A cautionary tale

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Print this page Chip Jones

Standing on the sidewalk outside a Circuit City store in suburban Richmond, the bargain-hunting shopper sounds almost apologetic about the 10 percent discount he’s just scored on a Samsung TV with a 37-inch screen.

“We bought some electronics over the holiday, hoping we’d help out” the struggling electronics retailer, says the Henrico County resident who declined to give his name. “I know people working for Circuit City, and it’s kind of sad seeing them lose their jobs.”

But inside the store in late January such merciful sentiments are in short supply as shoppers scurry about in search of digital prey. “Ten percent off!” one man scoffs. “That’s no big deal!”
Circuit City Stores Inc., whose humble origins as a Richmond television and appliance store in 1949 made it a legend in the annals of Virginia business, began liquidating in January. (Its sales discounts became progressively deeper in the following weeks.) Experts say the company is a victim of creeping complacency, intense competition and, in the end, a national credit crunch that scuttled any 11th-hour deals to save the company.

A federal bankruptcy judge gave the Henrico-based retail chain permission to sell all the goods at its remaining 567 stores by March 31 — driving another stake into the heart of the Richmond region’s economy as most of the 1,500 headquarters workers were sent packing as part of the elimination of more than 34,000 jobs nationwide. A few employees would stay on to carry out the fire sale, but they, too, would be on the street.

“It was really a combination of a lot of things that sort of snowballed over time,” says David Urban, a marketing professor at the Virginia Commonwealth University School of Business. “Then when you throw in the most recent economic circumstances — that was the straw that broke the camel’s back. But to say the economy did them in wouldn’t be accurate. It really began about 15 years ago.”
He recalls a conversation in the mid-1990s with a Circuit City executive who worked in corporate strategy. When the VCU prof asked about the competitive threat from a growing rival — Minneapolis-based Best Buy Inc. — “The message I got was they knew Best Buy was out there but did not really seriously consider it a major threat.”

At that time, Urban notes, “It was easy to think that.”  More than 14 years ago, Best Buy was about half the size of the Richmond electronics king, whose stock had soared at an average annual rate of more than 50 percent in the 10 years after it went public in 1983.

Circuit City’s leaders did a remarkable job of building on their trademark warehouse-style showrooms and blossoming into a Fortune 500 company known for its Midas touch for investors.

So why did the gold turn to rust? Industry observers say that, like a Shakespearean tragedy, Circuit City’s demise can be traced to a combination of pride and failure to embrace change. Among the mistakes cited by Urban; Tom Arnold, a finance professor at the University of Richmond’s Robins School of Business; and Kenneth Gassman, a Richmond business consultant formerly with Davenport & Co.:

• Underestimating Best Buy, which used a self-serve retail business model that had lower overhead costs than Circuit City. By 2003, when Circuit City followed Best Buy’s lead and stopped paying commissions and laid off the equivalent of 1,800 salespeople, the damage was done. “The younger consumer, who is more tech-savvy than anyone, didn’t find Circuit City a particularly exciting place to shop” anymore, says Urban.
•  Circuit City strayed from its core businesses — and lost many loyal customers — by ceasing to sell appliances. Instead, it stocked new goods and services that flopped.  “From a fundamental view,” says UR’s Arnold, “you kind of have to follow your own vision rather than imitating someone else. I think Circuit City went on to try to imitate Best Buy, rather than finding its own identity.”
• Though it was wildly successful with its CarMax used-car stores established in 1993, the venture hurt the company’s overall strategic focus, says Gassman. “Clearly CarMax was a successful venture, but it diverted management’s attention away from the core electronics business. Management thought Circuit City was on autopilot, and so they thought they had time to search out alternative concepts … But a retailer can never be on autopilot. ”

In the end, says Urban, Circuit City provides a cautionary tale for anyone in business. “If you get arrogant because you’re No. 1, or pooh-pooh the competition because you’re on top of the heap, what you really ought to be saying is, ‘We have to compete against ourselves.’ You have to get better … and offer the consumer more than you’re currently providing,” Urban says.

“You can’t just assume that things are going to stay the same, and you always have to look for ways to improve even if there’s no pressure to do so.”

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