Circuit City is an American consumer electronics retailer originally founded by Samuel S. Wurtzel in 1949. The company filed for bankruptcy in 2009 after being an industry leader for decades. Circuit City suffered from complacent management who also made poor decisions. Many Circuit City stores were outdated and in poor locations. Stores were also staffed with salespeople pushing high-margin products at a time when consumers were moving toward cheap, low-margin products.
Origin Story
Circuit City is an American consumer electronics retailer originally founded by Samuel S. Wurtzel in 1949.
Circuit City – then known as the Wards Company – was established after Wurtzel witnessed the start of the television revolution in the United States.
Imagining its future potential, he opened the first Wards store in Richmond, Virginia. Hundreds of stores followed as the company pioneered the electronic superstore format in the 1970s.
Just eight years later, it was forced to file for bankruptcy with the final Circuit City store closing in March 2009.
A new company was then founded in 2016 by Ronny Shmoel, who acquired the brand name and trademark rights in a deal with Systemax.
The demise of Circuit City is a cautionary tale in complacency, poor strategy, and bad management. Let’s tell this tale below.
Complacency
Circuit City became blinded by its success as a market leader in the 1980s and 1990s. In the highly competitive and dynamic electronics industry, this proved to be a fatal mistake.
At the start of the new millennium, Circuit City remained focused on a strategy it had developed in the 1980s that focused on products consumers didn’t want or need.
Management was not frightened by the emergence of competitors such as Best Buy, Costco, and Kmart. Former CEO Alan Wurtzel, son of Samuel, would later note that
“We thought we were smarter than anybody. But the time you get into trouble is when you think you know the answers.”
Outdated store model
Best Buy was the most significant threat to Circuit City, largely because it offered a better store experience. Best Buy stores stocked a wide variety of low-margin products to get customers in the door, such as CDs, video games, and peripherals.
The company also understood that as electronics became cheaper and more widespread, consumers no longer needed a salesperson to help them with their purchases.
Despite this clear trend, Circuit City stuck with a commission-based model. Its stores were populated with aggressive, jacket-clad salespeople who pushed high-margin items with extended service plans.
Poor store and branding strategy
At one point, Circuit City had a vast real estate portfolio. But many of its stores were built, completed, and then sat idle and empty for years. In 2005, the company had amassed around 1.2 million square feet of underutilized space.
Many of the stories themselves were also out of date.
After it underwent a rebranding and introduced the newer Horizon store format in the early 2000s, Circuit City left older stores unrenovated.
The company also opened too many stores too quickly, which led to some locations in close proximity cannibalizing each other’s sales. Other stores were opened in areas that were already saturated with competitors.
Another issue was that the company had a reputation for locating stores in suburban strip malls and retail centers and not in urban areas. This made it more difficult for them to compete with Best Buy which had a more substantial presence in urban locations with higher foot traffic.
Even as the company started to decline and face potential bankruptcy, it continued to build and open new stores. Remarkably, some were open for only a couple of weeks or so before they were shut down.
Poor inventory management
Circuit City operated more than 1,500 stores across the United States and Canada at its peak.
With such a vast network of stores, poor inventorymanagement meant the company had trouble moving its stock. This hindered its ability to purchase new stock and pay off the millions it owed to vendors.
At one point, the company owed $118 million to Hewlett Packard, $116 million to Samsung, and $60 million to Sony. In the wake of the credit crunch of the time, many such companies were reluctant to do business with Circuit City which had little to no cash on hand.
What’s more, while companies like Best Buy and Amazon were developing their online presence, management at Circuit City avoided doing likewise with the complacent belief that customers would always stick with them.
Corporate mismanagement
Circuit City management made several inexplicably poor decisions in the years leading up to its bankruptcy.
When new CEO Alan McCollough was appointed, he decided the company would stop selling appliances to focus on consumer electronics.
The decision meant a 15% decline in revenue and resulted in Circuit City missing out on the real estate boom where appliance sales skyrocketed. The move was confusing to the company’s core user base and only weakened Circuit City relative to its competitors.
In 2003, the company also eliminated its commission-based sales staff with little warning. Almost 4,000 high-paid employees were fired with plans to replace them with half as many staff paid by the hour.
Ostensibly made to reduce operating costs, the decision caused employee morale and productivity to deteriorate and had the reverse effect. The remaining employees avoided becoming too successful for fear of being fired, which cost the company sales.
Effect of mass terminations
Then-CEO Philip Schoonover told Reuters that the mass terminations would ”deliver improvements in our selling, general and administrative expense rate while maintaining appropriate investments to drive our key strategic initiatives such as digital home services, multi-channel and home entertainment.”
But it was widely believed that the sales staff were laid off because they cost too much to employ. In the process, management consultant Peter Cohan believed Schoonover had “violated a basic principle of good business.”
Nine months later, it seemed that Cohan had been vindicated. Sales were down 11% from the same period in 2006 and the move, as we touched on above, precipitated an unwelcome culture shift where employees were afraid to perform.
While dedicated sales staff were sometimes pushy in their tactics, customers did look to them for detailed advice about their specific needs. When Circuit City fired its most experienced personnel, customers flocked to competitors such as Best Buy instead.
Verizon deal
Circuit City partnered with telco company Verizon in 2004 and, as part of the deal, each retail store would incorporate a full-service Verizon sales counter. But the deal also stipulated that Circuit City could only sell Verizon phones and not those from other manufacturers.
While Verizon was one of the largest telcos in the United States, the inability to sell phones from other brands limited profits and, like so many other missteps, positioned Circuit City as inferior to Best Buy where consumers could purchase whatever brand they liked.
Stock buybacks
Sales continued to decline, but Circuit City had a considerable amount of cash on hand after spinning out its automotive chain CarMax and selling a private label credit facility.
Between 2003 and 2007, it spent almost $1 billion buying back its own stock. The company failed to mask its flagging sales, with the share price plunging from $20 in 2003 to just $4.20 by the end of 2007. Ultimately, the cash splash meant Circuit City could not survive the GFC which was less than twelve months away.
Key takeaways
Circuit City is an American electronics and appliance retailer originally founded in 1949 by Samuel Wurtzel. The company filed for bankruptcy in 2009 after being an industry leader for decades.
Circuit City suffered from complacent management who also made poor decisions. Many Circuit City stores were outdated and in poor locations. Stores were also staffed with salespeople pushing high-margin products at a time when consumers were moving toward cheap, low-margin products.
Circuit City sold several of its most valuable assets to fund a four-year stock buyback. The move failed to arrest a steady decline in its share price and meant the company was unable to survive the coming GFC.
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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
