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Why Circuit City Failed, an insider’s look.

I worked at Circuit City from 1997 to 2002 and got to see a lot of changes in the company and for the most part, not for the better. I watched the explosion of growth with new locations and saw major decisions that would seal the fate of a company.

When I started in 1997 Circuit City was expanding stores like crazy, most of which were close to a Best Buy or any other major electronic big box. The major difference between a Best buy and Circuit City was Circuit City was more upscale. The sales guys wore sport coats and were paid a nice commission. Because each person’s paycheck was impacted by how much they sold and didn’t get returned, salesmen know they had to learn the products and go around helping people. If they didn’t learn or maintain good sales numbers they were weeded out. The only down side as a shopper is a sales guy pushing expensive accessories and extended warranties but they knew the products (for the most part). This meant Circuit City’s main focus was expert knowledge and customer service. This is great for big ticket items like TVs, computers and sound systems. No so great for items like batteries or cordless phones. People like to just grab it off the shelf and get out with out getting shook down for a warranty.

With this business model you end up selling less but making more per item. This didn’t boost well with corporate who always looked to copy the success of Best Buy. They wanted to increases the amount of product moved. Circuit City ended up creating an image of quality and higher end service which also creating an image of higher prices even if the prices where the same or lower. So to shake this image they went away from sport coats and when to Polo’s like Best Buy.

The next major change which I believe was the beginning of the end was to stop carrying major appliances. There was no major mark up and there was nothing to make big profits off of but it was a sound constant income. People are always going to need stoves and refrigerators. They ended up using the floor space to sell small electronics and software. You know the stuff most people buy online for much less. Not only that but they bought the Sharper Image Company. You know the one that when belly up last year?

I never understood the decision and for years after people would come in looking for major appliances and we would turn them away. Circuit City tried to get one hot item back, window air conditioners. We would sell over 200 units in 2 days during the middle of the week if the weather was hot. Let me repeat, they sold 200 AC units in a Wisconsin market. Circuit City tried to carry just air conditioners but it never caught back on.

The nail in the coffin was Divx. Not the video format you use on your computer but the DVD movie rental player. You came in the store and for like 4 bucks you got a movie which was watchable for up to 48 hours from its initial viewing. Then you either tossed the disc or recycled it at the store or paid a few more bucks and you could keep the movie. The problems were the players needed a phone line to phone home for movie activations. Movies were only carried at Circuit City. The Divx movies you bought could only work on your Divx player and not your buddies. The biggest issue is you have to explain how it worked to shoppers and why you needed to buy this Divx/DVD player instead. The first year we might have sold like 20. The last few months of its life corporate pushed it hard and sales guys were moving 10 to 20 a week. I was surprised and thought at the time it would catch on. Then they killed it and lost over 100 million dollars. The Internet, movie downloads and Netflix would have killed it if it lived long enough.

At this point, Circuit City tried more and more “tricks” to stop this sinking ship. Consolidating warehouse resources and reduce the number of truck shipments. Prior to this Circuit City had 2 types of warehouses brown goods (TVs, stereos, computers, ect..) and white goods (appliances and furniture, TV stands). This made sense since major appliances were gone. But they also stopped paying the truck drives to unload trucks (which helped). They also cut back on the number of hourly workers like customer service and warehouse. We were now expected to do more with less.

Little know fact: a lot of the equipment like cash registers, fork lifts, and even the rugs with the company logo were leased. The rugs went away in the cost savings.

The next nail was commission employees were forced into hourly rates. Talented sales people liked commission and some ended up leaving. Others got the pay rate of what they averaged in their sales. Eventually they would be fired and allowed to reapply at a lower wage. Anyone they hired in on an hourly rate would get paid much less. So now people have no incentive to chase sales, learn products, or help customers. So your talent is equal to Best Buy and their image is still high prices. Circuit City could not compete selling small electronics which had little profit margin because of Internet shopping and Circuit City had the additional cost of brick and mortar stores. The Flat screen TV wars between Plasma and LCD created TVs with no markup.

Salvaging what was left.
There was a point I remember when Best Buy made a run for Circuit City and they were insulted by the offer. I guess the investors knew even less than corporate executives. If they only knew what was to come. Blockbuster came a sniffing and once they looked under the hood of this bet up car they went running.

The only thing left now is Carmax. Yes, Carmax and Circuit City were linked for years but Carmax got smart and separated its playing chips. Now they the only thing left. I’m sure they are still hurting from the whole auto industry collapse.

I knew Circuit City would fail but I figured sooner than later. I worked at location 3173 Brown Deer, Wisconsin which was in an area of the city where shopping centers are ghost towns. It was a store that closed in the first round a closings a few years ago then reopened as some “Outlet Center” to sell open box stuff other locations didn’t want on their sales’ floor. They closed again last fall and now all stores are closing affecting 34,000 people. A couple of them I know and hope them the best. I would have hoped some other company would have sucked them it and rebranded them. Now they are gone. RIPCC.