Friday, January 16, 2009

Bye bye Circuit City

Circuit City announced today that it failed to find a way to save the electronics chain. Having closed 155 stores in the past two months, the remaining 567 stores and 34,000 employees will be history in about 10 weeks’ time.

Circuit City had its fans and detractors; I was somewhere in between. Although I usually shop for electronics on price, I found it a reasonable tradeoff between variety and ease of use: Radio Shack is too small and Best Buy is too big. I liked Good Guys better — they had more personality — but they had even less scale and ran their liquidation during Xmas 2005.

Fool Rick Munarriz marks its decision two years ago to fire its highest productivity (and highest paid) sales reps as the beginning of the end. Don Tennant of Computerworld makes a related argument that it under-invested in knowledgeable sales staff.

Of course, there is no one single cause of its demise. But my guess that its once healthy margins were squeezed the same way as with Tower Records:

  1. As with other bricks and mortar stores, online selling commoditized distribution: the variety that Circuit City once offered was easily surpassed by online sellers.
  2. Online retailing facilitates price competition
  3. Wal-Mart has increased its product selection (and number of stores), providing a lower-cost alternative for those who don’t want to wait for the UPS driver to deliver.
This is clearly a big win for BestBuy and Wal-Mart, who will have a clear field going forward — although also a warning to further improve their website sales.

For Radio Shack, this seems both like an opportunity and a temptation. There will be markets that need more choice and competition in mid-range electronics products, which could provide growth. At the same time, Radio Shack has survived by largely avoiding large inventories of high-price, short-lifespan products, a model that fits its relatively slow inventory turnover.

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