise, buy it all at Costco. CC lost one of the big two reasons to go there.
There is a brand new CC and BB very close to each other here, BB is packed and CC is empty. It’s not the floor plan; this is a brand new store. I went to both stores and didn’t feel that the BB employee knew what he was talking about but couldn’t find anyone that even had an opinion at CC. So Costco enjoyed another sale and I saved money to boot.
CC isn’t going to make it if their new stores in my area are any example. The atmosphere in the stores is dead or flat, no enthusiasm or life on the part of the employees. They were as bad as the Chicago Bulls of late.
Circuit City is the Kmart of electronics chains. Myopic management that doesn’t understand the shopping experience or the value of clean, well stocked stores and knowledgeable sales people. Circuit City’s prices are always higher than Best Buy or Target, too. I avoid going into both Kmart and Circuit City. I predict both won’t survive.
Circuit City’s numerous missteps in customer service were bound to lead to losses. The reduction in experienced sales staff was the most baffling to me.
Floor plans can effect sales, but in the case of Circuit City, in-stock conditions and experienced sales associates are the major contributing factors that are sinking this ship!
Couldn’t agree more with sentiments expressed above, particularly those of Ms. Howe. But since I know her, I might be a bit biased here… 🙂
If an Electronics retailer is a “destination” store, then what is/are the reason(s) for the consumer to go to Circuit City? And to go to CC over Best Buy?
It isn’t service–not with 3400 dearly departed Electronics savants. Likely isn’t decor [for many]–Home Depot still looks like it was built for contractors, but some-to-many consumers still favor Depot despite substantial inroads by Lowe’s. Likely isn’t location location location [for most]: even with high gas prices, would the “typical” consumer drive 5 extra miles to go to Best Buy?
And price is the dominion of a small Bentonville-based retailer.
Can’t think of a compelling reason to go to Circuit City–which is frightening.
If it’s a destination store, going to Circuit City feels like vacationing in Columbus, OH [my beloved hometown] over the Holidays: why go there–except for family reasons–in December, when so many tropical locations are “calling”?
I just had an amazing thought. Let’s let RadioShack buy Circuit City. If you dejunked both concepts you could get every viable product in one 12,000 square foot store. That way, you could drop annual sales to $350,000 and still make a profit with fewer than 10 employees.
Store location and layout are, in my judgment, only a small part of the problem. A huge problem is the checkout experience,; can’t someone do something to streamline? Who needs all the paper, why not a digital receipt or email follow-up?
Yes, all customers appreciate knowledgeable staff but I suspect a high percentage of customers coming into any electronics store have done their homework on the web, know what they want and are only looking to touch and feel before purchase, and ask an employee “did I miss something in my research?” So reducing staff is a problem too, but could be overcome with a few sharp employees armed with their own PDAs to find internal and web-based information.
Finally, as a older shopper, give me less geeks and more professional sales associates. Hey–maybe they should take a page from Nordstrom.
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Circuit City has to have the most myopic management team in the retail industry. They used to have a fairly good sales staff, but they fired them all and hired “low wage” replacements. This put them on par with Wal-Mart, which generally offers the same products at lower prices. Then they came up with their expert installation and repair teams. A day late and a dollar short. Now they have built new stores that manage to blast hip hop all over the store from the automobile radio section which by itself forces me to shop elsewhere.
These people are spending too much time with consumers that don’t put anything on the bottom line. They try to draw kids in with deals on CDs and DVDs–Wal-Mart is usually cheaper and you don’t have to be there on Tuesday to get the good price.
My advice to anyone is to stay away from Circuit City. Wall Street agrees as their stock has dropped from a little over $20 a year ago to under $5 today. Yeah, find me management who can cost me 75% of an investment in one year and I will show you an organization about to implode.
It looks like Circuit City is about to make the same mistake other failed retailers have made. They think they can continue to be successful being a poor operator if only they had newer and prettier stores. It’s simply a matter of class and Circuit City doesn’t have it.
Kmart is another example. It doesn’t matter where they open, how much decor they put into the store, etc. It will only end up being a nice looking ghost town in a good location not doing any business.
I was in a Circuit City recently. I didn’t pay much attention to location, its decor, or its layout. What I remember most was the disheveled looking salesman who had a strong tobacco odor about him. That pretty much summed up the Circuit City shopping experience.
For decades, American shoppers were spoiled. They had multiple choices in each major retailing segment: 3 different national chains for office supplies (Office Depot, Staples, Office Max); 3 different national bookstore chains (Barnes & Noble, Borders, Books-A-Million); many conventional department store chains (Dayton Hudson, Marshall Field’s, Macy’s, Lord & Taylor); 3 national catalog retailers (Montgomery Ward, Sears, J.C. Penney); 2 national upscale grocers (Wild Oats and Whole Foods), etc. As the years go by, it’s clear that the competitive field is narrowing to 1 dominant player per retail category. At the moment, for big box electronics and appliances, the chosen player seems to be Best Buy. Because electronics and appliances have awfully low margins, the need for perfect execution in every way is more significant. Circuit City’s margins are falling, which makes its struggle even more urgent.
The accounting executives at Circuit City didn’t take enough consideration into the nature of the types of products the company sells.
This past year, Circuit City fired its most experienced sales clerks, replacing them with lower-wage help to trim costs. At this stage, when consumers are purchasing new technology high ticket items, the chances for “selling” are much greater when the consumer can obtain the right information and knowledge at the point of purchase.
It happened to Kmart and it happened to Eckerds and the list goes on. The only one that seems to have come back from the dead is Penney’s. Maybe there is a lesson to be learned there.
You can put lipstick on a pig but all you have is a pig with lipstick.
My most recent visits to Circuit City have resulted in the distinct feeling that nobody in management understands what a shopping experience should be or could be in the stores. As a consumer, it’s just too confusing. From store design to customer interaction to merchandising basics, it’s clear they need to rethink everything. There are so many talented retail consultants out there…perhaps Circuit City board of directors should hire a few of them and listen to their suggestions.
As well, a shopping experience research project and some shopper segmentation work seems like a no-brainer to me.
The number Circuit City has to be concerned with is 3400. That number led to all the other numbers that they put up this year. 3400 experienced associates let go before the crucial season. I really don’t understand what was behind that decision. Cost cutting is fine and dandy but not at the expense of sales and customer service. Consumers have obviously responded with their dollars and decided to shop Best Buy which has trained associates.
Can someone on the inside explain why CC did go that route? I’ve gone through the numbers and even spoken to some of their suppliers and no one knows the justification for gutting the sales force right before Christmas. 3400 is a number that should be tattooed on every CC executive when they release 4th quarter results and the stockholders should be the ones to do it!
Circuit City management got a short boost in stock value by firing its best sales staff. The firing of 3400 “highly paid” workers to hire lower paid ones was an ill advised and near sighted move. The “offer” for staff to regain their jobs (after 10 weeks!?!) at lower pay was bizarre and insulting. This action created many problems, including customer/consumer mistrust of the store entity itself. Did they believe that there would be no backlash to the simple disposal of a high quality, first line of customer contact? Customer service and sales product knowledge are key in the consumer electronics arena.
Read the blogs and the comments on various web sites. The top management of CC was just not thinking clearly when making this decision. I wish them luck, but this move has backfired in so many ways that it may be impossible for them to pull out of their retail death spiral.
I was in a Circuit City recently with the intent of buying a bookshelf stereo. I asked the only salesperson I could find for help. He was unable to assist me, as it was “not his department.” No effort was made to have someone else assist me other than the clerk pointing to the salesperson he said could help. That clerk was helping someone else at the time–so I waited 10 minutes before I decided to leave.
I purchased my stereo later that day on the web, where I found excellent product information and competitive prices. I have not been back in a Circuit City since–and do not expect I ever will, given that they will probably be extinct before long. I suspect my experience was similar to many others since the mass firings. The only thing of value to a customer, that differentiates one specialty retailer from another, is customer service–particularly in a world of commodity products–and it seems that has been eliminated from what Circuit City offers.
You can evaluate the strategy of downgrading the sales team by looking at other retailers who have done the same. Home Depot is an example of a retailer that imposed requirements on stores to have 50% part-timers and implement wage bands with maximum pay rates. This was a change to a sales team that was primarily made up of tradesmen who cost more money and offered great expertise to the customer. The result was…well, let’s not kick an ailing horse.
As a shopper, I try and try to shop at a new and convenient Circuit City near my house, but usually end up buying at Best Buy because I cannot get the info I need from the CC team and there is no confidence behind the info I extract. The largest controllable expense of a retailer also seems to be the largest contributor.
The conclusion is clear.
Everyone looking for a retail turnaround story has a common theory; first place to start is to cut costs, regardless of what the real problem is. This strategy doesn’t work for every situation, as CC has found out–the hard way.
An Equity Research report from Bank of America Securities summed it up: “We are not convinced that management’s urgency is sufficient to deal with some very dramatic declines in the operating business and the balance sheet.” On the other hand, replicating Best Buy may not work for CC as their problems are different.
Instead of focusing on cutting costs or on opening new stores, they should be focusing on improving productivity of their existing retail space. A significant portion of their traditional 34,000 square foot format is wasted or underutilized.
Demographics of consumer electronics customer changes very fast; they should be focusing on identifying their most valuable customers and understanding their purchasing habits, not just at Circuit City but elsewhere too (panel or survey data should help here).
I also think their checkout counters are extremely inefficient; I have seen customers walk out from the checkout on more than one occasion. On the other hand, the much smaller Apple Store has an innovative approach; sales associates equipped with wireless credit card scanners with receipts emailed to you.
The store relocation plan for CC may be a very good move if supported with a detailed study of trade-area demographics. The smaller 20,000 square foot format is also a great idea, since the productivity is pretty much the same as the inefficient 34K format.
All in all, CC may still change their game in ’08 if they realize that their problems are different from their competition’s and they will actually have to use some creativity to solve them rather than using canned approaches.
Circuit City firing their trained employees was in a word–dumb. The only reason to go to CC or Best Buy is for selection and knowledgeable sales people, otherwise, buy it all at Costco. CC lost one of the big two reasons to go there.
There is a brand new CC and BB very close to each other here, BB is packed and CC is empty. It’s not the floor plan; this is a brand new store. I went to both stores and didn’t feel that the BB employee knew what he was talking about but couldn’t find anyone that even had an opinion at CC. So Costco enjoyed another sale and I saved money to boot.
CC isn’t going to make it if their new stores in my area are any example. The atmosphere in the stores is dead or flat, no enthusiasm or life on the part of the employees. They were as bad as the Chicago Bulls of late.
Circuit City is the Kmart of electronics chains. Myopic management that doesn’t understand the shopping experience or the value of clean, well stocked stores and knowledgeable sales people. Circuit City’s prices are always higher than Best Buy or Target, too. I avoid going into both Kmart and Circuit City. I predict both won’t survive.
Circuit City’s numerous missteps in customer service were bound to lead to losses. The reduction in experienced sales staff was the most baffling to me.
Floor plans can effect sales, but in the case of Circuit City, in-stock conditions and experienced sales associates are the major contributing factors that are sinking this ship!
Couldn’t agree more with sentiments expressed above, particularly those of Ms. Howe. But since I know her, I might be a bit biased here… 🙂
If an Electronics retailer is a “destination” store, then what is/are the reason(s) for the consumer to go to Circuit City? And to go to CC over Best Buy?
It isn’t service–not with 3400 dearly departed Electronics savants. Likely isn’t decor [for many]–Home Depot still looks like it was built for contractors, but some-to-many consumers still favor Depot despite substantial inroads by Lowe’s. Likely isn’t location location location [for most]: even with high gas prices, would the “typical” consumer drive 5 extra miles to go to Best Buy?
And price is the dominion of a small Bentonville-based retailer.
Can’t think of a compelling reason to go to Circuit City–which is frightening.
If it’s a destination store, going to Circuit City feels like vacationing in Columbus, OH [my beloved hometown] over the Holidays: why go there–except for family reasons–in December, when so many tropical locations are “calling”?
I just had an amazing thought. Let’s let RadioShack buy Circuit City. If you dejunked both concepts you could get every viable product in one 12,000 square foot store. That way, you could drop annual sales to $350,000 and still make a profit with fewer than 10 employees.
Store location and layout are, in my judgment, only a small part of the problem. A huge problem is the checkout experience,; can’t someone do something to streamline? Who needs all the paper, why not a digital receipt or email follow-up?
Yes, all customers appreciate knowledgeable staff but I suspect a high percentage of customers coming into any electronics store have done their homework on the web, know what they want and are only looking to touch and feel before purchase, and ask an employee “did I miss something in my research?” So reducing staff is a problem too, but could be overcome with a few sharp employees armed with their own PDAs to find internal and web-based information.
Finally, as a older shopper, give me less geeks and more professional sales associates. Hey–maybe they should take a page from Nordstrom.