The second largest electronics retailer in the U.S. - Circuit City - announced on Friday that they could not sell their assets to another party who would agree to keep their doors open. They opted to sell their assets to liquidators who began yesterday to sell what remaining inventory and fixtures the 567 remaining Circuit City stores have in the U.S. with another 200 or so in Canada.
While this development wasn't all that surprising, nor was it as devastating to my company as the announcement of Tweeter liquidating their assets last fall, it's devastating to a number of huge manufacturers in our industry. And it also raises a red flag in the eyes of manufacturers as the playing field of where they can sell their products just became tremendously smaller.
Circuit City began innocently enough in 1949 as a television store in Richmond, VA. It grew into a number of different types of stores along the Atlantic seaboard and up into the Northeast in the 60's and 70's. One of those stores, a large warehouse-style store called Circuit City Superstore, garnered the most attention from consumers and the format stuck. In the 80's, Circuit City began an aggressive growth pattern that put over 1000 stores from coast to coast, including Canada.
The demise of Circuit City probably began with their expansive growth, growing too fast and putting stores into markets that either didn't need another electronics store, or putting too many locations into markets that didn't need that many Circuit City stores. And since Circuit City leased most of their buildings, they also didn't have the greatest locations for their stores.
A number of people in our industry point to one such location as a great example of Circuit City's questionable decisions that helped bring on the beginning of the end. In the mid-90's, Circuit City opened a store - a nice location, actually - that was literally across the street from Nebraska Furniture Mart in Omaha (see map). Then Circuit City began a very aggressive pricing campaign to either match or go below the everyday low prices Nebraska Furniture Mart had to offer.
What Circuit City didn't realize, or were too full of themselves to realize, is that the Blumkin family, which was backed by gazillionaire Warren Buffett, had deeper pockets and could afford to get into a "pissing" price-war with the upstart chain. When the Mart began to sell like-products UNDER cost to make their point understood with Circuit City, the chain kept playing the game with NFM. This kept up for a couple years before Circuit City threw in the towel and began to play nice with their neighbor.
But many in the industry continued to question Circuit's strategy in locating their Omaha store next to the Mart. While many business professors will say it's a great plan to be near your major competitor, Omaha was a growing community to the west. There was nothing in the new western end of Omaha that could have kept Circuit City from having a terrific market edge in the area. But Circuit wanted to show the electronics world that they had the might to take on the venerable Nebraska Furniture Mart in their own backyard. All it showed was what many of us already knew - you don't screw around with Nebraska Furniture Mart. The Omaha location finally closed in February 2004 - one of approximately 14 Circuit City stores that were losing money at the time.
The reasons for the end of Circuit City are many, with the economy being the biggest factor. But Circuit City was in trouble long before this recent economic downturn. Many analysts point to mismanagement by Circuit City decision makers and too much inventory on hand in stores and warehouses.
One of the major blunders by Circuit City management was the decision in 2004 to fire nearly 3400 "high paid" sales people who were making good money selling products on commission. These long-time sales people were seasoned employees and really knew their stuff when it came to products. They were replaced by people willing to work for $8 bucks an hour - young people who were really nothing more than clerks who had just a fraction of the knowledge the fired sales staff had garnered over the years. This, alone, alienated some of Circuit's long time customers who though they could trust the sales staff over personnel at other national chain stores.
Circuit's decision to stop selling appliances in the 90's also helped lead to where it ends up today. It didn't embrace the electronic home-gaming industry until it was too late. It had a chance to partner up with computer companies such as Apple for in-store promotions, but failed to do so. While Circuit City snoozed, Best Buy garnered more of the market share of consumer electronics. When Circuit City finally woke up and began to address some of their competitive issues with Best Buy head-on, WalMart nearly caught both of them.
Circuit City is presently saddled with over $1.2 billion dollars worth of inventory that has to be liquidated. That, wont for a better term, is a SHIT-LOAD of products that will be flooding the market place in the coming weeks. As of last week, Circuit still owed Hewlett-Packard about $120 million dollars (couldn't happen to a better company) and Samsung approximately $115 million. There was a report in industry trade magazines late last fall that Samsung was trying to take back approximately $75 million in inventory from Circuit.
The biggest problem with the closing of Circuit City is that the major electronics manufacturers now have even fewer places to sell their wares. The fear is that the major electronics retailers - Best Buy, WalMart and Amazon.com (yes, Amazon.com!) - will be able to put pressure on manufacturers to lower prices on products even more, allowing for more profit margin for themselves, while cutting into the already razor-thin margins manufacturers enjoy today. While this sounds great for the average consumer, this is turning into a horrible scenario for manufacturers. Things are already tight for many manufacturers with some announcing wholesale and widespread lay-offs in late 2008 and early 2009. If they have to continue to drop their wholesale prices to move product, or to appease a power retailer like Best Buy, they could suffer millions of dollars in losses just to keep making products.
Speaking of Best Buy, things are going so well for the Minneapolis-based company. Just before Christmas, Best Buy announced they had offered buy-outs or early-retirement to nearly 4000 of its corporate employees working in the home office in suburban Richfield. Sales are down at Best Buy and profits are eroding. Best Buy also put a clamp on expenses, including the discontinuance of all non-essential expenditures that were deemed OK in the past. It wasn't a great Christmas selling season for Best Buy, or for a number of other electronics retailers. This is not a good time for my industry.
The closing of Circuit City stores means more market shares for places like Best Buy, Fry's, Ultimate Electronics and other regional chains. But the retailers I fear the most are WalMart and Amazon.com. I can foresee a major price battle going on between those two that could lay Best Buy to waste at some point in the future. And that won't be good for anybody in my industry.
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