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Regrets as chain fights to survive: Retailer's miscues on strategy added up as rival Best Buy surged
(Richmond Times-Dispatch (VA) Via Acquire Media NewsEdge) Nov. 9--From humble beginnings in a small downtown Richmond storefront in 1949, Circuit City Stores Inc. grew into a retailing powerhouse.
For years, it was the country's largest retailer of brand-name consumer electronics. In 1974, it pioneered the warehouse-style showroom used by many retailers today.
Now the Fortune 500 retailer struggles for survival.
For all the superlatives, the story of Circuit City also is one of missteps and missed opportunities in a rapidly changing marketplace, according to former executives, board members and retail observers.
Many experts question the Henrico County-based chain's long-term viability. Circuit City continues to lose market share and profit to rival Best Buy Co. Inc. and Wal-Mart Stores Inc., as it has in the past decade.
Circuit City's problems largely stem from decisions in the 1990s and early this decade, including:
--testing new ventures that distracted executives from the core business;
--not seeing Best Buy as a formidable competitor;
--putting many of its stores in inferior locations;
--not initially selling video games, computer software and similar products as Best Buy did;
--stopping the sale of appliances; and
--continuing to have store employees work on commission.
Others believe Circuit City became too smug and didn't reinvent itself quickly enough in the face of strengthening rivals.
"Once Circuit City fell significantly behind Best Buy in sales per store in the late 1990s and once Best Buy really became profitable, it became very difficult to catch up," former CarMax Inc. CEO Austin Ligon said.
Company executives believed in the 1990s that they were taking the right steps to plan for Circuit City's future, former executives and employees say.
"All of us who were there in the early and mid-1990s knew that Best Buy was a growing threat," said Ligon, who until 2006 oversaw the automotive retail business that Circuit City created in 1993. He began working at Circuit City in 1991 as senior vice president of corporate planning.
"We studied them seriously, but we made the mistake of not testing hybrid concepts or a Circuit City version of a Best Buy store. I think we all, in retrospect, would agree that we regret that."
Best Buy unseated Circuit City as the nation's top consumer-electronics retailer by revenue in 1995. A year later, Best Buy faced its most severe financial challenge, but it has soared ever since while Circuit City sales have languished, particularly in the past several years.
Even after bringing in a former Best Buy executive, who was named Circuit City's president in 2005 and CEO in 2006, the chain couldn't turn around the business. Philip J. Schoonover left seven weeks ago.
Many say Circuit City is paying the price for its slip-ups. It has posted a loss in five of the past six quarters. Its stock is trading for less than the cost of a postage stamp.
Early last week, the chain announced thousands of layoffs and the closure of 155 stores, about 21 percent of its U.S. locations. That includes leaving 12 markets, including former strongholds of Atlanta and Phoenix. On Friday, it laid off hundreds of employees at its corporate offices.
"It is a crying shame that it has come to this," said Edward Villanueva, a board of directors member from 1978 to 2000 who worked at Circuit City from 1967 until he retired in 1987 as treasurer and chief financial officer.
"How did it get there? There is not one thing," he said. "It was an accumulation of things over the years."
. . .
Circuit City executives realized in the early 1990s that the chain would have superstores in every major U.S. market by the turn of the century if it continued its rapid pace of store growth.
The retailer needed a plan for growth after 2000. Circuit City, under former CEO Richard L. Sharp's leadership, explored a variety of businesses to get into.
The chain created CarMax in 1993. In the following years, it got into the home-security business, which it eventually sold, and tested the installation and repair of home air-conditioning and heating systems, which it discontinued. The chain even considered opening large furniture stores but scrubbed that plan.
By the mid-1990s, Circuit City ventured into creating and selling a digital video disc rental system called Divx. The chain poured more than $200 million into the venture before pulling the plug in 1999. Divx couldn't get the necessary support from Hollywood studios and from additional retailers to make it a viable business.
"They had a lot going on," said Edwin L. Underwood, a former analyst at Scott & Stringfellow Inc. in Richmond who followed Circuit City from 1984 until 1997.
"Everyone was trying to figure out what business to get into next," he said. "They took their eye off the ball."
Kenneth M. Gassman Jr. followed the chain for 20 years until 2001 as a retail analyst for Davenport & Co. and Wheat First Securities (now Wachovia Securities) in Richmond.
"Management apparently thought that Circuit City could run on autopilot," he said. "Retailers can never run on autopilot. There's a new challenge every day."
Leonard L. Berry, a marketing professor at Texas A&M University who once taught at Virginia Commonwealth University, said companies cannot grow if they forget about the core business.
"The best time to reinvent your company is when times are good, not when times are bad," Berry said. "If you look away from your core business for a second, things can slip."
. . .
Circuit City's core retail business was on a roll during the first half of the 1990s. Sales were soaring. Profit was growing. Mom-and-pop stores and regional competitors closed after trying to take on Circuit City.
At the time, its closest competitor, Minneapolis-based Best Buy, was about half the size of Circuit City by sales and number of stores.
Circuit City stock increased at an annual average rate of 50.5 percent in the decade after going public in 1983, beating all industry peers and placing it at the top of the Fortune 500 service companies' rankings for having the highest return to investors.
That achievement and its rapid growth got Circuit City highlighted as an example of a strong company in Jim Collins' 2001 best-seller "From Good to Great."
But as the mid-1990s approached, Best Buy was gaining on its rival. Best Buy started as a small music store chain in Minneapolis, but the retailer changed its format to a large consumer-electronics store in 1989 and began opening locations across the country.
The two companies are similar in many respects but had vastly different approaches to selling. Circuit City emphasized its highly trained, commissioned sales staff. Best Buy's stores were bigger than Circuit City's, offered a self-serve approach and didn't pay commissions to its sales staff.
"I seriously doubt they will surpass us in sales," Sharp said in November 1994. "A lot of people have made similar predictions."
Best Buy's sales rapidly increased. Its stores were about one-third larger but generated nearly 70 percent more in sales than a typical Circuit City. But the problem then was Best Buy's profit margin -- it didn't make as much on those sales as Circuit City did.
"It is not like we were not paying attention to Best Buy," CarMax veteran Ligon said. "We knew they were a threat. But we just didn't take them seriously enough because they weren't making much money yet."
That mind-set and the experiments Circuit City conducted allowed Best Buy to push past Circuit City, said Laurie Bauer, Best Buy's spokeswoman from 1990 to 2003.
"For us, it wasn't how we can be more like them, but how can we be better and different than them," Bauer said. "They didn't view us as a big enough threat, and that was a huge mistake."
Even when Best Buy was on the brink of bankruptcy in 1996, Circuit City did nothing.
"When you are producing strong financial results, perhaps it is easy to think that you've got the right model in place or you don't question your model," said Ann Collier, who was in charge of Circuit City's investor and public-relations department from 1987 to 2003.
"If consumers seem to like what you are doing, it is hard to question or ask, 'Will they like it tomorrow?' It is the whole hindsight is better than foresight," she said.
In 1997, Best Buy began getting its financial house in order by improving its gross profit margins and inventory management. At the same time, Circuit City was focusing on Divx and expanding CarMax.
. . .
By 2000, Best Buy's profit and sales really took off. It would have been nearly impossible for Circuit City to catch up without radical change and expansion plans, former executives, company employees and retail observers said.
Executives under CEO W. Alan McCollough's leadership made a dramatic change in the business. The chain stopped selling appliances and used the space for new product categories --including DVD movies, video games and digital cameras -- that Best Buy had sold for years.
Circuit City never replaced the revenue it lost from selling the big-ticket items.
"Appliances also brought in older consumers with money," Gassman said.
The music and videos would, theoretically, cause customers to visit the store more frequently, he said. But music and videos are commodity items with no margin.
Besides, Best Buy already was a leader in selling video games, music and movies.
"We did put music in the store, but it was an afterthought," said Scott Elles, former Circuit City director of corporate operations who is co-owner and president of World Art Group in Henrico.
"Best Buy made that a primary focus because music and computer software brought in a lot of foot traffic. A lot of that foot traffic was young people who would buy a CD player, but later in life they were the ones buying the TVs. They developed more brand loyalty to Best Buy."
. . .
Circuit City long insisted that paying commissions to store salespeople meant those workers were better-trained because they had an incentive to keep up with the latest technologies. That, in turn, meant they would provide better service to customers. It was a salary system ingrained in the retailer's culture for decades.
Best Buy argued that its employees were just as educated but not as pushy as Circuit City. Best Buy workers didn't try to steer shoppers to a more expensive television set or pressure them into buying an extended warranty. Best Buy eliminated commissions in 1989.
Circuit City stopped paying commissions in early 2003 and laid off the equivalent of 1,800 salespeople.
"What we had to offer was a model consumers liked, and it offered a return to our shareholders," Circuit City's Collier said. "Consumer research never said they didn't like the commissioned sales work force. What changed was not so much consumer preference but the products and the cost equation. Switching to digital [products] meant lower profit margins while consumer familiarity increased."
Last year, the chain laid off 3,400 store workers who were receiving paychecks higher than what rival electronics retailers paid. That caused a backlash among shoppers, analysts said.
. . .
Circuit City's real estate strategy created another problem.
In the late 1980s and in the 1990s, Circuit City often entered a market before Best Buy, frequently choosing locations that were not necessarily the best. The chain consistently chose what it called "B" locations.
"We had a view of the world that we were a destination retailer, and we could go anywhere and people would come to us," a former Circuit City executive said.
When Best Buy entered a market, it snagged prime real estate. And when it located stores in the same market as Circuit City, Best Buy put stores on the fringe of a growing area while the Circuit City store was in a more mature part of town.
Circuit City has tried to freshen the look of its existing stores and improve new-store location. Since 2000 through the end of February, the retailer has built, relocated or remodeled 313 stores, or 46 percent of its store base.
. . .
Alan L. Wurtzel, the son of the company's founder and the CEO from 1972 to 1986, said Circuit City didn't take the threat of Best Buy seriously enough.
"At some point along the way, we were too focused on making a profit short term rather than building value for customers long term," said Wurtzel, who served as board chairman from 1986 to 1994 and vice chairman until 2001.
"We made mistakes," he said.
Wurtzel said Circuit City's downfall is distressing to him.
"It's very, very sad when you see your baby die," he said. "I feel badly for all the people who have devoted their lives to building this company." Contact Gregory J. Gilligan at (804) 649-6379 or ggilligan@timesdispatch.com.
To see more of the Richmond Times-Dispatch, or to subscribe to the newspaper, go to http://www.timesdispatch.com.
Copyright (c) 2008, Richmond Times-Dispatch, Va.
Distributed by McClatchy-Tribune Information Services.
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