Circuit City's Schoonover Just Doesn’t Get It

Here is an interview from the WSJ with the CEO of one of my favorite “inept company” targets, Phil Schoonover of Circuit City (CC). In my opinion Phil doesn’t truly address any of the issues facing the company, engages in too much corporate spin and seems over-focused on cost cutting. The customer experience is Circuit City’s main problem, and merely saying “we have the best customer experience” is irrelevant if the customers are clearly expressing a preference for your competitors.

From the WSJ:

Since taking over Circuit City Stores Inc. in 2006, Chief Executive Philip J. Schoonover has performed radical surgery on the consumer electronics retailer. Last year he laid off more than 3,000 higher-paid store employees and changed the routines of the others while promoting a smaller, less-expensive store format.

But it isn't clear yet whether he has saved the patient. Mr. Schoonover's hopes for a 2007 revival were crushed late last year despite the hunger of consumers for big-screen TV sets, GPS navigation systems and MP3 music players. As Circuit City's losses ballooned, rival Best Buy Co. pulled further ahead…

…WSJ: Your turnaround plan suffered a number of setbacks in the last year. What happened?

Mr. Schoonover: We began a set of initiatives to fix expenses, saving the company $200 million annually. The amount of change was necessary but disruptive, particularly in the fiscal third quarter of 2007. I think we did the right things, but we disrupted the system more than we could digest, particularly in the holiday selling season.

I don’t see how someone can say the above and keep a straight face. If you implement changes that disrupt operations in a way that hurts profitability during the holiday shopping season, someone didn’t do their job correctly. Furthermore, cost cutting should be a behind the scenes activity that doesn’t impact your company’s ability to attract customers. Demand for electronics was rather high this holiday season (it was one of the few bright spots), Circuit City should’ve been a beneficiary of that demand internal disruptions or no.

From the WSJ:

WSJ: How do store employees, who have been through multiple layoffs, fare in these changes?

Mr. Schoonover: We want engaged associates who have fun at work, bring a passion about the products, and enjoy serving customers. We've made a lot of changes in how we interact with our associates so that Circuit City could become the employer of choice. We hadn't changed the way we manage and lead since the inception of sales commissions. This is a very different way to manage and lead.

How is Circuit City going to become the employer of choice if you lay off 3,000 of your best people to save costs, instead of looking at your best people as an investment in the company’s future? How are potential employees going to look at Circuit City as the employer of choice when they know that people prefer to shop with the competition, top employees are being laid off and replaced (or rehired) at lower salaries?

If I’m engineering a turnaround of a company I want the best and brightest in the trenches with me even if they’re expensive, as those are the people you need to make significant changes. I would also avoid actions that would either demoralize existing employees, or potentially discourage potential employees from joining my organization. Layoffs are sometimes necessary, but there are better ways to manage them without shooting yourself in the foot.

A successful turnaround is about long-term success, not short-term cost savings.

Saying that things are different and that your goal is to be a great place to work, won’t carry much weight with your employees when your actions tell them otherwise.

From the WSJ:

WSJ: How is Circuit City's multichannel approach -- store, Internet and call centers -- any different from the approach of its two bigger rivals, Best Buy and Wal-Mart Stores Inc.?

Mr. Schoonover: We have a culture that is beginning to cooperate and work together to provide a customer experience that is different and better.

One example is our "24/24" promise. Order online, and we'll have your purchase ready for you at a store in 24 minutes. If not, we'll give you a $24 gift card. Our technology is unique and allows us to make that promise. Another is content. We have product reviews by leading consumer magazines. We have a whole explanation on what you need to make this new digital entertainment world work.”

The question wasn’t truly answered because if you look at Best Buy (BBY) and Circuit City’s web sites, review the offerings, make comparisons, etc, the WSJ’s question still stands: “what is truly different and what is truly superior?”

Circuit City needs to abandon the clichéd statements on turnarounds and the single minded focus on cost cutting and ask itself the following question: “Why is the consumer choosing to purchase their electronics goods from Best Buy instead of from us, even though we stock similar products at nearly identical prices?” Better yet, why are we losing money when we sell extremely popular products that are minting money for our competitors? Even if their operating costs are higher than they should be, there is no excuse for losing money in the consumer electronics market right now. Even the inept should be beneficiaries (in the form of positive earnings) of the high demand for computers, HDTVs, MP3 players, etc.

The best thing for Phillip to do right now is to spend a year visiting stores of Best Buy (and other competitors) with the objective of observing customer/employee interaction and the overall customer experience. Only then, will Circuit City have the information it needs to engineer a turnaround. The focus on cost cutting reeks of desperation to me, as the company’s problems are strategic and how it presents itself to the consumers. Circuit City needs to ignore its own spin and truly listen to the consumers who aren’t showing much interest in their stores.

I would also advise Circuit City to follow the example of Best Buy and create something similar to Magnolia (Best Buy’s higher-end A/V brand), only he should shop at various high-end A/V stores and seek to replicate that customer experience within Circuit City stores. As a long-time audiophile, I can tell you that putting a bunch of higher end electronics in a room and calling it the “audition” room for your high-end gear doesn’t pass muster. The customer experience one receives in a true high-end store vs. a mass market retailer, is analogous to the experience one receives at a Mercedes dealership compared to a used car dealership that operates out of trailer.

Circuit City’s shares closed calendar year 2005 trading at $22.59 and now trade at $4.94 (as of market close 2/8/08) a decline of roughly 78%, the stock hit a high of $30.49 in June of 2006 and has fallen 84% since then. Close to $17 billion in market value has been lost since June of 2006, how much more shareholder value will be lost before there is a change in leadership?

Sources:

The Wall St. Journal: “Can Circuit City Survive Boss’s Cure?” – Gary McWilliams, February 11, 2008.

Disclosure: at the time of publishing the author didn’t own a position in Circuit City.

Comments

[mgv11:]

I think many valid points are raised here, when I read the WSJ article I was amazed at the poor follow up questions to some of the statements. They had a checklist and simply kept moving.
I also have no problem copying what is working at your competitors, this is what makes a small mom and pop hard to go national, the guys can copy and distribute the concept quickly... if they are paying attention.

2008 Feb 11 11:43 AM

[The Truth W...:]

Every CC I've been in feels like I'm in a hugh impersonal warehouse similar to Costco or BJs. Too many flat screens in a too bright surrounding with few sales people. CC doesn't sell quality tvs such as Pioneer or Definitive Technology products. Best Buy does. If I wanted cheap instead of quality I'd go to Target or Walmart.

CC charges 15% restocking fee for a computer if box is opened. Best Buy does not. The same for HD players.

Best Buy has Magnolia where the customer doesn't feel overwhelmed when shopping for a flat screen. Lighting is better and sales people are there to answer questions.

Best Buy doesn't play stupid games with inflated prices over MSRP and then drop them to MSRP and call it a sale as CC does. For example CC website has the price for Sonys new HD camera HDR-SR12 as $1499.99. The Sony store is selling it for $1399.99.
This is insulting the intellligence of the public.

BB doesn't lock on their prices like CC. I just bought Definitive Technologies best speakers, Mythos ST that listed for $3600 a pair, for $3000.

Garmin has a new GPS avalible in mid April, the NUVI 880. The MSRP is $1071.41. Beach Audio is selling them for $781.99 delivered. Its not even listed on CC web site. CC had better realize that the internet exists and get with the program.

CC prices for Blu-ray DVDs are wayyyy too much. Can't compete with Amazon, Target or Deep Discount DVD so why should anyone even go there?

2008 Mar 10 09:39 AM

[User 195463:]

Circuit City has THE WORST Customer Service I have EVER Encountered. I will NEVER buy anything at circuit city again.

2008 May 18 08:30 PM

[guesswho:]

It's hard to give out good customer service at my circuit city mainly because the managers treated us like crap, when anything was out of stock or when things weren't going the right way they would blame the warehouse or customer service reps. Not to mention when i worked in the warehouse we had to do the jobs of about four different departments.
1) the warehouse job (what we were hired to do)
2) we have to tag and prepare ad sets for the week (the job of a pricing/ad team)
3) the work of the PST team, which is dvd's, games, mucis and electronics (because the stupid corporate heads thought it would be more productive by getting rid of the PST team)
4) we also had to do janitorial work

lastly not to mention that almost all of the people that worked in the store i was at were university students who had to work their way through school and getting paid $8.00 an hour for all the work they have to do, helping a customer was the lasting we wanted to do. The only reason I stayed was because all of my friends worked there

2008 May 28 04:24 PM

[The Reality...:]

1. BB DOES have restock fees on computers, cameras, and GPS....15%, pretty much the standard. Neither havehave restock fees on ANY DVD player, HD, Bluray, or regular DVD.

2. CC price matches....just like anyone else. Do your research, find the better price, and ask them to match it....not that difficult

3. CC carries panasonic plasmas....someone named "Pioneer" as if it were on a platform far above the others.....so why is Pioneer contracting with panasonic to have them put their screens in Pioneer TVs?

4. To the person who hated their job....quit. Stop whining and quit if its so horrible. If all of your friends decided to become "custodial engineers" as their career, would you do it with them for the rest of your life? You work to make money, not hang out with your buddies.

2008 Sep 29 11:56 AM