what-happened-to-circuit-city

What happened to Circuit City?

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 Many Circuit City stores were outdated and in poor locations.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.

Background

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. 

By 2000, the company employed more than 60,000 people across 616 locations in North America. 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Outdated store model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. 

Many of the stories themselves were also out of date and in less visible areas than the newer Best Buy stores.

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 inventory management 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.

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.

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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