Circuit City Bankruptcy? | Boil Before Drinking
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I remember reading something in the spring about Circuit City firing anyone making 51 cents or more above an arbitrary maximum average. Because we all know how generic sales people are, I’d much rather have the “I don’t know what that is” high school kid helping me than the guy who’s been doing it for 10 years.
The good news is that the verdict is in and it’s a hard indictment of corporate idiocy. Circuit City’s stock price is down from almost $20 in March to just above $5 now. Of course this should mean a multi-million dollar bonus for the CEO shouldn’t it?
Now I believe it’s the responsibility of the free market to continue tearing Circuit City a new one, and if we’re all lucky they’ll be under new management and/or bankrupt by next Christmas.
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Historically, CC was the leader back in the mid 90’s, then the CEO McCullough made some terrible decisions, and they went down to a break even sort of deal for years. In 2003, they fired all their prof. sales people making over about $35k/yr (if full time)(many made e.g. $55K and were real pros. They continued to wander in the valley of the shadow of death, and it took the board 4 years to get rid of McCullough, paying him off in many many millions, rather then suing him for his disasters. The new CEO, in 3/2007 fired all the sales people making over about $25k/yr(their pay had ranged from about 25k to 35k tops) (full time equiv), and replaced them with youngsters making perhaps $20-$25k/yr full time equiv. Next they fired supervisors who made about $30k/yr, and replaced them with people making about $20-$25k/yr, often 19 yr old kids.
And the die was cast, and their trailing 12 mos earnings show a $300 million $$ loss.
Now, as a sometimes customer I can see the place has become a pressure cooker on the sales people, as if it is their fault for CC’s disaster. One telling item is that turnover in the last 6 mos has been in the 80% range at some stores. The only thing at all they have going for them is their firedog services group shows signs of life, but you can’t imagine how many p. off customers they have who have. It’s not unusual to end up waiting a mos for PCs to be fixed, pc’s which get sent out to a third party, and CC doesn’t even send them out until they receive a free shipping box from the 3rd party, another weeks delay.
To add insult to injury, people who buy extended warranties on pcs are finding out that the promise of free diagnostics has become a charge of $60, potentially rebatable, but you can imagine the length CC will go to in order to prevent giving back the money. No matter what, “software is almost always involved” and how can the customer prove otherwise.
So they are in many ways pissing off their customer base re service and warranties, things that will be remembered in the future. Does BB do the same, I could rant on my one bad experience with them also. Screaming at the cust. svc manager worked wonders, though.
Economically, CC serves only one useful function for the customers. They are seen as a lower price option vs Best Buy, and their marketing miscues have enhanced that image. Of course, besides the Internet & mfr to customer direct sales, they also compete with Staples, office depot, etc. And the one thing they kind of had going for them - better customer service, is going downhill due to inexperienced sales force and the turnover. Also,One of their great profit margin operations, the roadshop for car stereos, GPS, etc is often not even staffed on the sales floor. I had to walk out after waiting an hour re buying a GPS.
So the rock and the hard place is that to break even they need to save 300 mil/yr. Assuming the average store needs about 12 equivalent full time people x 2 equivalent 8 hr shifts, and with .
average direct wage costs of $10/hr, that is about $300mil/year.
So, they can only break even by firing all but the store mgrs, and keeping their business at the same level. Is all that is left for them is to become a walmart of electronics, but walmart got their first. And by hiring perhaps 4 people to sell electronics at ea Walmart store, they can pick up lots of the ‘easy to seel, but customer needs some reassurance type of business.
Real bottom line - it looks like they are a rusty, broken down ship with serious holes in the bottom. Yes, the vulture capitalists may find a way to make some money off the deal. I’ll also ask - what about all the people who bought extended warranties from CC - will they be honored? Will people start to recognize this and stop buying them, another big hole in the bottom of the ship.
Then there is my friend who works at best buy. He does store planning, and BB has plans to put in more stores, specifically targeted to capture the traffic from suburban areas that currently goes into more mature areas to get to a CC. Gas is $3/gallon, remember? And BB is doing what I have seen in variant form by Home Depot - planning to open a second store in some locations near CC to further dominate the market. Also, some of these second stores will simply be Geek squad service stores for fixing etc PC,s TV,s etc, just to get more market share in that business.
While I don’t have a view on how BB is going to move upscale e.g. with home theatres, etc, their ‘magnolia’ operation seems to be targeting the upscale market. This of course requires a professional sales team, not college kids, and how many good pro’s would bet their career on CC?
I made a lot of money on CC in the past, but realized it wasn’t backed up by a sustainable business model. I’ve read that CC isn’t #2 in their market, but is actually #3, and I question if there is room for three in the retail market, especially as more and more people get comfortable buying over the internet. I’ve read somewhere that they do about $2B / yr on their website, but if the stores fail, that biz will decline also.
The whole biz reminds me some years ago of a cousin who worked real hard with 1-2 employees building fiberglass boats. 60-70 hours/week. We went through his numbers, and showed him he could make more money renting out the building he owned, then keeping the biz. No kidding, the guy was great with boats, but lousy with numbers. So he retired, and his hardest job was cashing the checks that came in monthly for the building he owned. Is there an analogy here??
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