Circuit City finally powers up, but Best Buy is now `far ahead'

More store remodelings, change in aisle strategy applauded by analysts

February 13, 2003|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Circuit City Stores Inc. says it is remaking itself into the kind of home electronics retailer where consumers can easily find the product they want, pluck it off a shelf and cart it away.

Plans to remodel more stores and switch salespeople from commission to hourly pay should help the electronics chain secure its spot behind rival Best Buy Co. Inc., analysts said yesterday.

"They're doing the things they should do, they have to do, they should have done a long time ago," said David Campbell, a retail analyst with Davenport & Co. "Best Buy is far ahead in terms of executing and brand positioning and vendor relationships. At this point, I see [Circuit City] playing catch-up to the competition."

Some analysts said the new strategies may be too little and too late.

"The clock is ticking for Circuit City," said Michael M. Via, director of research for Anderson & Strudwick. "Their business model is just behind the curve. Retailing moves fast, and they're not moving fast enough. Every month Best Buy is picking up more market share, and I don't expect that to change."

Consumer electronics has become increasingly competitive, with traditional stores and Internet vendors vying for customers, said Jordan Kaplan, a professor of managerial science at Long Island University in Brooklyn. "Consumers are price [and] feature conscious, and with the ubiquitous availability of Internet shopping, you can get your best price," Kaplan said. "Consumers are in the driver's seat in retail electronics, and those that are occupying that space have to work harder to keep what they have."

Last week, Circuit City said that its January sales at stores open at least a year fell 2 percent and that it expects fourth-quarter earnings from continuing operations in the range of 35 cents per share to 40 cents per share, below analysts' expectations of 47 cents per share.

With that announcement, the chain said it would convert to hourly pay in all 626 stores, lay off 3,900 commissioned salespeople and hire additional "product specialists," resulting in a net reduction of 1,800 positions. The changes are expected to simplify store operations and trim operating costs, the company said.

"Hourly associates can deliver the high level of product knowledge that Circuit City customers expect while also taking on a broader range of customer service responsibilities," said W. Alan McCollough, Circuit City's chairman, chief executive officer and president.

Customers today typically have already researched the products they want, and they seek less detailed information from salespeople, McCollough said.

The retailer also said it would continue with a store remodeling program that has included moving products out of the warehouse onto the sales floor, where they are more easily accessible to customers, and new displays for digital televisions.

In fiscal 2004 the chain plans to move to the next phase of its remodeling program in 200 stores, improving the signage and making the layout easier to navigate.

In its favor, Campbell said, Circuit City has some strong new store prototypes. But the chain also runs some outdated stores that are not well-suited to the current consumer electronics market.

"They've got some good ideas, like the newer, more modern stores," Campbell said. "They need to get their store base upgraded and relocated and focus on execution. Best Buy has stolen a lot of customers, and they need to try to get some back."

It wasn't always that way. Circuit City benefited from the personal computer boom in the 1990s, and several years ago stopped selling appliances to focus more on electronics. But when computer sales started to level off in 2000, the retailer wasn't prepared for the next wave in consumer electronics, analysts said. Best Buy shifted more quickly to newer technologies, analysts said, allocating more space for digital cameras, camcorders, satellite systems and video games and software.

Some analysts said it's probably too late for the Richmond-based chain to ever outpace Best Buy.

"Circuit City for many years was sticking to commission sales because it wanted to stress customer service as a value-added component of the business - as opposed to off-the-shelf stores like Best Buy and Wal-Mart and Lowe's," Via said. "Clearly, that has failed, and they're going the other way, trying to be more self-serve."

Part of Circuit City's weakness, Via said, has been a format of keeping many products off the sales floor.

"Most things you had to go through a salesperson and wait for it to be brought around," Via said. "People don't want to do that anymore, they want to pick it up off the shelf. The speed and ease of the experience is what people are looking for."

The store remodelings and staff changes will accomplish just that, while allowing the chain to cut costs and become more efficient, Circuit City officials said.

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