Circuit City Unplugged

Tweet

Circuit City has now officially joined the list of faltering U.S. companies facing severe financial troubles. In a series of announcements over the last few months, the company has disclosed plans to close 20 percent of its stores and layoff thousands of workers. Increased competition from Best Buy, Wal-Mart, and others, along with a deep U.S. recession are being blamed for the company’s troubles. I don’t agree. Like so many companies that have entered a death spiral over the years, it is obvious to me that Circuit City was just another company suffering from bad management.

I truly feel bad for the workers who have lost (or will soon lose) their jobs at the company. What is really sad, though, is like so many other companies that have been in the same situation, the people responsible for the troubles - the executives – get to keep their jobs while thousands of workers lose theirs. It is not the salespeople, accountants, warehouse workers, and cashiers who led the company into decline. In fact, I cannot even think of a situation where a salesperson or cashier can cause company to go out of business.

Back in 2007, the company laid off 3400 of their higher priced salespeople and replaced them with lower-paid workers. In justifying the move, Circuit City spokesman Jim Babb was quoted as saying, “All companies at one time or another need to go through and make sure their cost structure works with market conditions.” Being the employee-focused company they are, Circuit City did allow these workers to reapply for their old jobs at a lower wage (and after a 10-week waiting period), but they were not given the option of staying at a lower wage. Just for comparison, according to the company’s 2008 proxy filed with the SEC, Circuit City CEO Philip Schoonover received in excess of $6 million in compensation for the year (and each member of his executive team received compensation in excess of $1 million). Imagine what these people would receive if the company had actually been successful this year. It is really sad that the Circuit City executive team is accepting this level of compensation while throwing thousands of people out of work – especially in today’s economic climate.

Besides the obvious morale issues caused by this type of action, the company gave up on its customers by firing their trained and experienced salespersons. Circuit City had the reputation of having among the most knowledgeable people in the retail electronics industry. By ridding the company of the high level of expertise that customers had come to expect, Circuit City eliminated the only advantage it had over companies like Best Buy and Wal-Mart. They treated the products they sold like commodities and became just another discount electronics store. The problem with this strategy is that they did not have the cost structure to compete as a discount store.

In their 2006 annual report, the company formally announced its “three parallel areas of work.” These were: UPGRADE the current business through talent, processes and systems; EVOLVE the core business to grow revenues and profits through fundamental change; and INNOVATE to grow new business with new consumer values. Like so many, the parallels comprise another very catchy and creative slogan that lacks substance. In mid-2006, the company’s stock was trading at $30.75 – it closed today (11 November) at $0.13.

Further on in the report, Schoonover writes, “I embrace the opportunity to lead Circuit City as we continue the transformation of our company to better serve our customers, Associates and shareholders.” Looking at the performance of the company since 2006, there is little evidence that Circuit City has served anyone well . . . except Best Buy and Wal-Mart.