Circuit City — The “Good to Great” Darling That Fired Its Own Moat

Summary

Circuit City was the second-largest consumer-electronics retailer in the United States, and on January 16, 2009 a bankruptcy judge approved its plan to close every last store. Founded in Richmond, Virginia in 1949 as the Wards Company — a single television store opened on the hunch that the South's first commercial TV station was about to go on the air — it grew over six decades into a chain of roughly 700 big-box superstores, renamed Circuit City in 1984 and listed on the New York Stock Exchange the same year. For a generation it was where Americans bought the television, the camcorder, the first home computer, walked out past a wall of car stereos, and were talked through the choice by a commissioned salesman who actually knew the difference between the models. By the end, the 567 stores still standing were liquidated in going-out-of-business sales, and more than 34,000 people lost their jobs.

The detail that turned the collapse into a business-school parable is that Circuit City was, for a while, the model. In 2001 Jim Collins anointed it one of eleven exemplars in Good to Great, citing stock returns from 1982 to 1999 that beat the market roughly twenty-two-fold. It was supposed to be one of the companies that had cracked the code of durable greatness. Seven years after the book reached the bestseller list, the company that proved its thesis was filing for bankruptcy, and the case is now taught as a caution about reading a tailwind as a virtue.

What killed Circuit City was the ordinary squeeze of its industry — Best Buy beat it on stores and experience, Walmart beat it on price, and Amazon was quietly making the showroom itself obsolete — compounded by a recession that arrived at the worst possible moment, in late 2008, when electronics are exactly the kind of thing households stop buying. But the chain did not merely lose to those forces. It handed them the win. In a series of cost cuts culminating in March 2007, it fired thousands of its most experienced, highest-paid salespeople specifically because they were experienced and highly paid, and replaced them with cheaper hires — gutting the knowledgeable-service advantage that was the one thing keeping a higher-cost store relevant against a discounter and a website.

So the verdict is unusually clean. Circuit City was killed by the broad disruption that flattened a generation of electronics retailers, and also by a self-inflicted wound that the company chose, calculated to the dollar, and booked as savings. The brand survives today only as a licensed website, sold off in the wreckage to Systemax for $14 million — a label, not a chain, the most literal kind of afterlife a dead retailer gets.

Timeline

The Store Where You Asked the Guy

Circuit City's original advantage was the one a website cannot replicate and a discounter does not bother to: a person on the floor who knew the products. In the 1980s and 1990s, buying a television or a stereo or a first home computer was a genuinely confusing purchase — the specifications were opaque, the price was large enough to matter, and the customer arrived wanting to be told what to buy. Circuit City's commissioned salespeople were trained to do exactly that, and the commission, whatever its irritations, aligned them to spend the time. The format worked spectacularly well. From 1982 to 1999 the stock returned roughly twenty-two times the market, the kind of run that gets a company into a Jim Collins book and onto a generation of MBA syllabi as proof that disciplined retailing compounds.

It is worth dwelling on how good the numbers looked, because the looking-good is half the lesson. Good to Great was not careless; it screened hundreds of companies and Circuit City genuinely had the track record. What the record could not show was that the moat was already being filled in. Best Buy had arrived with a brighter, lower-pressure store and a non-commissioned floor that customers found less aggressive. Walmart and the warehouse clubs were turning televisions into commodities sold on price alone. And the internet was about to make the most valuable service a Circuit City salesman provided — telling you what the specifications meant — freely available to anyone with a modem. The returns Collins celebrated were, in part, the last good years of a format whose moment was quietly passing.

The company's own diversifications tell the same story of a business unsure what it was. CarMax, launched in 1993, was a real success — and Circuit City spun it off in 2002, parting with arguably the best thing it ever built. DIVX, the self-destructing DVD it championed in 1998, was a costly embarrassment that ended in a roughly $114 million write-off and a lasting place on lists of doomed formats. A chain that was beating the market on the strength of one excellent retail idea kept reaching for others, and in 2002 it sold the one that worked.

The Number on the Spreadsheet Was a Person

Then came the decision that the case file exists to record. Facing margin pressure, the company concluded that its store labor was simply too expensive — and that the most expensive labor was its most experienced. In 2003 it abolished commissioned sales entirely, flattening everyone to an hourly wage and shedding some 3,900 of its longest-tenured salespeople; insiders would later name this the most consequential mistake the company ever made. Then, in March 2007, it went further with a stroke of pure spreadsheet logic: it identified roughly 3,400 store employees who were paid "well above the market-based salary range for their role," fired them, and announced they could reapply for their old jobs after a waiting period — at the lower, market-rate wage.

The internal arithmetic was sound and the strategic arithmetic was suicidal. The workers it targeted were expensive precisely because they were good — they had stayed, they had sold, they had earned raises by being the people customers trusted. One twenty-year veteran earning $18 an hour was told he could return at $8 or $9. The company was, in effect, defining its single durable competitive advantage as a cost line and then cutting it, in an industry where the entire case for paying more to shop at a higher-cost store was that someone there would know what they were talking about. Sales slowed. Morale collapsed. The press coverage was exactly as bad as it sounds, the kind that attaches a phrase — "fired for earning too much" — to a company's obituary years in advance.

Here the wit has to stop, because the people on the other side of that spreadsheet were real and the move was, beyond being a blunder, simply cruel in its mechanics: escorted out one morning, severance counted in weeks, invited back at half the wage. They absorbed the cost of a strategy that did not even work. The savings were booked; the advantage they represented was destroyed; and within two years the rest of the workforce — more than 34,000 people — followed them out the door, this time with no version of the store left to reapply to.

The Five Factors

Aftermath

The human toll was immediate and concentrated. More than 34,000 people lost their jobs across early 2009, in the depths of a recession in which there was nowhere obvious to land; the experienced salespeople purged in 2003 and 2007 had merely been the first wave of the same destruction. The empty superstores — distinctively shaped, instantly recognizable — joined the dead-mall iconography of the period, and many of the boxes sat vacant for years before being carved up or razed. FireDog, Circuit City's answer to Best Buy's Geek Squad, went down with the ship.

The brand's afterlife is the licensed-website kind. In May 2009, Systemax — the same company that had recently scooped up the carcass of CompUSA, another fallen electronics chain — bought Circuit City's trademarks and CircuitCity.com for $14 million plus a cut of future revenue, and relit the name as an online-only store. It was a logo on a website, not a retailer; the chain itself was gone. What endures is the lesson. Circuit City is now the standing rebuttal to its own Good to Great chapter and the textbook example of cost-cutting that eats the business — the company that read its best, most loyal employees as a line item and cut it, then discovered too late that the line item had been the moat.

Lessons

References

• Circuit City Wikipedia
• Circuit City Unplugged: Why Did Chapter 11 Fail to Save 34,000 Jobs? (House Judiciary subcommittee hearing, March 11, 2009) U.S. Government Publishing Office
• Circuit City Lays Off Employees for Earning Too Much Money ABC News
• Circuit City and the "Good to Great" Business Book Conundrum CBS News
• Systemax Revives Circuit City Brand Online Channel Insider