Circuit City Files Chapter 11

Circuit%20City%20small.JPGAfter announcing it would close 155 stores then laying off several hundred people at its Richmond, Virginia headquarters, Circuit City announced this morning that it has filed for Chapter 11 protection. This follows the demise of Gateway Country Stores, Good Guys, Sharper Image, CompUSA, and Tweeter.

Why are brick-and-mortar electronics retailers having such a hard time? Is Best Buy really that popular? Are Wal-Mart and Target moving into the space? No, I think part of the reason can be found at Amazon.com and the like.

I haven't been inside a Circuit City or Best Buy in a long time. I can get more unbiased information from the internet, not to mention cheaper prices, often with free shipping. Gone are the days where I need to lay my hands on a product. I can usually find enough reviews and comments to determine whether the product meets my needs. I even ordered my plasma TV from the internet (after viewing the same model at a neighbor's).

And so I think this is the end of the pure-play consumer electronics stores. Only the retailers that have diversified into appliances, overseas stores, and partnerships will have a strong store presence.

By the way, I think Circuit City has one of the best websites. I hope that baby doesn't get tossed out with the bathwater.

Comments:

"Gone are the days where I need to lay my hands on a product. I can usually find enough reviews and comments to determine whether the product meets my needs."

Even more so: Packaging and wording can be so misleading. Without knowing the technical language and specifications, sometimes not even knowing the background make relying on oneself to judge the product an act of ignorance.

Posted by Brian Tkatch on November 10, 2008 at 11:57 PM CST #

There is an interesting article (http://www.time.com/time/business/article/0,8599,1858079,00.html?iid=tsmodule) at Time called "Why Circuit City Busted, While Best Buy Boomed." It blames CC for not adapting fast enough to keep up with the market.

Posted by David on November 11, 2008 at 12:57 AM CST #

Oops. Best Buy isn't booming now either. You may well be right. This could be the beginning of the end for CE stand-alone stores. Maybe. If so, it's mostly a self-inflicted wound.

Having said that, the scariest part of Circuit City's most recent troubles (forgetting about the litany of sins over the past 24 months starting with losing money on every plasma TV it sold during Holiday 2006) is that it's all VERY bank-related. Credit related. A bank re-valuing the company's inventory DOWN, which reduced the borrowing power of its asset based credit line. The rest - like factors cutting the company off are traditional...but the whole asset-based loan universe is a train wreck waiting to happen.

No one talks too much about this, except if you're a retailer living with one (an asset-based loan). Then you think about carve-outs, re-valuations, and covenants. If the bank thinks you might have a sales shortfall coming soon, it can revalue your inventory NOW. And there goes your working capital. Poof.

Now all that's left to talk about at Circuit City are the fees that the bank, attorneys and others will make from the filing.

Why do we care about this? Because it serves to take retailers' eyes off the ball - the customer, the product, the technologies to support their efforts - all can get forgotten. I promise, this is way bigger than CE. It'll kill you in apparel and just about every category where inventory ages. It's not a small problem (unless you're selling wine).

Posted by Paula Rosenblum on November 12, 2008 at 08:41 AM CST #

I agree, Paula. And in addition to getting squeezed by creditors, there's the vendors as well. When retailers don't perform well, their vendors tighten their terms, which sometimes impacts sales, which causes even worse terms. Its a downward spiral.

What bothers me about this particular situation is that CC used to be sitting on $800M in cash, and I don't think they made good use of it. That might be blamed on the fact that they are a public company that must always report back to shareholders quarterly. If they were private, they might have had a better chance to spend the cash more strategically, forgoing short-term results in favor of a long-term turnaround.

They had three buyout offers that I recall, two of which were private. Back in June 2003, Carlos Slim offerred to buy CC at $8 a share which was slightly above the trading price. That would have cost him around $1.5B at the time. In February 2005, private equity firm Highfields Capital Management offerred $17 a share. And of course in April 2008, Blockbuster offerred $6. Hindsight now.

I hope other retailers are watching closely.

Posted by David on November 12, 2008 at 12:21 PM CST #

Well, they treated their employees like toilet paper - sh-- on, and dispose. And the good people were fired and replaced by youngsters. No wonder they went into the trash can.

And the last two canned CEOs took home multimillions for their destructive rampage that destroyed what was once the leader in the retail electronics business.

btw, the only way in recent years they had made a profit was via outrageous, scamulous credit card interest rates and traps for those buying their so called zero interest deals.

And the great retail scam - extended warranties. Where 50-60% of the cost went to the store as pure profit. And where you will find endless stories of "they told me it was covered until I needed service..........", etc.

So, who knows what will happen, but just as our nation has been robbed of trillions on wall street by the Mob rule of the white house gang, the ordinary stockholders and employees of CC have been robbed as well.

There ought to retribution - lawsuits to charge the execs with malfeasance in office, and recover the millions they were paid for destroying this once proud company.

And a warning - if you have CC gift cards, well - use them while you can.

Posted by Jason21TX on November 19, 2008 at 07:02 AM CST #

The whole situation is bad. I look for them to shed half their stores, go private, then re-emerge a stronger company. Time will tell.

Posted by David on November 19, 2008 at 11:59 AM CST #

Now, how many David Dorfs can there be out there, blogging about Circuit City?

Hello, friend.....
:o)

Posted by Scottie Brimmer on December 23, 2008 at 04:33 AM CST #

Hi Scottie-- that's just one of many posts on retail. Hope you are doing well.

Posted by David on December 23, 2008 at 11:05 AM CST #

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David Dorf, Sr Director Technology Strategy for Oracle Retail, shares news and ideas about the retail industry with a focus on innovation and emerging technologies.


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