What happened to Circuit City? - FourWeekMBA (2024)

Circuit City is an American consumer electronics retailer originally founded by Samuel S. Wurtzel in 1949.The company filed for bankruptcy in 2009 after being an industry leader for decades. Circuit City suffered from complacent management who also made poor decisions. Many Circuit City stores were outdated and in poor locations. Stores were also staffed with salespeople pushing high-margin products at a time when consumers were moving toward cheap, low-margin products.

Aspect	Explanation
Foundation and Early Success	Circuit City was founded in 1949 in Richmond, Virginia, by Samuel Wurtzel and W. Ronny Sachs. Initially, it operated as a small television store. Over the years, it expanded its product offerings and store locations, eventually becoming a leading consumer electronics and appliance retailer in the United States. Circuit City’s “Superstore” concept, which featured a wide range of products and knowledgeable sales associates, contributed to its early success. The company went public in 1961.
Growth and Expansion	Throughout the 1980s and 1990s, Circuit City experienced significant growth, becoming one of the largest electronics retailers in the U.S. The company expanded its store network to include hundreds of locations across the country. It was known for its innovative store layout, which included separate departments for various product categories, as well as its commissioned sales model, where sales associates earned commissions based on their sales performance. Circuit City also launched the “Divx” DVD format, which ultimately did not gain widespread consumer acceptance.
Challenges and Competition	Circuit City faced challenges from competitors such as Best Buy, which adopted a similar “big-box” retail model. Additionally, online retailers like Amazon began to gain traction, posing a threat to traditional brick-and-mortar electronics stores. Circuit City also faced criticism for its commission-based sales model, which some believed led to aggressive and sometimes pushy sales tactics. The company attempted to adapt by introducing a no-commission model, but the change created internal friction among employees.
Bankruptcy and Liquidation	In 2008, Circuit City filed for Chapter 11 bankruptcy due to a combination of factors, including declining sales, a challenging economic environment, and high levels of debt. During bankruptcy proceedings, the company attempted to find a buyer or investor to help it recover, but no suitable offers emerged. As a result, Circuit City made the decision to liquidate its assets and close all of its stores. In March 2009, the company ceased operations, marking the end of an era for the once-prominent electronics retailer.
Legacy and Brand Revival Attempts	Despite its closure, Circuit City’s brand and legacy still held value. In 2016, the brand was acquired by Systemax Inc., and there were attempts to revive Circuit City as an online retailer with a focus on consumer electronics and appliances. The revived Circuit City aimed to cater to the e-commerce market, but it faced challenges in a highly competitive online retail landscape. The brand struggled to regain the prominence it once had, and the revival efforts ultimately fell short of reestablishing Circuit City as a major player in the industry.
Influence on Retail Industry	Circuit City’s rise and fall highlighted the challenges faced by traditional electronics retailers in adapting to changing consumer preferences and the growth of e-commerce. It served as a cautionary tale for other retailers in the face of increased competition from online marketplaces. The decline of Circuit City also had implications for the broader retail industry, leading to discussions about the importance of customer experience, pricing strategies, and the need for innovation in a rapidly evolving retail landscape.
Consumer Nostalgia	Circuit City holds a place of nostalgia for many consumers who remember it as a destination for purchasing electronics and appliances. The brand’s legacy lives on in the memories of those who shopped at its stores during its heyday. Discussions about Circuit City often evoke sentiments of nostalgia and reminiscence, underscoring its significance in the history of consumer electronics retail in the United States.

Table of Contents

Origin Story

Circuit City is an American consumer electronics retailer originally founded by Samuel S. Wurtzel in 1949.

Circuit City – then known as the Wards Company – was established after Wurtzel witnessed the start of the television revolution in the United States.

Imagining its future potential, he opened the first Wards store in Richmond, Virginia. Hundreds of stores followed as the company pioneered the electronic superstore format in the 1970s.

By 2000,the company employed more than 60,000 people across 616 locationsin North America.

Just eight years later, it was forced to file for bankruptcy with the final Circuit City store closing in March 2009.

A new company was then founded in 2016 by Ronny Shmoel, who acquired thebrandname and trademark rights in a deal with Systemax.

The demise of Circuit City is a cautionary tale in complacency, poorstrategy, and badmanagement. Let’s tell this tale below.

Complacency

Circuit City became blinded by its success as a market leader in the 1980s and 1990s. In the highly competitive and dynamic electronics industry, this proved to be a fatal mistake.

At the start of the new millennium, Circuit City remained focused on astrategyit had developed in the 1980s that focused on products consumers didn’t want or need.

Management was not frightened by the emergence of competitors such as Best Buy, Costco, and Kmart. Former CEO Alan Wurtzel, son of Samuel, would later note that

“We thought we were smarter than anybody. But the time you get into trouble is when you think you know the answers.”

Outdated store model

Best Buy was the most significantthreatto Circuit City, largely because it offered a better store experience. Best Buy stores stocked a wide variety of low-marginproducts to get customers in the door, such as CDs, video games, and peripherals.

Poor store and branding strategy

At one point, Circuit City had a vast real estate portfolio. But many of its stores were built, completed, and then sat idle and empty for years. In 2005, the company had amassed around 1.2 million square feet of underutilized space.

Many of the stories themselves were also out of date.

After it underwent a rebranding and introduced the newer Horizon store format in the early 2000s, Circuit City left older stores unrenovated.

The company also opened too many stores too quickly, which led to some locations in close proximity cannibalizing each other’s sales. Other stores were opened in areas that were already saturated with competitors.

Another issue was that the company had a reputation for locating stores in suburban strip malls and retail centers and not in urban areas. This made it more difficult for them to compete with Best Buy which had a more substantial presence in urban locations with higher foot traffic.

Even as the company started to decline and face potential bankruptcy, it continued to build and open new stores. Remarkably, some were open for only a couple of weeks or so before they were shut down.

Poor inventory management

Circuit City operated more than 1,500 stores across the United States and Canada at its peak.

With such a vastnetworkof stores, poorinventorymanagementmeant the company had trouble moving its stock. This hindered its ability to purchase new stock and pay off the millions it owed to vendors.

At one point, the company owed $118 million to Hewlett Packard, $116 million to Samsung, and $60 million to Sony. In the wake of the credit crunch of the time, many such companies were reluctant to do business with Circuit City which had little to no cash on hand.

What’s more, while companies like Best Buy and Amazon were developing their online presence, management at Circuit City avoided doing likewise with the complacent belief that customers would always stick with them.

Corporate mismanagement

Circuit Citymanagementmade several inexplicably poor decisions in the years leading up to its bankruptcy.

When new CEO Alan McCollough was appointed, he decided the company would stop selling appliances to focus on consumer electronics.

The decision meant a 15% decline in revenue and resulted in Circuit City missing out on the real estate boom where appliance sales skyrocketed. The move was confusing to the company’s core user base and only weakened Circuit City relative to its competitors.

In 2003, the company also eliminated its commission-based sales staff with little warning. Almost 4,000 high-paid employees were fired with plans to replace them with half as many staff paid by the hour.

Effect of mass terminations

Then-CEO Philip Schoonover told Reuters that the mass terminations would ”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.”

But it was widely believed that the sales staff were laid off because they cost too much to employ. In the process, management consultant Peter Cohan believed Schoonover had “violated a basic principle of good business.”

Nine months later, it seemed that Cohan had been vindicated. Sales were down 11% from the same period in 2006 and the move, as we touched on above, precipitated an unwelcome culture shift where employees were afraid to perform.

While dedicated sales staff were sometimes pushy in their tactics, customers did look to them for detailed advice about their specific needs. When Circuit City fired its most experienced personnel, customers flocked to competitors such as Best Buy instead.

Verizon deal

Circuit City partnered with telco company Verizon in 2004 and, as part of the deal, each retail store would incorporate a full-service Verizon sales counter. But the deal also stipulated that Circuit City could only sell Verizon phones and not those from other manufacturers.

While Verizon was one of the largest telcos in the United States, the inability to sell phones from other brands limited profits and, like so many other missteps, positioned Circuit City as inferior to Best Buy where consumers could purchase whatever brand they liked.

Stock buybacks

Sales continued to decline, but Circuit City had a considerable amount ofcashon hand after spinning out its automotive chain CarMax and selling a private label credit facility.

Between 2003 and 2007, it spent almost $1 billion buying back its own stock. The company failed to mask its flagging sales, with the share price plunging from $20 in 2003 to just $4.20 by the end of 2007.Ultimately, thecashsplash meant Circuit City could not survive the GFC which was less than twelve months away.

Key takeaways

Circuit City is an American electronics and appliance retailer originally founded in 1949 by Samuel Wurtzel. The company filed for bankruptcy in 2009 after being an industry leader for decades.
Circuit City suffered from complacent management who also made poor decisions. Many Circuit City stores were outdated and in poor locations. Stores were also staffed with salespeople pushing high-margin products at a time when consumers were moving toward cheap, low-margin products.
Circuit City sold several of its most valuable assets to fund a four-year stock buyback. The move failed to arrest a steady decline in its share price and meant the company was unable to survive the coming GFC.

Timeline and Key Highlights

Origins and Expansion: Circuit City was founded in 1949 by Samuel S. Wurtzel and became a pioneer in the electronic superstore format. It rapidly expanded its store network and became a leading consumer electronics retailer in the 1980s and 1990s.
Complacency and Poor Strategy: The company’s complacency and adherence to outdated strategies led to its downfall. It failed to adapt to changing consumer preferences and focused on products that were no longer in demand.
Outdated Store Model: Circuit City’s stores were outdated, and its commission-based sales approach was not appealing to customers who preferred cheaper, low-margin products. Best Buy’s more customer-friendly store experience posed a significant threat.
Poor Store and Branding Strategy: Many of Circuit City’s stores were poorly located and outdated, leading to a waste of resources. The company also failed to renovate older stores and opened new ones in already saturated markets.
Poor Inventory Management: With a vast network of stores, Circuit City struggled with inventory management, leading to difficulty in moving stock and issues with vendors.
Corporate Mismanagement: The company made several poor decisions, such as eliminating commission-based sales staff and entering into a restrictive partnership with Verizon, limiting its ability to sell a variety of phone brands.
Stock Buybacks: Circuit City spent a substantial amount of money buying back its own stock between 2003 and 2007, depleting its cash reserves and leaving it vulnerable to economic downturns.
Decline and Bankruptcy: Despite its past success, Circuit City’s sales continued to decline, and the company filed for bankruptcy in 2009, marking the end of its once-prominent position in the consumer electronics industry.