Circuit City Six Read online

Circuit City Six

  Don Eames

  Copyright © 2009 Eames Management Group

 

  Table of Contents

  The World Asks the Question

  1. Arrogance

  2. Real Estate

  3. Home Appliances

  4. Commission Model

  5. Firedog

  6. Talent

  Learn from Others’ Mistakes

  Revenue and Net Income Snapshot

  About the Author

  More eBooks from Eames Management Group

 

  The World Asks the Question

  How Could This Happen?

  As I was enjoying my cup of Masala Chai tea with the CEO of a new start-up electronics retailer in New Delhi, India, I was asked a question: “What happened to Circuit City?” It is really amazing to most people that a company like Circuit City could go from solvency to bankruptcy and liquidation so quickly. Wherever I go in America, Russia, Middle East, India or elsewhere, leaders of large retail organizations want to know the story.

  In Jim Collins’ 2001 book “Good to Great”, Circuit City is featured as a company that made a leap from a good performer to a great performer. Jim wrote: “Circuit City became to the consumer electronics retailing what McDonald’s became to the restaurants – not the most exquisite experience, but an enormously consistent one.” In the early 1980’s the company had built a culture of discipline that produced superior execution of the “4-S” model (service, selection, savings, satisfaction). “It was because of this consistency that Circuit City took off in the early 1980’s and beat the general stock market by more than 18 times during the next 15 years.”

  The problems that Circuit City faced started years before but the severity was compounded by the current economic climate. External threats included weakening consumer demand, growing unemployment, tight credit and collapsing housing markets. Internally the organization suffered from several years of declining sales, a weak balance sheet, skeptical vendors worried about getting paid and increasing competition from Best Buy and low service/no service retailers.

  Aside from these current realities, in my opinion, Circuit City made six fatal mistakes which resulted in one of the most significant business failures in retail history. These mistakes undermined their own progress and ultimately killed them.

  By understanding and analyzing these mistakes, today’s leaders must learn how to steer their companies away from these potential failures. This is the purpose of this eBook.

  Special thanks to our Senior Strategy Consultant, Vitaly Demin, for helping me put this eBook together.

 

 

  1. ARROGANCE

  How It All Started

  The Genesis

  In the early 90’s, Circuit City was the leading electronics retailer in the United States with about 400 stores nationwide. At that time their competitor Best Buy was a small struggling company with about 70 stores. They were focused on survival, growth and conquering the 400 store giant. Led by the founder Dick Schulze, the company was driven to take the game to Circuit.

  Best Buy aggressively entered existing Circuit City markets where the latter had been doing business for 5-10 years. In those markets, the strategy was to go into newer retail developments which outpositioned Circuit City’s existing locations. This proved to be a game changer. Best Buy mandated best locations in these trade areas and often paid a premium price rather than saving money and picking less costly and inferior sites.

  Losing the Edge

  The Circuit City reaction to this Best Buy offense was to do nothing, stick to their existing real estate strategy and stay in their older store locations. The results are well known. By 1996, Best Buy had surpassed Circuit City in size and was sweeping up market share.

  The arrogance of the top leadership of Circuit City allowed Best Buy to successfully implement their strategy. A refusal to admit that they could be challenged by a smaller company took Circuit City to the point of no return – no return to the success they had once had.

  Takeaways

  HAVE EDGE, NOT ARROGANCE

  Humility is always better than arrogance

  Never be satisfied, always keep moving the ball

  Stay ahead of the competition – never give up ground

 

 

  2. REAL ESTATE

  Prioritizing “B” Site Locations Is Never a Good Strategy

  Real Estate Strategy Aiming Low

  Over the years, Circuit City struggled to produce maximum return on their real estate strategy. They prioritized cheap leases which resulted in inferior or “B” locations. Because they were not aggressive in locking up new great real estate, they were almost always second to Best Buy. They did not realistically evaluate the ROI of existing stores, keeping unproductive stores open after the shopping node had shifted and stores turned unprofitable. They also followed a very weak remodel and refresh program resulting in old tired stores that did not allow for the newest technologies to be presented in a compelling way. Circuit City never achieved the customer traffic needed to produce profitable results and the customer experience continued to decline.

  On the Other Side

  In contrast to Circuit City, there are many reasons for the success of Best Buy. Their overall real estate strategy, site selection competency, aggressive pursuit of new “A” quality locations, store design and lease negotiations along with a proactive remodel/refresh strategy are world class. Circuit City, however, believed in their own strategy and was unwilling to change.

  Customers Make Choices

  A faulty real estate strategy caused Circuit City to fall behind the competition and continue to erode the customer experience. Given all of the superior choices that customers have today, this was a fatal error.

 

  Takeaways

  BE STRATEGIC

  Always go for “A” locations as long as NPV is positive and IRR is within your acceptable range

  Be faster than your competition

  Hire the best real estate experts in the industry

 

 

  3. HOME APPLIANCES

  From White Goods to Red Ink

  Not Taking It Slow

  In June of 2000, Circuit City’s CEO Alan McCollough announced that they would stop selling appliances. It appears to have been an overnight decision. The combination of increasing competition from Lowe’s and Home Depot, high fixed costs, inventory investment and declining sales spurred the decision to move quickly. In fact, their White Goods vendors were not even notified of the change prior to the announcement.

  Side Effects

  Circuit City’s strategy to replace the appliance business was to expand the consumer electronics section of the store and bring the box product out of the back room onto the selling floor. This meant a major retrofit of the selling space from a commission set up to non-commission format while reducing warehouse space. Obviously, this was easier said than done. It required a substantial capital investment which strained the profitability of the company and it also took three years to complete these updates.

  The Reality

  By exiting the White Goods business Circuit City lost the appliances customer and traffic. The leadership of the retailer lacked an understanding of the metrics of the business. The home appliances category may have operated at a loss but the margin dollars it generated were applied to the company’s fixed overhead. These dollars were not replaced. Also, as my business associate Vitaly Demin commented, eliminating this category created a significant disruption for the retailer’s brand because their customers had associated Circuit City’s name with home appliances as well as other consumer electronics
product categories.

 

  Takeaways

  THINK BIG

  Always test your assumptions before you act, look for unintended consequences

  Many financial decisions have another side to them which may often hurt other aspects of the company’s business

  Focusing on short term can lead to trouble – think long term

 

  4. COMMISSION MODEL

  Listen to Your Customers, They Don’t Like This Experience

  It Only Took 14 Years

  For years Circuit City considered their commissioned selling staff to be a major differentiator from Best Buy who eliminated commissioned sales compensation in 1989. It was Circuit City’s belief that by training and compensating knowledgeable and professional sales people they could provide a superior shopping experience. However, by 2003, faced with falling sales and profitability, the company felt compelled to move their sales employee compensation model from commissioned to hourly rate.

  Losing Their Best

  The results of this change were devastating. 3,900 highly trained but expensive commissioned sales people were terminated. Sales in profitable categories declined. Circuit City was left with an ineffective under-trained selling staff and continued to lose market share. Terry Smith, a former Change Management executive at Best Buy commented on this: “When decisions are made without a systemic understanding of the impact on employees, customers and business results, the overall outcomes are not maximized.”

  Back to Arrogance

  Circuit City, having been one of the most successful retail companies in the world, never learned to embrace change. Their leaders, as great and smart as they were, held on to old models well beyond their usefulness. They did not realize how important it was to change and do things differently in this very dynamic world. This critical mistake was not about the fact that they made the decision to move to a non-commission selling model, it was about the fact that it took them almost one and a half decades to figure that out.

 

  Takeaways

  CHANGE MANAGEMENT

  When changing strategies, understand the impact on your business, customers and employees and manage the risk accordingly

  In order to make a successful change in your operating model, ensure organizational alignment (process, structure, systems, compensation, training, culture, etc)

  5. FIREDOG

  “Better Late Than Never” Doesn’t Always Work

  Geek Squad? Hmmm… Yeah, Whatever

  In 2002, Best Buy bought Geek Squad and grew it into the number one national service organization with revenues projected to reach over $1 billion in 2009.

  Circuit City did not see the value in providing their customers with comprehensive services solutions. It took them four years to realize that they had to do something about it. To challenge Geek Squad, in 2006, Circuit City launched Firedog. This move required a huge financial investment which put strain both on the company’s financial and people resources. Building a brand is difficult, very expensive and takes time. The rollout lacked consistency, local ownership, and customer acceptance. Also, by that time Geek Squad had already developed into a very strong brand with a large base of loyal customers.

  The introduction of the Firedog project became another money drain for the company. The Circuit City’s services organization never got close to what Best Buy had accomplished.

  Put Your Money Where Your Margins Are

  Considering the narrow margins in electronics retailing, baskets must be built to improve the profitability of each transaction. For years baskets were filled with warranties and accessories. While these are profitable they do not necessarily enhance the overall customer experience and satisfy the true needs and desires of customers. Unlike Best Buy, Circuit City refused to recognize this customer service and profit opportunity. They should have been first, not second four years later.

 

  Takeaways

  STAY TUNED

  Be the leader

  If you are not the leader, at least be a fast follower

  Invest in profit opportunities

  Listen to your customers, know what they want

 

 

  6. TALENT

  Your Best Employees Are Your Greatest Asset. Keep Them

  They Let Them Go

  In 2007, faced with falling sales and profits, Circuit City had to find a way to improve their overall profitability. A decision was made to reduce their labor costs, the largest contributor to SG&A. In one day 3,400 sales associate jobs were eliminated. People holding these jobs were their most tenured, knowledgeable, successful and highly compensated employees. They were replaced by new, much less experienced sales people that were unproven and under-trained. The results proved disastrous. “Firing 3,400 of arguably the most successful sales people in the company could prove terrible for morale,” wrote Colin McGranahan, an analyst with Sanford Bernstein & Co.

  Hurting the Core

  The morale of the remaining employees plummeted resulting in even more turnover. With the loss of their best employees, the Circuit City customer experience deteriorated and much like in the restaurant business, when customers have just one bad experience they almost never come back. There are just too many choices.

  This fatal mistake resulted in an unrest inside the organization, lost customers, lost productivity, lost revenue and lost profits from which they never recovered.

 

  Takeaways

  ANY ORGANIZATION IS ALL ABOUT PEOPLE

  Make retention of your best people one of the top priorities

  Create a great culture inside your organization where your employees would love to belong

  Invest in training. Untrained or under-trained employees are usually dissatisfied with their jobs which negatively affects themselves , other employees and customers