Circuit City takes further steps to reduce its costs

Hot on the heels of the announcement that CompUSA and Tweeter are closing 126 and 53 stores respectively is word that Circuit City is firing 3,400 employees and bringing in lower-cost workers to fill their roles. The company says that the move is aimed to help realign its cost and expense structure.

"These actions represent the execution phase of the work initiated this winter to accelerate Circuit City's transformation. We expect to deliver improvements in our selling, general and administrative expense rate while maintaining appropriate investments to drive our key strategic initiatives such as digital home services, multi-channel and home entertainment," said Philip J. Schoonover, chairman, president and chief executive officer for Circuit City. "Unfortunately, a number of Associates are directly impacted by the actions, but we are making Circuit City stronger for the long term."

This move comes after Circuit City announced in February that it was closing 62 stores in Canada along with seven underperforming stores in the United States.

The 3,400 employees affected by the job cuts represent 8% of Circuit City's total work force. Employees will be given four weeks’ worth of severance pay and will have the option of reapplying for their positions at a lower pay grade after a 10-week hiatus.

"This strategy strikes me as being quite cold," said Bernard Baumohl, an executive director for The Economic Outlook Group. "I don't think it's in the best interest of Circuit City as a whole."

Likewise, Timothy Allen, an analyst for Jefferies & Co., said that the move could end up backfiring for the company. "It's definitely going to have some cost-savings, but I think the bigger impact could be seen in weaker, poor service," said Allen. "I have a feeling the people they're letting go have probably been there longer, have more experience, more product knowledge."

Jose Macias of San Diego, California was fortunate enough to skate through Circuit City's jobs cuts in 2003. At that time, employees making more than $18 an hour were fired -- Macias was making $17.70 an hour at the time. This time around, Macias wasn't so lucky. His hourly rate translated to $18.72 an hour which is well above the full-time pay cap up $15.50 for his department.

"I dedicated seven years to them. Loyalty gets you nothing," said Macias.

Circuit City also plans to outsource its IT infrastructure operations to IBM in order to reduce costs by roughly 16%. This separate move will affect an additional 130 employees -- 50 of which will become IBM employees while the other 80 will be fired.

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