Was Circuit City’s Closing Foreshadowing for Best Buy?

Jul 6, 2012
J. Webster
Comments Off on Was Circuit City’s Closing Foreshadowing for Best Buy?

In 2009, large electronics retailer Circuit City closed its last store and changed the face of storefront electronics. While many believed the closing of the second largest electronics retailer to be a benefit to Best Buy, it appears to have been an early precursor to what was to come.

Circuit City had a high of 567 stores in the United States to compete with leading electronics store Best Buy. In November 2008, Circuit City began closing stores after declaring Chapter 11 bankruptcy. Over 150 stores were closed to try and save the company’s operations through the holiday season of 2008. In January 2009, Circuit City began a liquidation process before ultimately ending operations in March.

Circuit City closed as a result of online sales. The company had competed with Best Buy for years and had survived. However, the prominence of Amazon.com began to affect sales and profits of the company. Circuit City had stores that were 15,000 to 45,000 square feet. The company had to pay high amounts of rent and keep the store staffed with employees. Amazon, with lower overhead costs, could cut the prices of items and appeal to at home shoppers. The holiday season of 2008 proved that the busiest shopping period of the year wasn’t what it used to be for physical retail stores.

Fast forward to 2012 where Best Buy is now going through the same hardships faced by Circuit City. Best Buy has had less physical competition with the closing of other electronic stores, but still can’t compete with Amazon. In 2011, the company outlined a plan for a turnaround:

  • Access to a larger market
  • Expand Best Buy’s online presence – double the company’s internet sales within 3-5 years
  • Scale Best Buy Mobile – Expand to 600 -800 stand alone stores in five years
  • Grow Five Star in China – 400 to 500 stores in five years
  • Maximize pricing and assortment in Best Buy stores
  • Drive returns in Best Buy stores – reduce square footage in physical stores
  • Copy Apple Stores – this seems to be their last ditch effort

In April of this year, Best Buy announced the list of 50 stores it was closing around the country. Shares hit a four year high in the month of April after investors saw a short relief of the company’s turnaround strategy. By closing under performing large stores, the company saved on its sky high rent prices for its large warehouses. And everyone joked about how Best Buy was the showroom for Amazon.com.

The assets of Circuit City were sold to Systemax, who bought the brand for $14 million. Systemax bought the company’s assets to utilize the Circuitcity.com website. The company also owns Tiger Direct and CompUSA. Systemax is a leader in online electronic sales. Could Systemax someday be interested in buying the Best Buy brand and maintaining the company’s online presence?

There are several possible scenarios for Best Buy:

  • Acquisition Target – has been rumored by a former CEO of the company but could be a costly move
  • Acquirer – Best Buy could go after several smaller chains like Radio Shack to try and gain further entry in the stand alone mobile market
  • Bankruptcy – With the beginning of store closings, this could be the start of a long term liquidation process
  • Online Only – Best Buy could close stores and switch to an online only model

Amazon has become one of the biggest retailers in the United States. It appears that only Apple will be able to physically compete with the leading online retailer. Amazon has hurt major retailers like Wal Mart, Barnes and Noble, and now Best Buy. As Amazon expands its inventory base and product offerings, it continues to hurt new physical stores around the country.

And then in a last ditch effort that’s straight out stealing, Best Buy is testing a store concept that copies Apple stores. As the one physical electronics store that has been able to compete with Amazon, perhaps Best Buy is doing the smart thing. In a Best Buy store located in Minnesota, the electronics giant is testing a more open concept for customers. The store also has several locations where customers can pay for their purchases. Borrowing (stealing) a page out of Apple’s book, customers might be able to check out with handheld devices in Best Buy. The company is also focusing on employees being knowledgeable on products and being able to answer questions. Customer service is what sets Apple apart and if Best Buy is successful with this initiative, others could follow suit.

Announced recently, Best Buy is laying off part of its Geek Squad force. The employees who can install and fix a number of electronics products had been one of the areas Best Buy could compete against Amazon. No one from Amazon sets up your computer or comes to your house to install your television. With job cuts coming from one of the company’s significant upgrades, could more store closings or job cuts be far behind?

Almost 20% of investors are betting shares of Best Buy will trade lower. Despite trading down for most of 2012, short interest is 19% in Best Buy shares.

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