Circuit City Goes Obit City

What were your initial reactions to news this morning that Circuit City (OTC BB: CCTYQ.PK) was seeking bankruptcy court approval to liquidate its assets? Did you fumble through your pockets for any gift cards that you will need to quickly redeem at the consumer-electronics chain? Did you log in to your brokerage account, snapping up shares in rivals like Best Buy (NYSE: BBY  ) , Conn's (Nasdaq: CONN  ) , and hhgregg (NYSE: HGG  ) that will benefit from the thinning pool of competitors?

I was all over the map. My heart went out to the 30,000 employees, because they will be set off into the wild in a very difficult climate. It's also only natural to point out that Blockbuster (NYSE: BBI  ) dodged a bullet. It was exploring the purchase of Circuit City before walking away last year.

Circuit City shareholders were also denied exit strategies by overconfident executives in the past. The chain turned down buyout offers at $8 a share in 2003 and $17 a stub in 2005.

This doesn't mean that the private equity buyers caught a break. Maybe they were packing the magical elixir that would have put the company on track. Heck, if Blockbuster would have had time to integrate Circuit City, I can definitely see how the convergence of consumer electronics and specialty entertainment could have worked out, too.

We'll never know at this point. There could be life after liquidation for some of Circuit City's assets, like the firedog home installation service. If firedog doesn't survive as a standalone, wouldn't it fit well with a chain like RadioShack (NYSE: RSH  ) ? Maybe an online retailer such as Amazon.com (Nasdaq: AMZN  ) buys the traffic-heavy Circuit City website as a clearance site for distressed inventory. Ultimately, though, this is the end of the line for a company that seemed to be Best Buy's biggest threat a couple of years ago.

If anyone is chronicling the rise and fall of Circuit City, I'd like to offer up March 2007 as the beginning of the end for the company. It was then when the retailer decided to let go 3,400 unit-level associates who were earning above-average salaries at the company. It may seem like a shrewd move, until you consider that those on the higher end of the chain's pay scale are likely the seasoned vets on the front line who knew the company the best.

"It's not just that you're letting go what may be some of your productive associates," I wrote at the time. "What kind of message does this send to your remaining hires? Don't overachieve. Lay low. Do just enough to stay with the pack."

Circuit City's morale got laid off that day, too. It's a miracle the company even lasted this long without a heart.

The fall and fall of Circuit City:

Best Buy is a Motley Fool Inside Value recommendation. Best Buy and Amazon.com are Motley Fool Stock Advisor picks. The Fool owns shares of Best Buy. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz can watch time fly at a consumer-electronics store. He's a gadget geek that way. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On January 16, 2009, at 2:25 PM, FinancialFellow wrote:

    I used to work there back when I was in high school (12 years ago). At the time they were stronger than Best Buy and had a very good outlook. There stock was in the 30's back then. I was back in one of their stores a year or so ago and was amazed at how bad it was. Sales people that looked like they were 15 years old, a poorly lit environment, etc... Best Buy is such a more pleasant place to shop. That said, I think Best Buy will find themselves with more competition from onlin only retailers such as Amazon. At least until Amazon has to start collecting sales tax: http://financialfellow.com/2009/01/14/get-ready-to-pay-sales...

  • Report this Comment On January 17, 2009, at 12:53 AM, TrailerParkJawa wrote:

    I used to work at Circuit City during college (92-96). It doesnt surprise me CC went under. Not only did the company change for the worse over the years but so did the consumer base in some ways. I think electronics consumers are more sophisticated than 15 years ago and they dont need as much hand holding. In a world where there is Fry's, Costco, Best Buy, etc, there wasnt much for CC to stand out for.

  • Report this Comment On January 17, 2009, at 7:47 PM, mprongue wrote:

    The fall of Circuit City is a retail tragedy. Recall the mid-80's and into the 90's. Where did you buy your electronics? Circuit City was defining the consumer electronics industry. There was no Best Buy and Wal Mart sold underwear and Moon Pies.

    Circuit City was pieced together from compilation of multiple businesses starting in 1949 with Samuel S. Wurtzel's "Ward's" going public in 1984. Growing to 765 stores, ultimately, was no guarantee of success. How many retail giants have crashed and burned?

    Circuit City owned the electronics market going into the 90's when Best Buy started gaining steam (having gone public in 1985). Circuit City did the "sales counselor thing" pretty well, but the American consumer moved on using the Internet to scope out their electronic selections. Best Buy capitalized on this and eliminated commissioned sales people. Best Buy located their stores in prime real estate areas of cities and created gorgeous and colorful facilities. Consumers started to abandon Circuit City in favor of the younger, funner, cooler, more colorful Best Buy.

    I went to Chicago to do a competitive shopping analysis for a week in 1994 to scope them out. My reaction was "WOW". Circuit City ignored the Best Buy challenge and instead decided to loose $114 million dollars on a boondoggle called "DIVX"- a recordable DVD and then diluted their strategic focus by devoting copious amounts of efforts to selling used cars with Car Max.

    When the BBY stock hit $1.00 per share on 2/28/97 Executive VP Richard Birnbaum of CC announced that Circuit City had Best Buy "on the ropes!" Sounded a lot like President Bush declaring "Mission Accomplished" but had CC focused on their core business perhaps today's total failure of Circuit City could have been different.

    So many mistakes were made from ditching the Appliance business to focus only on electronics to massive remodels of many stores to firing key employees it seemed like a team of Best Buy operatives had infiltrated the boardroom and were intentionally destroying the company. Many seasoned DMs, RVPs and Division Presidents who built the company were terminated and slowly but surely, systematically, Circuit City failed at every turn in the 2000's.

    If anyone was surprised by this bankruptcy then they must not understand the history of the rise and fall of this company. It's an American tale of what not to do in business, how to fail magnificently in strategic planning, how to ignore the American consumer while all the time plowing ahead into the fog at full-speed.

    Smart money sold CC at $99 per share in 1999 after it dumped DIVX and wrote their investment off. That was one of the few smart moves I ever made.

    Goodbye Circuit City- there were a ton of dedicated people that made you a success. Too bad you fired them all. You reap what you sow.

  • Report this Comment On January 18, 2009, at 11:38 AM, johnnyc123 wrote:

    Cheers to MPRONGUE's commentary! You are spot on with your analysis. Anyone who has worked for this company in the last 20 years for any length of time should would not have been suprised by the ultimate demise that has fallen upon Circuit City Stores, Inc.

    I too recall the day that in 1997 when I sat in the Thalbro training center in Richmond, VA and heard Jerry Lawson (Eastern Divison VP) state emphatically that Best Buy was "on the ropes". Like many times in my career with Circuit City, I had to wonder how so many corporate executives could be so naive, completely clueless about changing consumer trends, the retail sales environment and... dare we say it... totally without vision of how technology might change the way business would be done in the 21st century.

    Anyone remember the early TV advertisements for Circuit City? The ad would usually follow this format: Show a TV and the price, Show a VCR and the price, Show an Appliance and the price, then the Big Red Plug comes down in a bolt of lightning... that was it. That was their "branding". When I suggested to one of the VP's that our ads were boring and not current with the times, his response is that Circuit City "does not do image ads". Then, a couple of years later, they hire the ad firm of Chiat-Day to create image ads for the company.. go figure that.

    Having some access to many of the company's upper management in Richmond, I had even suggested early on that Circuit City needed an internet presence and could explore internet marketing and sales (this was back when most of us got our internet access over 14.4K modems via Compuserve). I hand coded an HTML website for demonstration to him on my laptop. The response was similar... "No, that isn't really something that is going to be significant". Now granted, at that time.. the world had not heard of iTunes, Facebook, or even Amazon and cell phones were still big bricks made by Motorala... but still, it represents that total lack of vision from the very people who were at the helm of this doomed ship. "What, use the latest technology to sell the newest electronic gadgets? Nahh"

    Before the days of Best Buy and strip malls, Circuit City was a self titled "destination location". They did not put their stores in the main hub of retail businesses or in large shopping malls. Their theory was that people who wanted electronics would travel to their stores, even if it was a bit out of the way. As consumer shopping trends changed, they still didn't see the flaws in that strategy. Only in the last few years did they change their classic "drab grey and maroon" store layout and began seeking new locations near other retail centers (usually across the street from an already established and thriving Best Buy store).

    Policies and proceedures changed frequently in my last few years with Circuit City. At the store level, it was "Soup of the Day" management. New reports and programs were generated by Middle Management in what only can be described as a desperate attempt for Department Heads to justify their existence. As soon as one program got put into place, it was removed and replaced by bad idea. At one point, our PSB (program strategy book) even had the MARGIN column removed from it. We, as store managers, were not to manage selling techniques based on profit, but by some mandated product ranking, yet our bonuses were paid based on the P&L performance.. yes.. it sounded just as crazy at the time. This program was soon abandoned and some other pointless, idiotic one took it's place. Again, instead of focusing on what WOULD make a difference, we were chasing our tails while Best Buy was steadily eroding our market share.

    How about the messy business of doing away with comissioned sales people? I had to sit in my store and bring in our sales people one at a time and have this conversation: "You have been a great employee, you have exceeded every sales quota, you have been on the president's sales list for 12 months straight, you have the highest customer service awards, you have done everything right, nothing wrong... your position has been eliminated. here is your severance package." WHAT?? Let's take these longtime heros of our store and turn them out? Why? Because the company does not want to pay them what they were worth? This one counselor would routinely have repeat customers waiting in line for him.. and only him.. to serve him. UNBELIEVABLE... We are going to get rid of the superstars and keep the mediocre as a skeleton crew to staff the store. The company needed to do some trimming, but should have started with the fat, bloated middle management and rather than cleave out the backbone at the store level.This was one of the final straws for me and I resigned my position soon after.

    All in all, Circuit City was always playing catch-up rather than exploring the role of innovator. Sure, they did try to develop DIVX, a greedy proposition that consumers wisely rejected. I began my career with Circuit when the company took care of it's associates and it's customers. As competition increased and times changed, the sluggish behemoth always seemed to choose the wrong path or try to change it's course after the damage was done. I feel bad for the store associates and corporate employees that have been left in the wake. Most of my colleagues have wisely moved on to other employment opportunities. To the my personal freinds who stuck it out and have now gone down with the ship, my heart goes out to you.

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