January 08 Beacon

Of Peanuts and Monkeys in Retailing

As the old saying goes: “When you pay peanuts, you get monkeys.” Circuit City…once the industry’s largest seller of electronics but now in a struggle to turn their business around…may have learned this lesson the hard way.

Circuit City recently reported third quarter results that showed significant losses in both sales and profits…a loss that resulted in the market pummeling their stock by more than 25% in one day. Circuit’s announcement included a statement from CEO Phil Schoonover who explained that Circuit’s results were impacted by “…lower close rates, reduced attachments of higher margin accessories and firedog(SM) services and lower extended warranty net sales as compared with the prior year.”

Circuit City, in a cost cutting move announced earlier this year, laid off 3,400 of their more experienced (and expensive) sales staff in favor of replacing them with less experienced…and less expensive…new hires. Many industry observers have suggested that lower close rates and poor attachment sales are exactly what happen when you degrade the quality of your sales staff.

Like many businesses...Schoonover faced a difficult situation when he became Circuit's CEO. He took over a retail operation that has not made any significant operational changes in years. This reality has saddled them with a higher cost structure than the lean and mean Best Buy...their principal competition. Schoonover had to cut costs, revamp operations, rework the basic Circuit floorplan...and he had to do it quick - before their situation further deteriorated.

So is Circuit City lost in the jungle? Only time will tell for sure…but before you send out a search party, there is more to the story. Consider the following points:

• Circuit City has reported that they have begun to “address the execution issues and experienced sequential improvements in close rate, and our key TV attachment basket improved each month of the quarter after hitting a bottom in August.”

• Comparable stores sales are said to have experienced double digit increases on the Black Friday weekend...which occured late in the reporting period.

• Circuit has begun opening new stores in a new “The City” concept that is showing stronger results than their twenty-year old racetrack stores. They plan to open more "City" stores in the coming year.

So are we bullish on Circuit City? They face huge challenges in a very difficult and unforgiving market. Also, it is not clear how they view their competitive posture vs. Best Buy. On the one hand, it makes sense to get a more competitive cost structure in place...especially in electronics retailing. But, on the other hand, are they trying to out-Best Buy Best Buy? Are they a step-up to Best Buy...how do they fit in? The competitive positioning seems fuzzy.

The financial markets are losing patience. Today, Fox Business News placed Phil Schoonover #2 on a list of the top ten worst CEO performances in 2007!

Circuit City is certainly not out of the woods (or jungle) yet. We’ll keep an eye on them as only time will tell. They might end up a lost monkey...or they might end up more like Tarzan speedily swinging above the jungle on vines!