Circuit City

MAY 2011

In the mid-nineties, Circuit City, then the largest specialty consumer electronics retailer in the United States, was looking to expand into new markets. The company set its sights on selling used cars - a large market with about forty million used cars sold annually in the United States (Figure 1). In fact, about two thirds of U.S. auto dealers’ unit sales were of used cars, which sold for about $7,500 on average compared to about $20,000 for the average new car. Circuit City’s executives were wondering whether their superstore concept, which worked so well in the consumer electronics market, would carry over to the used car market.

Consumer Electronics Retailing in the United States

Until the early seventies, consumer electronics (CE) was a stagnant industry with color TV, a mature product experiencing limited innovation, as its leading category. CE retailing was relatively straightforward: stores carried a modest selection of radios and televisions and some also sold hi-fi audio equipment. There were few manufacturers, and products were simple. The market largely comprised of small, conveniently-located independent retailers. The limited product selection and lack of differentiation allowed department stores such as Sears and Montgomery Ward to establish a strong position based on their consistent quality and national advertising.

During the seventies, foreign manufacturers started selling increasingly complex CE products, product variety increased and new categories such as VCRs and CDs emerged. It became increasingly difficult for general retailers to cope with the increased complexity. Small stores that specialized in stereo equipment started carrying additional CE products. The ability to handle a broad product variety within a single, focused category created a competitive advantage for specialty CE retailers. Consumer demand for selection and service created a role for CE specialists with knowledgeable salespeople and staff that could provide after-sales service. Consumers had comfort in the knowledge that they could come back to the store with any problem and have it solved, regardless of manufacturer. CE stores started selling service contracts that increased consumers’ peace of mind while generating fat margins for the retailer.

Along with the growth of the CE category (Figure 2), CE retailing went through massive change. Specialty CE chains such as Circuit City Stores (“CC”) and Best Buy evolved to satisfy the increasing sophistication and breadth of CE offerings, taking away market share from independent retailers, who were unable to compete against the buying power, selection, cost and advertising advantages of the larger national chains. The specialty chains later attacked the department stores, whose salespeople did not have industry-specific knowledge and whose stores could not hold a large selection of CE merchandise. National specialty retailers also had a significant cost advantage over independents. Due to their size, they could buy directly from manufacturers at a discount. And, as the specialty CE chains grew, their buying clout continued to increase.

By Haim Mendelson, Graduate School of Business, Stanford University. Copyright © 2011 by Haim Mendelson. To request a copy or for permission to distribute this publication, please email haim@stanford.edu. This publication may not be digitized, photocopied, distributed, or otherwise reproduced, posted or transmitted without the permission of the copyright holder.

Circuit City

The largest CE specialty chain in the United States until the late nineties was CC, followed by Best Buy.¹ The company’s first store in Richmond, Virginia started selling TV sets in 1949 along with the launch of the first TV station in the Southern U.S.² The company grew and went public in 1961. In 1977, it started focusing on 4,000-9,000 sq. ft. stores featuring branded, high-end audio and video CE products. In 1984, the company started rolling out superstores sized 30,000-40,000 sq. ft. that carried CE products and home appliances and included in-store service departments.

In the mid-nineties, CC sold video equipment, audio equipment, personal computers and peripherals, other CE products, entertainment software, and major appliances. Each of CC’s store locations followed centrally-controlled operating procedures and merchandising programs including procedures for inventory maintenance, advertising, customer relations, store administration, merchandise display and store security. Each store carried a standard line of products selected at the corporate level and supplied directly to the stores from CC’s regional distribution centers. CC aimed to maximize profitability in each market it served by capturing a large market share that produced high sales volumes across a broad merchandise mix.

CC supported its nationwide rollout by spending considerable amounts on both local and national advertising to stimulate sales. As the volume of sales increased, advertising expenditures as a percent of sales declined to about 5% in the mid-nineties.

Because consumer electronics, personal computers and major appliances represented relatively large purchases for the average consumer, CC’s business was affected by consumer credit availability. To facilitate the sale of big-ticket items, CC established a subsidiary providing private-label credit cards and established links to third-party credit providers. Credit extension, customer service and collection operations were fully automated with state-of-the-art technology supporting high-level customer service. CC used its point-of-sale (POS) system to provide a rapid customer credit approval process. Customers’ credit applications were scored electronically, and qualified customers received credit approval in less than a minute. Technology also supported an aggressive collection philosophy, which was based on early detection and frequent contact with delinquent customers. In addition to increased credit availability, its private-label credit card program provided CC with additional marketing opportunities, including direct mail campaigns to credit card customers and special financing programs for promotions. In the mid-nineties,

1 In the late nineties, Best Buy overtook CC which became the second largest specialty CE retailer in the U.S.

2 At the time, the company was called Wards.

most of CC’s sales were on credit (almost a fifth through CC’s private-label credit card, and more than two fifths through third-party credit sources).

Circuit City’s Customer Value Proposition

CC’s customer value proposition focused on what it called the five “S”s: selection, savings, service, satisfaction, and speed.

• Selection: CC’s merchandising strategy emphasized a broad selection of products (a few thousand in each store) sold at a wide range of prices. Merchandise mix and displays were controlled centrally to ensure consistency from store to store. CC operated a centralized buying organization, which reduced costs by purchasing in large volumes and by structuring merchandising programs that were supported by advanced management information and distribution systems. These systems and procedures reduced CC’s operating costs, enabling the second “S”: savings.

• Savings: All products were sold with a lowest-price guarantee: if the customer found the same product at a lower price at a local competitor, he or she would get 110% of the price back. CC’s pricing and selling strategies varied by market to reflect competitive conditions. Although suggested retail prices were established by the company’s central merchandising department, each store manager was responsible for shopping the local competition on a regular basis and had the authority to adjust retail prices to meet local market conditions.

• Service and Satisfaction: CC was committed to a superior buying experience and high-quality customer service. All products were covered by a 30-day money-back guarantee. CC staffed its stores with commissioned sales counselors who provided expert advice. Sales counselors received training on product features, customer service and store operations so they could be truly helpful and assist consumers in making buying decisions. CC offered service and repair for nearly all the products it sold through in-store factory-authorized service and repair departments. Customers were also able to purchase extended warranties on most of the merchandise they bought at CC, extending coverage beyond the manufacturer’s warranty period. Repairs were performed at one of more than thirty regional service facilities, and products were then shipped back to the store where they were returned to the customer. CC also had in-home technicians who serviced large items not conveniently carried to a store. In addition, CC provided convenient credit options, home delivery, installation centers for automotive electronics, and a toll-free product support line.

CC’s service operations were supported by the company’s state-of-the-art Customer Service Information System, which maintained an online history of customer purchases and enabled the company to assist individuals with future purchases by ensuring that new products could be integrated with existing products in their homes. The system also facilitated product returns and repair. In addition, this system supported CC’s toll-free product support line, which provided customers with access to skilled product specialists. From their homes, customers could receive immediate answers to basic questions regarding product usage and installation.

• Speed: CC used sophisticated systems to speed up operations, increase efficiency and product availability, and track demand. Point of Sales (POS) systems were designed to check inventory availability, accelerate transaction processing, and quickly approve credit. In the mid-nineties, CC operated nine automated distribution centers for CE products. These centers were designed to serve stores within a 500- mile range. They were equipped with conveyor systems with laser bar code scanners to reduce labor requirements, prevent inventory damage and maintain inventory control. In addition, CC operated smaller distribution centers handling primarily appliances and larger electronics products.

CC’s strategy was enabled by the use of information technology. The company’s POS system maintained an online record of all transactions and allowed performance to be tracked by region, store and individual sales counselor. The information gathered by the system supported automatic replenishment of in-store inventory from the regional distribution centers and was incorporated into CC’s product buying decisions. The POS system was linked to the credit approval systems of both CC’s credit subsidiary and third- party credit sources. In the stores, electronic signature capture for all credit card purchases, bar code scanning for product returns and repairs, automatic price tag printing for price changes and computerized home delivery scheduling enabled merchandising for CC’s broad product selection, increased efficiency and speed, and enhanced service quality and customer satisfaction.

Used Car Salesman?

CC wanted to take advantage of its core competencies to expand into new markets. One of the markets it considered was used car retailing, where it hoped to significantly improve the consumer experience. CC was considering the creation of a new retail chain based on superstores with 500-1,000 used cars in each. Cars would be no more than five years old and driven for less than 70,000 miles. Cars would be bought at wholesale auctions or from shoppers who wanted to trade in their vehicle. Prospective sellers would get an appraisal that they could take in cash if they decided to buy a car elsewhere. Cars would then be reconditioned and sold at the superstore.

Shoppers would browse through the car selection using computer-based kiosks that would show photos of each car, its price, location within the store, etc. Prices would be fixed with no haggling. Each car would have an embedded chip to track how long it sits in the store and when a test-drive takes place. The sales counselor at the store would arrange for financing as needed. Cars would come with a standard warranty, which could be extended for an additional cost. Stores would be advertised for cleanliness, one-stop shopping, customer friendliness, transparency and speed.

CC executive Richard L. Sharp asked for $50 million to launch a wholly-owned subsidiary of CC based on this concept, known internally as “Honest Rick’s Used Cars.” Should CC fund the project? Should it enter the used car market.