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Circuit City Closing All Stores - Made Mistakes

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January 17th, 2009
Circuit City Stores Liquidate Inventory

 

Circuit City Stores Inc., once the largest consumer electronics retailer and currently the second largest, just announced they will lay off all of their 30,000+ employees. They will be liquidating all inventory and closing down their remaining 567 stores by March 31, 2009.

Circuit City's problems do not stem from our current economic problems. Circuit City's problems started years ago when they changed their focus from consumer electronics to other ventures. In 1993 Circuit City began investing and testing a new retail venture: selling used cars. At the time, upper management claimed that the used car business had no clear industry leader, so CarMax was born. In 1997 shareholders approve a plan to track CarMax stock separately than Circuit City stock.

Circuit City's Biggest Mistake
In 1997 Circuit City made their biggest mistake. Along with a group of greedy entertainment lawyers, they invested over $100 million dollars into a new video format called DIVX (Digital Video Express) that they believed would revolutionize the movie rental industry. That mistake Circuit City caused a major backlash. Our website, fightdivx.com, started out as a site that was against this format, and we have since kept the name.

In September of 1998, the first DIVX was released. At the time, the DVD format was relatively new, and DIVX discs were "enhanced" with copy protection and sold as a benefit to their customers. The DIVX players played DVDs and DIVX discs but cost on average $100 more per player.

DIVX players had a built-in modem which automatically dialed in occasionally to Circuit City to report what movies the customer watched. DIVX discs cost $4.50 and could be watched only one time. If you wanted to watch a movie more than once you could because the disc was yours to keep, but it would
cost you an additional charge.

Circuit City did everything to brainwash their employees to sell these players as they disparaged regular DVD players. They even offered incentives to cashiers and janitors if they could entice a customer to buy a DIVX
player!

In June of 1999 - just over a year after the first DIVX was released, Circuit City announced they would no longer support the failing DIVX format. They offered a $100 refund to customer who had bought a DIVX player to try and save face in light of public criticism. The DVD obviously won the format war Circuit City created.

Circuit City's after-tax cost of closing the DIVX business totaled $114 million. Circuit City had a $88.2 million loss in the first quarter of 1999, compared to a $12.5 million gain the previous year. The company never really recovered from this.

Circuit City Stops Selling Major Appliances
In 2000 Circuit City decided to leave the appliance business-one of the most profitable parts of their business-by replacing appliances with small electronics like computer software, MP3 players, and music CDs. As a result, they alienated some of their long-time customers, leaving them to shop at Sears or Best Buy for their large appliances.

By this time Circuit City was feeling the squeeze of internet companies. Customers had no reason to shop at a Circuit City store since they could find more information and better prices online for their consumer electronics.

Circuit City Goes to Hourly Employees
In 2003 cut approximately 3900 sales counselor positions company wide. This move cost Circuit City $16 million dollars in severance payoffs alone. Circuit City replaced their knowledgeable sales staff with low-cost, untrained hourly workers. No longer was Circuit City a great place to get help on complicated electronic purchases.

In 2005 Circuit City rejected a $3.25 billion cash buyout offer from Boston investment firm Highfields Capital Management LP, in hindsight a huge mistake.

In 2006 Circuit City launched a PC services and home-installation business called Firedog. But competitor Best Buy had the upper hand with their Geek Squad, and Circuit City continued to fall further behind Best Buy.

Replaced Employees with Lower-Paid Workers
In 2007 Circuit City laid off about 3,400 retail employees and replaced them with lower-paid workers. Things were getting worse for this once retail giant, even though big US economic problems hadn't even begun yet.

In May of 2008 with Circuit City stock dropping fast, Blockbuster was considering a takeover. By July of 2008 Blockbuster withdrew their takeover bid.

Circuit City announced in early November of 2008 that they were closing 155 stores in 55 markets by the end of the year. They laid off 17% of their employees including nearly 700 employees at their headquarters in Richmond, VA. They filed for Chapter 11 bankruptcy protection, listing assets of $3.4 billion and debt of $2.32 billion.

Liquidation Announced
On January 16, 2009 Circuit City Stores Inc. ran out of options and announced they would liquidate their estimated $1.2 billion in inventory. Circuit City creditors will receive the first 70.5 percent. Circuit City stockholders will end up losing everything.

If Circuit City had kept their focus in the last 90's, valued their longtime customers, and treated their employees better they might still be a thriving company today. But a myriad of managerial blunders and a whole lot of corporate greed took down this industry giant. We can only hope other large corporations might learn from their mistakes.

 

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