Who Can Buy Circuit City AND Successfully Turn It Around?

Jul. 3.08 | About: Circuit City (CCTYQ)

Now that Blockbuster (BBI) has walked away from Circuit City (NYSE:CC), it's time for the speculation to begin over who is should/can buy the company.

The problem is that these discussions will probably revolve around who has the ability to buy CC, and then the analysts will more or less "invent" a scenario under which the marriage of the two companies makes sense.

Mind you I'm not trying to insult said analysts or accuse them of subterfuge, I just think they're starting from the wrong place, because instead of thinking in terms of who can afford to buy CC they should be thinking in terms of the solutions to CC's problems and then about companies that are capable of delivering those solutions.

When we look at CC, we see a company whose product mix and pricing are very similar to a successful competitor (Best Buy), so it stands to reason that their problems undoubtedly revolve around customer service, the customer experience and branding. I.e. they need to solve the problem of customers simply not wanting to shop at their stores, and electing to shop at a similar competitor that offers a superior customer experience.  

Starting with the above, we realize that whoever buys Circuit City needs to be able to successfully rebrand the stores, and build a fashionable, hip and exciting customer experience that will draw customers away from Best Buy (NYSE:BBY). A good example is the type of customer experience consumers receive when they go to an Apple (NASDAQ:AAPL) Store where consumers will wait outside for hours in anticipation of visiting a new store, despite the lack of new products and the fact that said consumers typically already have the Apple products they want.

Turn the Circuit brand into something with enough cachet and love from consumers that they'll wait in cold for a new store to open, and you'll have no problem saving the company. Even if you're not able to accomplish that, turn CC into a cool place to shop for electronics and consumers will come back.

Now that we've established what CC needs to do to save itself, the task of figuring out who should buy CC and/or whose purchase of CC will be successful becomes a lot easier. It has to be a retailer that can push CC up-market, a retailer that can reimage the brand and create cachet and excitement around shopping at Circuit City.

Needless to say, that means that Wal-Mart (NYSE:WMT) and Sears (NASDAQ:SHLD) need not apply because neither company has the ability to build a high-end brand, push a brand up-market, etc, Wal-Mart's failures at going up-market are well documented and Sears isn't exactly hip and exciting. More importantly people go to stores like Best Buy and Circuit City to buy products, receive services, etc, that are better than they can get at a store like Wal-Mart, Sears or Target (NYSE:TGT), so mixing Wal-Mart with the former two retailers is a bad idea. A Circuit City in a Wal-Mart (or Sears) would just confirm people's misgivings about the CC brand.

I'd also disqualify Costco (NASDAQ:COST) because its experience (while well suited to its business model) is very utilitarian and not synergistic with Circuit City, either.

Target is an intriguing option because their relationships with top designers and ability to add hipness to a very un-hip business (discount retail), could be leveraged to build some stylish and fashionable stores. However they would need to see CC as a way to pursue customers that don't currently shop at Target for electronics, and as a way to provide additional services to their existing customer base. Think: a situation where the higher-end products are sold at CC, but someone who buys a laptop at Target is able to go to Circuit City for installation and support.

Apple is an off the wall option because they could definitely refashion the stores successfully, the question is whether or not they'd want to sell competitor's products and if it would be too much of a distraction. Of course, the obvious flaw here is that if Apple wanted to build a more wideband consumer electronics business they could just expand the product mix at their current stores, so there is little reason for them to buy Circuit City.

Still, it’s an interesting idea. 

Aside from Target, I think the company's best hope is a private equity company, with the intelligence and resources to seek out the designers, branding experts, etc, who can rebuild the brand and create a top of the line customer experience.

At the end of the day, whoever buys Circuit City needs to understand that the key to success is rebuilding the brand and creating a better customer experience, anyone who buys the company just because they can afford it with the hope of just adding it to their existing operations is doomed for failure. Unfortunately (especially when I look at some other recent deals), the winds will probably blow towards the biggest checkbook, so I don't have much hope for a deal being executed that actually delivers on its promise, 3, 5, 7 years down the road.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.