The Rise and Fall of Circuit City
Here is the video from this transcript: The Rise and Fall of Circuit City
Circuit City grew to be one of the largest electronics retailers in the U.S. at some point. It was the best performing stock in the 80s, delivering more than 9,000% returns to shareholders. Its stores were carrying all the electronics one could think of. So, how come such a big name declare bankruptcy in 2008? Let’s dive in.
Samuel Wurtzel was having a haircut while on vacation in Richmond, Virginia, when he learned the first commercial TV station in the South would go live. Being a savvy businessman, he saw the immense potential of opening a store to sell TV sets. That was in 1949. He moved from New York to Richmond and opened a store called Wards. The stores initially sold solely TV sets but later expanded to include home appliances as well.
In the late 50s, Wards began selling appliances within larger discount merchandisers. To grow even further, he acquired a discount department store as well as a hardware and houseware store. Through these acquisitions, Wards expanded its offerings to automotive supplies and clothing.
Samuel Wurtzel passed down the flame to one of his sons, Alan, to build the business further. Alan wasted no time to refine the business. At that time, stereo-equipment was in popular demand. Wards swiftly expanded into that category by opening specialized audio stores, known as Sight-n-Sound.
By mid 70s, Wards decided to shift focus on consumer electronics and opened its first electronics superstore, called The Wards Loading Dock. Offering a range of video, audio and other appliances in a bigger facility enabled Wards to benefit from bulk discounting. Its lower prices attracted customers who would otherwise make a trip to smaller stores. The concept was so successful that Wards streamlined the business by closing some of its smaller TV and appliance stores.
In late 70s, Wards began to ramp up its audio equipment offerings to capitalize on the stereo trend. The remaining stand-alone audio stores were converted into full-service electronics specialty stores. This is when Wards changed the name of these stores to Circuit City Stores. In the early 80s, Wards bought the struggling Lafayette Radio Electronics, a high specialty seller that had stores in New York City. But that investment never took off and was shut down in the late 80s.
Wards was expanding its Loading Dock superstores under a new name, Circuit City Superstores. And since the Circuit City name gained traction, Wards changed its corporate name to Circuit City Stores in 1984, the same year it filed for an IPO on the New York Stock Exchange. Alan moved to be chairman while Richard Sharp was chosen to take over the management of the company. Sharp continued to streamline operations to the superstores.
The company continued to grow, carrying all the innovative electronics customers could think of: Microwave, VCRs, cordless telephones. The company liked the idea of clustering the smaller stores with the superstores in order to derive economies of scale in marketing efforts. The strategy worked well, helping Circuit City reach the 1-billion-dollar sales mark in 1987.
Circuit City ventured into the used-car space with its new chain, CarMax. But the company did not use any salespeople to push car sales. The idea was to simplify the used-car buying experience. The prices were fixed. There would be no annoying salespeople nagging customers. The concept resonated so well with customers that CarMax even went for an IPO. But since diversifying into the used-car space, Circuit City was no longer the number one electronics retailer. Best Buy surpassed it in 1996.
Circuit City tried to make a comeback in electronics by investing in Divx, a digital movie disk that would play on Divx players. Divx was competing with DVD and ended up performing poorly. When Sony and Warner Brothers declared they would not make their movies available on Divx, Circuit City had to pull the plug on the 233-million-dollar project. Despite all this, core electronics business was stable, passing the 10-billion-dollar mark in 1999. At that time, the e-commerce website was rolled out that allowed customers to order products online.
At the turn of the millennium, Sharp was succeeded by Alan McCollough, who wasted no time in implementing changes. The early 2000s were tough for the chain, operating in a weaker retail environment and facing competition from Best Buy. The first thing Alan McCollough ordered was to stop selling appliances to focus on consumer electronics. This actually benefited competitors, who rode on the wave of the residential boom. Instead, Circuit City implemented a 1.2-billion-dollar plan to overhaul its stores. As part of its expansion plan, it wanted to relocate its stores in more prime locations instead of remodeling them.
Then in 2002, Circuit City decided to spin off CarMax, its most profitable business at the time. McCollough still wanted to focus on consumer electronics and this time he wanted to remodel the video departments, for some reason. Then in 2003, McCollough made a huge mistake, and I think you’ll agree. He removed commissions as part of the pay structure in favor of an hourly pay system. As part of the plan, the 3,900 highest paid salespeople were let go. Needless to say, employee productivity and morale were crushed.
I mean, that’s a really bad system. They were essentially penalizing good salespeople for selling too much. The remaining employees found no incentive to provide a good level of customer service. If Circuit City wanted to reduce costs that badly, they could have reduced the rate on commissions. Firing thousands of people overnight was definitely not the right decision.
Soon enough, the core business was performing poorly. Underperforming stores were closed and non-core assets were being sold to infuse cash in core operations. CompUSA even attempted to acquire Circuit City for 1.5 billion dollars, which the board of directors rejected in 2003. The company made some questionable acquisitions in 2004, buying MusicNow, an online digital music store, and InterTan, which operated stores under the RadioShack, Rogers Plus and Battery Plus names. Circuit City was all over the place. There was really no clear vision of what it wanted to become. They continued to layoff their best salespeople, firing over 3,000 of them in 2007.
Moreover, Circuit City was complacent in the face of competition. They did not develop their online presence when Best Buy and online retailers like Amazon were making moves in the industry. Also, they failed to revamp their inventory system which made it suffer from a poor cash to cash cycle. That in turn made it lag in terms of cost efficiency, effectively putting itself behind Amazon, Best Buy and even Walmart. Management at Circuit City might have been overconfident, thinking that customers would stick with them.
During all that time, Circuit City spent nearly 1 billion dollars in stock buy backs. I guess they were trying to support their stock price amid disappointing operating results. They used up nearly all of their cash when the financial crisis hit. Suppliers were affected by the credit crunch and thus tightened credit terms, requiring upfront cash payment for their products. Since Circuit City had no cash, vendors were reluctant to supply Circuit City as they feared the company could close its stores at any moment. Circuit City thus could not buy new products and the old inventory could not be onloaded fast enough to pay off existing debt commitments.
In November 2008, Circuit City closed over 150 stores and laid off 17% of its workforce. Later in the same month, it declared bankruptcy. The company could unfortunately not find a buyer to avoid liquidation. Vendors were right to stop supplying the company as it still owed over 100 million dollars to both Sony and Hewlett-Packard.
Circuit City made a comeback in 2018. Under its new owner, Ronny Shmoel, Circuit City planned to open kiosks, stores within other stores and eventually its own showrooms. The brand is still alive but it’s far from being a behemoth it was twelve years ago.
In the end, I think that Circuit City was victim of a series of bad decision making from management, which were amplified by the financial crisis. Do you think that Circuit City would still be here if management made wiser decisions? What should they have done better? As always, let us know what you think.
