Who Can Buy Circuit City AND Successfully Turn It Around?

Now that Blockbuster (BBI) has walked away from Circuit City (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 (BBY). A good example is the type of customer experience consumers receive when they go to an Apple (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 (WMT) and Sears (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 (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 (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.

Comments

[mgv11:]

I think the branding and experience are right on, the stores have committed so much space to TV's everything else is simply a Wal-Mart arrangement, rows of stuff.

2008 Jul 03 07:44 AM

[Sumknight1949:]

Perhaps the CC real estate should be taken by MotorbikeMax, utilizing the concept of CarMax. With the economy crashing almost as fast as the dollar, Dow in bear market, jobs being cut, and fuel at $4.00, no one can afford an economical Japenese car. They have raised the prices on their Hondas and Toyotas several times this 2008 model year. I suppose that "if you want economy, its gonna cost ya", as a toyota salesman once told me.

Anyway, CC cannot compete with BB. Not today, not in a year. BB cuts them off at the high end with knowledgable store staff. CC's Firedog service is a joke. They installed a wireless system for my wife. After replacing wireless devices that were already there, they finally got it to work...one day. A gentleman from our IT department put the old equipment back on and the sytem works forever.

While BB cuts them off at the high end, Walmart destroys them at the low end. The CC model of "no knowledge" service is identical to W,- with triple the prices.

I see no hope for them, unless they can ....hmmm...I'd get my 2 bucks while its there.

2008 Jul 03 08:15 AM

[How much?:]

I agree with the Branding issue and CC has been struggling with it for the last 8 years since everything changed with their selling model. They have consistently tried to become like Best Buy over the last few years including executives, store management, and product line. Becoming Best Buy Jr will not work.

I have thought about a Target buy out for years. Everytime I go into one, the color scheme and design reminds me of a CC and I could easily see the electroncis department at Target branded with the CC logo (assuming that still means anything). Many CC stores could be closed down and Target would benefit from the CC Website ( one area that CC destroys BB), Firedog Install service (other posters one bad experience not withstanding), and training programs (product knowledge more so than the customer service)

The CC stores left open with the Target name (something like Circuit City by Target or the new format CC is working on, The City by Target) would benefit by branding, access to better products and vendors, merchandising, management, and overall more pleasing stores to shop in. In my estimation, this would allow Target to compete vs BB although not really hurt BB, and further distinguish themselves as an alternative to Walmart (who is in the middle of rebranding to become more like Target) At the price of the stock, Target has very little downside.

2008 Jul 03 11:10 AM

[abc2cba:]

CC needs to get rid of Schoonover, just wait when whatever ends up happening with CC, Schoo will run back where he came from - BB, sent from there to destroy CC over the past 7 years.

Service is great there, and what are you talking about samknight?
fire dog makes much more sense than greeksquab, that was proven time and time again that are driven by only one thing and that is how to explain the customer to bend over really slowly just to stick them with bs the majority don't even know what they are talking about. GS staff is taught to deal with people with verbatim lingo - it is broken, you will need a new one or for $$$ we will "fix" it - for a day or two.

If you ask me, if CC shuts down put big european like night clubs in the place, I am not talking about strip joints, but disco like night clubs.

That's all... for now.

2008 Jul 03 05:29 PM

[billddrummer:]

CC would be better off 50% smaller, with boutique stores catering to higher end shoppers. Let BBY be the big box CE retailer, while CC services the specialty side of the business.

Trouble is, with the damage the brand has sustained over the past 3 years, who will believe it without wholesale management changes, not only at the top, but at the store manager level? Unless the company installs store GMs that understand the psyche of the affluent shopper, that proposal will fail too.

What's clear is that the current operating platform isn't working at all, despite the compost spewed by upper management.

2008 Jul 07 02:52 PM

[Nafiz:]

I think CC need the Appliances back to the store, which was cut off about 8years ago also lost huge customer & stock market.get rid of high school kids which is no help when you need it, Focus on customer Service,Customer Service & Customer Service.Customer will come back Rick Sharp just don't know when he handed the compay to Allan.He just failed to run this company for a big time.

2008 Jul 14 04:21 AM

[mrducttape:]

Being one of the Damn Fools© who actually works for Circuit City, I see the following problems...

1). Store operations are a disaster: From clueless Store Directors who have NO CE KNOWLEDGE, to fresh Operations Managers who watch the store being stolen from underneath them, there is no competence at the STORE LEVEL as to what the business of store merchandising is. This is the biggest reason the stores always look horrible from a branding standpoint. In CC there is a "team" of people expressly hired to merchandise the store called "product flow". Unfortunately these people have no concept of what the product is, where it goes, and no expectation to PRICE IT CORRECTLY. I currently have 180 day old laptops killing me in DISCO/DEVAL but PFT has to merchandise them as sales has no control over this. ( and we had no idea we had this product until last week, when I saw it physically). The fix is to dismiss all PFT members and get the department managers/supervisors to actively manage DISCO/DEVAL. Currently there is no incentive to do this as it adversely hurts the Store Directors margins, which is where there compensation is based.

2). Selling by rote: In the stores the sales people ( like me) are expected to fill out a 8½x11 forms that tell me everything to attach to a sale, it's a variation of the used car salesman ploy used to give legitimacy to all the addons we are expected to do except that given the lack of training on product, many sales associates have to use this to sell. What's missing from this? The product, why is a HP better that a Toshiba for the customer? Why is selling Gateway better for me as a store ( higher margin, more actual profit dollars), but worse than Compaq if something goes wrong ( I can bill HP for service, I can't bill Gateway for warranty work). And this is just computers, cameras and TVs has the same learning curve problems, which leads me to my final point...

3). Reliance on addons to make money: Circuit City relies on addons to make money. Were talking not only the warranties, but the overpriced services, to the Humble little USB cable to hook up the "free" printer you just got ( that will kill you in 6 months with the ink it uses). Lets take the USB cable, it cost you retail at CC $30 us, I can go down the street to Home Depot and get the same cable for $7.97. For CC that cable is ~95% margin, it adds 50% more profit dollars to the sale of a PC ( 8% of $549.99 is $44, 95% of $30. is $28.50, this is gross profit). Unfortunately for CC I'm not the only one who can figure this out. many people are opting out of warranties, services, and extras as they either have it, can get it cheaper somewhere else and perceive no value in getting it done at CC, or see the product as a disposable commodity that if it fails it is simply not economical to fix. All of these together doom Circuit City as the perception of failure looms over the company reinforcing the disposable nature of the product and people servicing will not be there in the future, so why invest in it.

2008 Jul 15 02:00 AM

[billddrummer:]

To mrducttape:

Every CE retailer uses addons to increase profit margins. But with CC, that strategy hasn't worked in 6 consecutive quarters--which lines up nicely with the decision to fire the top sales people back in March 2007.

Accessory attachments can make or break a CE store. Without the attachments, you might as well be selling at WMT.

2008 Jul 18 05:26 PM