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Closing 155 of its retail locations wasn't enough to prevent bankruptcy for Circuit City

The state of the global economy and that of the U.S. economy are making things difficult on many companies in the U.S. as sales fall and credit terms tighten. Consumer electronics retailers and computer manufacturers are among the companies that are feeling much of the economic pressure.

One of the biggest retailers to find itself in a serious economic crunch is Circuit City. The consumer electronics retailer announced today that it is filing for Chapter 11 bankruptcy to protect itself from creditors after cash flow problems began to prevent it from completing its turnaround efforts.

The bankruptcy filing is far from the first sign that the electronics retailer was suffering. Circuit City announced just last week that it was closing 155 of its stores across America. The massive store closures would eliminate 17% of Circuit City's U.S. workforce.

Reuters reports that out of the last six quarters Circuit City has reported a loss in five of them. The consumer electronics leader is Best Buy followed closely by Wal-Mart according to Reuters. Losing the competition posed by Circuit City in the markets where its stores are closing would at a glance seem to be a good thing for other consumer electronics retailers.

However, Circuit City is having massive liquidation sales at the closing locations that could prove to be a big problem for Best Buy – at least in the short term. In the beginning stages of the liquidation sales discounts at Circuit City are said to be at least 30%. As time goes by and the stores get nearer to closing, the discounts will only get bigger. The discounted merchandise could pull important holiday shoppers from the more stable electronics retailers into closing Circuit City stores.

Analyst Dan Binder from Jefferies & Co told Reuters, "Longer term, you've got Best Buy, who's dominant in the sector, taking share. But in the short run it could feel the pain of the liquidation activity."

Filings from Circuit City for Chapter 11 showed the company had $3.4 billion in assets and $2.32 billion in debt as of August 31 with more than 100,000 creditors. Circuit City first started to consider closing stores in October. At the time the Wall Street Journal reported that the closing of the stores was an attempt to stave off Chapter 11.

Only a few weeks later Circuit City announced on November 3 its plans for closing the 155 stores across the country. A big factor in the decision to file Chapter 11 was the fact that Circuit Creditors had tightened credit terms extended to the retailer considerably. Some creditors were even requiring upfront payments before shipping goods.

Circuit City CFO Bruce Besanko wrote in a court filing, "In large part, a Chapter 11 filing is due to three factors, all of which contributed to a liquidity crisis that prevented the company from completing its turnaround goals outside of formal proceedings: erosion of vendor confidence, decreased liquidity and a global economic crisis."

Best Buy had said previously that it would consider taking over locations that rivals closed. There is no word from Best Buy on whether it will take over any of the Circuit City stores that are closing.



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By JasonMick (blog) on 11/10/2008 10:24:03 AM , Rating: 2
Let me preface this with a disclaimer. First, there are no Fry's in my area, so I sadly cannot enjoy what some here say is so great. Secondly, I did shop @ both Best Buy and Circuit City, and found their prices to alternate of which had the better sale deals. So I'm not completely down on Circuit City.

That said, I cannot believe the illogical nature this company conducts itself in.

Perfect example:
A new store opened in a part of Michigan I'm familiar with just 2-3 months ago. This huge store took months to build and was specially built for Circuit City. When I looked at the list of store closings I was shocked to see this store on the list.

Perhaps they are closing all the stores in MI because of the poor economic climate, but to select brand new stores for the 20 percent to close? This seems sheer lunacy.

In my mind the loss of Circuit City is sad for its effect on competition, but any company that opens a huge new store and then closes it months later, while leaving older, less successful stores open is doomed to failure.




By Lord 666 on 11/10/2008 10:50:49 AM , Rating: 2
Putting that new store in MI on the chopping block just makes it easier for them to sell to Best Buy. The newer store is more attractive for sale for many reasons for buyers, but for sellers, they are attempting to cut their losses to a minimum.

I'm looking forward to the sales as I have noticed Best Buy have dramatically reduced their prices on HDTVs (LN46A630 specifically) for this week.


By Aarnando on 11/10/2008 11:16:38 AM , Rating: 2
"Out of touch" seems an appropriate tag to me. Even if selling the new store makes sense, the question of why this store was built in the first place comes up. If you're bleeding money to creditors, it is not a good idea to increase your debt by creating new locations.


By theapparition on 11/10/2008 12:17:50 PM , Rating: 2
Still opening up one right around the corner from me. As if the 4 other stores in a 10 mile radius wasn't enough.


By Exterous on 11/10/2008 11:00:43 AM , Rating: 3
A big reason Circuit City is facing a crisis was their 'Drive to 65' program. Their goal was to open 65 new stores over the past 2 years with low regard to market conditions. Not to mention the bungeling of a new register system that failed, leaving about 15-20% of stores that can't communicate with the rest. Want to check stock there? Too bad.

The part about leaving 'less successful stores open' is not true. Older maybe. The closings were based on performance in relation to expenses. The new stores might bring in a few more dollars, but the property is probably mroe expensive and so is the upkeep.

As an employee of Circuit City in Michigan I can tell you that the stores that closed were really of no suprise to us (well, one of the 6 was - we didn't expect them to close that many in one of the best districts in the company). They were contantly under-performing and rarely met their daily goals.

The new stores never got a chance to get off the ground. They looked nice, but didn't ahve the customer base that a lot fo the older ones did. Would they have done better? Probably if the they had gotten a chance to grow. Unfortunately, this is not about the long term right now

*crosses fingers that I get to keep my job till I find another one*


By Exterous on 11/10/2008 11:02:09 AM , Rating: 2
Edit: I ment one of the six that closed in our district - the east side of michigan


By FITCamaro on 11/10/2008 2:43:16 PM , Rating: 2
quote:
Not to mention the bungeling of a new register system that failed, leaving about 15-20% of stores that can't communicate with the rest. Want to check stock there? Too bad.


Interesting. I always thought Circuit City had a better inventory management system. I know with Best Buy, their in-stock product numbers aren't always up to date. I was told with Circuit City they could track in real time whether or not a product was available.


RE: Unsurprising for a business completely out of touch
By aj28 on 11/11/2008 11:57:05 AM , Rating: 1
They can, yes, however the problem lies in their POS systems. Traditionally Circuit City had used either DPS and Magellan in their stores, but most new stores (as well as some old ones) recently moved over to a system called rPOS which, while allowing for a more streamlined GUI and internet access at every terminal, could not be remotely logged into by either of the other two systems.

Coincidently, if you purchased an item from an rPOS store, it's an absolute bitch to return at stores using another system because the only way is by returning it as "no history" which is basically a direct hit to that store's bottom line. Most of them will do it anyway so long as you have a receipt, it's just a pain is all...


By Oregonian2 on 11/11/2008 11:08:22 PM , Rating: 2
A newspaper article I read about it today said that a big problem was that when CC was king, they went and made major blunders in the 1990's by expanding by getting great deals on land in bad locations. Locations that didn't bring in the crowds.


By HaB1971 on 11/10/2008 2:49:53 PM , Rating: 2
Here in Georgia where they are cutting a lot of stores, there is a new store that had it's grand opening in July that is one of the closing stores. This one had the casual approach with associates in jeans, it was hard to tell them apart from the 5 customers normally found in the stores.

Being curious on the sale prices (like the rest of the scavengers) I paid the store a visit and found the prices for a close out were a joke. 5% on PC's and laptops, with up to 20% off of stuff like DVD's etc.

This is my perception of the situation.. you need to close 155 stores to stop the hemorrhaging of money to have some liquidity. Each moment these stores are open you are loosing money on rent, utilities, employee pay and benefits.
Instead of just loading up all the product in a truck and delivering it to the open stores they have this liquidation team sell off the product at prices that really won't drive any foot traffic. Not to mention they took those stores off the CC website so you could not even check inventory.

If they want to stop the rot then either redistribute the stock to other stores so they can sell it or gut the prices so they can shut the stores ASAP therefore saving some money.

Don't expect to find PS3's or Xbox 360's on sale they'll get their butts handed to them by Sony and Microsoft for trying.

Yes it sucks to lose your job because of inept management and the inability to adapt. The company laid off about 3,400 retail employees last year and replaced them with lower-paid workers, a move analysts said could backfire, hurting morale and driving away customers. hmmm... ya think??


By FITCamaro on 11/11/2008 7:32:21 AM , Rating: 2
They pissed off a lot of people when they moved from commission to hourly as well. I worked in a Circuit City for Sprint when the transition happened. I understand why they did it. There was no incentive to move up in the store because commission based employees could make more than the managers. There were guys clearing $60,000 a year working there while managers might get $35-40,000. Some places more, a lot more(was told a guy in Tampa was clearing $100,000 a year).

So it sucks that they did it, but they kind of had to. But I'm sure it alienated a lot of people.


By HaB1971 on 11/11/2008 1:57:18 PM , Rating: 2
I also happened to work there at the time of the transition from comissioned to hourly and though you can argue that people were making too much money on comission they only did so because they knew how and what to sell to people and only kept that money if the product was never returned.

Got to feel sorry for those losing their jobs though.


By aj28 on 11/11/2008 12:07:40 PM , Rating: 2
To be fair, I'm pretty sure the remaining product in those stores was already sold off to liquidators - It's no longer Circuit City setting the prices at those locations. Also, much of the product is being moved to other stores or returned to their manufacturers (one of the perks of buying on credit) as a means of recouping their losses.

Also keep in mind that this is in fact a legitimate reorganization effort. They're not just slashing prices and pleading for people to come back to them... Lots of people on district and regional levels are losing their jobs because the positions have been deemed unnecessary. For the most part unless you are an overarching district manager or store-level, you risk being gutted. Specialty people like district firedog and operations managers have already been removed from the loop... They're going back to a streamlined, sales-driven business like they always should have been and for the good of the industry, let's hope it works out.

(Also, as a side note to the online-only people, keep two things in mind 1) Online stores will almost NEVER pay for return shipping, and 2) Laptops and desktops are often sold very near, at, or below cost at retail outlets, so don't fool yourself into thinking NewEgg will always have a lower price, regardless of their significantly reduced overhead.)


By Eris23007 on 11/10/2008 8:12:39 PM , Rating: 5
Jason,

The notion you're addressing here is one of "sunk costs." Sunk costs are dollars which have already been spent by a business and cannot be recovered, such as those spent to build a new store.

One fundamental concept taught early in an undergraduate-level (and MBA-level, for that matter) business curriculum is to ignore sunk costs when making business decisions. While this seems counterintuitive, it is absolutely the correct advice: who cares how much you spent on something in the past - business decisions MUST be based purely upon expected future performance.

As someone else pointed out, newer stores are not necessarily more successful. Older stores may be more successful due to a superior location, better management & staff, or simply a long-standing clientele. The incorrect decision may have been the locations and/or economic climate in which CC chose to build their new stores.

So, if you have an old store which is making a strong profit margin compared against a brand new store which cost you millions of dollars to build but is losing money, and you have to reduce operating expenses due to insufficient cash flow (the situation in which CC finds itself), which are you going to close? No question, the new store.

I cannot comment on this specific decision that Circuit City made, as I do not know the details of this store vs. the others not selected for closure. That's not the point. The issue is that you used flawed logic in concluding that Circuit City acted illogically. Ignoring sunk costs is absolutely appropriate.

Not only that, you termed their decision "sheer lunacy."

I don't know about others, but I've observed this over-reactionary pattern in a number of your posts, especially as pertains to others' business decisions. Have you considered that maybe you are unqualified to cast these judgments? The people making these decisions are certainly not perfect, but likely have extensive training and years of experience operating large businesses.

You might benefit from considering others' perspectives before leaping to such emotional (and logically flawed) conclusions. You might also benefit from taking a few business classes to understand the theory underlying the decision-making processes you so regularly trash.


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