Circuit City plans to sell used cars

April 07, 1993|By New York Times News Service

Would you buy a used car from this retailer?

Circuit City Stores Inc., the giant home electronics chain, startled Wall Street, auto dealers and much of the retail world yesterday with an announcement that it was going into the used-car business.

The news, tucked near the end of a news release detailing the company's financial results, overshadowed a 38 percent increase in profits in Circuit City's fiscal fourth quarter.

"I was a little surprised that the media picked up on that when we announced earnings that were above expectations and described our keymarkets and plans for expansion, all of which will have a big impact on our business," said Ann Collier, Circuit City's spokeswoman.

She stressed that the venture was only a test and would have no impact on the company's bottom line.

Initially, the announcement was greeted with laughter on Wall Street. But when the guffaws subsided, analysts pronounced the concept "exciting," "innovative," even "wacky" -- strong language for a crowd that generally speaks in ratios and percentages.

Auto dealers were somewhat less enthusiastic. "What do they know about the car business?" said Ted Orme, spokesman for the National Automobile Dealers Association. "Next thing you know, Safeway will be selling television sets."

But a retail consultant heralded it as a breath of fresh air in an industry notorious for recycling old ideas. "Keep one thing in mind: In retailing, the old tried-and-tested formulas are weakening, and real creativity is what is going to drive business in the future," said Kurt Barnard, of Barnard's Retail Marketing Report.

Ms. Collier said that although Circuit City had room to grow for the rest of the decade, it had been looking for expansion opportunities to carry it into the 21st century.

"We were looking at related businesses, and this seemed like a business where we could use our skills in customer service, operating controls and professional management."

Although Circuit City has released scant details about its new venture, it plans to apply to used cars the techniques it has used selling radios, televisions, dishwashers and air conditioners.

Circuit City's stores carry vast selections of brand-name electronics and appliances sold at lower prices than smaller competitors can afford to offer because they lack its buying power. With its slim profit margins, Circuit City must sell a lot of merchandise at a fairly fast clip.

Dick Strauss, owner of Dick Strauss Ford Isuzu and Suzuki in Richmond, Va., said there were some parallels between selling cars and high-ticket durable goods. Circuit City is used to financing long-term sales and to providing extended warranties, two key components of the auto business.

But Circuit City also makes its money by selling large quantities rapidly. Without such vigorous turnover, the company cannot afford to offer rock-bottom prices.

Mr. Strauss said Circuit City might have difficulty acquiring the inventory it needs. It may also have trouble selling the 300 to 400 cars a month he estimates it must sell to achieve the profitability it demands from its electronics stores.

Initially there does not seem to be much of a relationship between selling cars and selling refrigerators. And Circuit City did not shed much light on its rationale.

Kenneth Gassman, an analyst at Davenport & Co. in Richmond, made a few informed guesses. After its sales representatives sell a car, he surmised, they might suggest a car stereo system, cellular phone, car alarm or extended warranty.

Mr. Gassman has learned that the company plans to open its first used-car lot on a 15.4-acre site in Richmond, where the company is based, later this year. The lot will accommodate 500 cars, which will be sold at sticker price.

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