Circuit City Stores, Inc.

views updated

Circuit City Stores, Inc.

founded: 1949 (as wards company)

Contact Information:

headquarters: 9950 mayland dr.
richmond, va 23233 phone: (804)527-4000 fax: (804)527-4194 url: http://www.circuitcity.com

OVERVIEW

Circuit City, a Fortune 500 company, is the nation's largest retailer of major brand-name consumer electronics and appliances and a leading retailer of personal computers and music software. The company operates 512 "Superstores," 50 Circuit City Express (mall-based) stores, and 4 consumer electronics-only stores in the United States. Many Superstores range from 18,500 to 43,300 square feet. Plans for 1998 included an additional 60 Superstores with a total of 80 by the end of the decade. More importantly, the company has a presence in all the top 50 U.S. markets and nearly all the top 100. Still, Circuit City, with a presence in 65 percent of the U.S. market, has the option of expanding. The company plans to expand its store base 13 to 14 percent per year.

Circuit City's core product categories are audio, video, and appliances. Over the years the company has introduced many key products such as the IBM PS/1 computer in 1991, making Circuit City the first superstore to sell it. Circuit City offers exclusive or semi-exclusive brands, unlike its competitor, Best Buy. This allows the company to raise margins and reduce attention to low-profit items. Circuit City is the only nationally franchised Sony XBR and Alpine dealer.

COMPANY FINANCES

In 1998 net earnings were $104 million, compared with 1997's $136 million. Circuit City Stores total sales for the year ending February 28, 1997 increased 16 percent to $8.87 billion from $7.66 billion in the prior fiscal year. In fiscal 1996 total sales were $7.03 billion, a 26-percent increase from 1995's $5.58 billion.

Over the last 11 years, Circuit City has also shown a steady increase in profits. The company's stock ranged from a low of $31.00 to a high of $49.63 over a 52-week period. The annual dividend was $.14 per share and Circuit City's price-earnings ratio was 10.97.

ANALYSTS' OPINIONS

Some critics contended that Circuit City is at a disadvantage by having a commissioned sales force. In response, Circuit City contracted with an independent research firm in 1994 to find out customer opinion of the level of service provided by electronics retailers. The result was that Circuit City's level of service was right where other retailers were—scored with too little attention paid to the customer.

Other critics believe that Circuit City is a "loss-leader" merchant in the music business. They claim that Circuit City and competitor Best Buy attract customers to their stores with low-priced music and then try to sell them higher priced merchandise. Other music retailers fear they could be squeezed out of the market by this tactic and there has been pressure on music manufacturers to stop selling to Circuit City and Best Buy.

On January 12, 1998, D. H. Toung of Argus Research Corp. compared Circuit City to Best Buy, in reference to earnings: "The CC Circuit City shares are trading at 23-times our EPS estimate for fiscal year 1999. We believe that the company's improving earnings and growing market share support this evaluation. Historically, the shares have traded in a P/E range of 10-28 times earnings. We believe the shares can trade into the upper end of this range. With its price having declined 23 percent from a 52-week high (compared with a 7.6 percent decline for the BBY shares Best Buy), we view the CC shares as more attractively valued than the BBY shares."

HISTORY

In 1949 Samuel Wurtzel started a small retail television business in Richmond, Virginia, called Wards Company, which eventually expanded to include small appliances. In the 1960s the focus shifted to selling stereos, as consumer demand dictated. Wards began to acquire several appliance retailers to strengthen its presence in the marketplace and became a public company in 1961.

In 1966 Alan Wurtzel, Samuel's son, joined the business and changed the stores into full-line electronics retailers. Wards opened its first electronics superstore in 1975 and it was an instant success. That same year the company spent half its net worth to start its first electronics superstore in Richmond. The move was such a success that in 1981, Wards moved into the New York market by acquiring Lafayette Radio Electronics. The company then decided to refocus attention on the market in Los Angeles and pulled out of New York. After this experience, Wards began to hit single markets with a large number of stores. This strategy proved to be successful. The company continued to expand and, in 1984 Circuit City was established as the company name.

STRATEGY

Circuit City's marketing strategy emphasizes a broad selection of products, price ranges, and new products. Merchandise pricing and selling strategies vary by market to reflect competitive conditions. The target market is baby boomers, and the company's strategy is to keep prices low and provide exceptional service. The company sells top-line, multi-feature merchandise requiring knowledgeable salespeople. New salespeople go through extensive training and are required to pass a test before they go out on the job. According to Forbes, Circuit City keeps from 20 to 70 sales people per store.

Circuit City attributes its success to the use of key prices and commissioned sales personnel, and the ability to regionalize its stores to fit the target market. Despite low pricing and high overhead, Circuit City is still able to turn a generous profit. This is due to the fact that Circuit City sells top-of-the-line merchandise with high margins. The company prides itself in its efficient operations, and learned that price wars were not the answer to gain market share. "There is no competitive advantage to lowering prices," CEO Richard Sharp commented, "the easiest thing is to match price." Therefore, as part of its competitive strategy, Circuit City provides each customer with a low-price guarantee. In short, the company will beat any legitimate price from a local competitor.

Since 1993 Circuit City has followed a "showroom" format, in which only one model of each product is displayed. The company has an automatic replenishment of inventory, which keeps stock neither too high nor too low. Before entering a new market, Circuit City first conducts a market survey to determine demand. From the results of its findings, the company then chooses an appropriate store format. Also, to make certain the consumers are satisfied with their purchase and service, Circuit City conducts more than 25,000 telephone surveys each month.

The ability to choose its business partners wisely is another Circuit City strong point. In 1993 Circuit City chose to end its partnership with Mitsubishi, claiming that the company's products were "uncompetitive in pricing and technology." Some of the company's partnerships that have proven successful are General Electric, Hewlett-Packard, Hitachi, JVC, NEC, Packard Bell, Panasonic, Sony, Thomson, and Whirlpool. The company also relies on considerable amounts of advertising to stimulate Superstore and electronics-only store sales. Because of their presence in most major metropolitan markets, Circuit City has begun to take advantage of national broadcast and print advertising opportunities.

INFLUENCES

Market trends have influenced Circuit City. When consumer spending dropped in 1990 and the electronics industry was failing to introduce new products, Circuit City earnings decreased. In response, the company decided to expand to malls and opened its first Impulse store (currently called Circuit City Express). Circuit City has also been influenced by its competitors' moves. In 1993 Circuit City installed music departments in its stores as a reaction to Best Buy's success in its sale of music. The strategy was aimed at putting pressure on Best Buy rather than adding to profits.

In 1993 Circuit City expanded to Chicago where Best Buy had the largest market. Also in 1993 Circuit City opened a used car dealership in Richmond, Virginia, called CarMax. CarMax offers a good selection, reasonable prices, and high quality vehicles priced $1,000 under list, including warranties and other enhancements. The idea was to apply power retailing to auto dealing. In 1994 the company opened a second CarMax in Raleigh, North Carolina. Plans for 1997 included opening 8 to 10 more stores and 15 to 20 after that. Circuit City intends to have 80 to 90 CarMax units by 2001.

FAST FACTS: About Circuit City Stores, Inc.

Ownership: Circuit City Stores, Inc. is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: CC

Officers: Richard L. Sharp, Chmn. & CEO, 50, 1997 base salary $890,488; Alan W. McCollough, Pres. & COO, 47, 1997 base salary $466,165; Richard S. Birnbaum, Exec. VP Operations, 44, 1997 base salary $589,450; Michael T. Chalifoux, Sr. VP & CFO & Corporate Secretary, 50, 1997 base salary $475,193

Employees: 42,312

Chief Competitors: Circuit City's competitors include other full-service retailers, self-service retailers, general merchandise retailers, and local independent operators. Over the years the company's competition has shifted to include more self-service retailers, who offer a more limited product selection but at highly competitive prices. Some primary competitors include: Best Buy; CompUSA; Wal-Mart; Sears; Service Merchandise; The Wiz Inc.; Kmart; Office Depot; Montgomery Ward; Costco Companies; Sun Television and Appliances; Tops Appliance City; Tandy Corporation; and Media Play.

Expansion to the Northwest started in 1994 with Circuit City opening its first stores in Portland, Oregon. In 1995 Circuit City opened stores in Connecticut, Denver, Buffalo, Rochester, and Salt Lake City. In 1996 the company entered two new markets, Pittsburgh and Detroit, expanding more high-price items like personal computers and home theater systems. Plans for 1997 included opening stores in New York City.

CURRENT TRENDS

Circuit City has responded to trends successfully. In 1996 the company downsized, opening smaller stores in response to a lapse in sales. The smaller stores cut costs since they were less expensive to operate. In response to an increase in appliance sales, Circuit City installed an on-line system providing approximately half its stores access to GE and Amana product specifications and also enabling them to manage special orders. By 1997 approximately 17 percent of Circuit City's sales came from major appliances.

Circuit City predicts that sales will reach $104.3 billion by the year 2000. There are plans for rapid expansion into new markets and increases in store size. Higher productivity will also be key to reaching this goal. Circuit City's entry into the New York market could not have come at a more opportune time, as Nobody Beats the Wiz, which had been the largest electronics retailer in this region, closed 17 of its 53 New York-area stores. The Wiz filed Chapter 11 and was subsequently purchased by Cablevision Systems.

In fiscal 1998 Circuit City expects to open approximately 60 Superstores, replace 10 to 15 stores, and add Circuit City Express stores. New market entries will comprise 35 to 40 of the new Superstores, including approximately 15 in the New York City market and entries into Indianapolis, Indiana; Dayton and Columbus, Ohio; and many smaller markets. According to CEO Richard Sharp, "Circuit City's goal is to maximize profitability in each market it serves by capturing large market shares that produce high sales volumes across a broad merchandise mix."

PRODUCTS

Circuit City sells video equipment including televisions, digital satellite systems, video cassette recorders, and camcorders; audio equipment including home stereo systems, compact disk players, tape recorders, and tape players; mobile electronics including car stereo systems and security systems; home office products including personal computers, peripheral equipment, and facsimile machines; other consumer electronics products including cellular phones, telephones, and portable audio and video products; entertainment software; and major appliances including washers, dryers, refrigerators, microwave ovens, and ranges.

Circuit City is reluctant to invest in too many computer software titles because they become outdated so quickly. In 1996 Circuit City expanded more high-price items, like personal computers, which accounted for one-fourth of overall sales in 1997, and home theater systems. As a result, the Circuit City brand grew. The company believes that software will soon be distributed electronically instead of through retail channels.

CHRONOLOGY: Key Dates for Circuit City Stores, Inc.

1949:: Samuel Wurtzel starts a small television retail business called Wards
1960:: Wards expands into licensed television departments with larger mass merchandisers around the country
1961:: Wards offers stock to the public selling 110,000 shares
1970:: Samuel Wurtzel steps down as president and Alan Wurtzel, Samuel's son, takes over as president
1977:: Wards becomes Circuit City when the stores expanded into full-service electronics stores
1987:: Sales reach $1 billion for the first time
1993:: Circuit City begins to sell used cars under the name CarMax
1998:: Digital Video Express and Circuit City join together to develop a new format of DVD

Future products include Digital Video Discs (DVD) that are the same size as audio disks and provide excellent quality and sound for home theater first-run films. Digital Video Express (Divx) has joined with Circuit City to create an enhancement of the current digital video disc, or DVD, technology and will compete directly with video rental and pay-per-view. This new technology could cause consumers to wonder whether the DVD players without the Divx enhancement will quickly become obsolete. Even though you can view DVD disks and Divx disks on the Divx players, Divx disks will not work on standard DVD players. Circuit City has invested about $100 million in the two-thirds owned partnership with Digital Video Express and plans to launch the product by mid-1998. However, much controversy is surfacing with the launch of this new format of the current DVD standard. Some analysts believe this gives consumers a choice. When all is considered, Discount Store News believes it will "ultimately depend on the consumer" whether Divx succeeds in the marketplace. Best Buy will not be supporting Divx.

CORPORATE CITIZENSHIP

According to Morgan Stewart, spokesperson for Circuit City, the company operates the Circuit City Foundation, which contributes generously to various charitable organizations. In addition, the company's associates volunteer for different causes. Top management does not include their corporate citizenship in their annual report, press releases, etc. Morgan Stewart went on to say that the company donates because "it is the right thing to do, and not for publicity."

GLOBAL PRESENCE

Circuit City has more than 500 stores in the United States, with the largest number being in California. Originally started in Virginia, Circuit City developed stores in the South and West, and were very successful. In 1991 the company entered the Texas market and opened superstores in Dallas, Houston, and Austin. Texas is where the stores first offered electronic office products such as computers, copiers, fax machines, and software. With its entry into New York, Circuit City now operates in nearly all the top 50 markets. Circuit City has considerable expansion opportunities and plans to operate 800 stores by 2001. Circuit City operates exclusively in the United States, and there is no indication that the company will go international.

EMPLOYMENT

Circuit City recruits through college campuses, trade journals, and newspaper advertising, and new employees require five weeks of training. Circuit City promotes from within and conducts routine evaluations. Employees may attend seminars and workshops to improve skills. The company operates an internal training and development program to help employees in their career direction. They also offer summer internships to students. Due to rapid expansion, Circuit City is always seeking employees.

SOURCES OF INFORMATION

Bibliography

andreoli, teresa. "new markets, service, ads lead circuit's growth charge." discount store news, 3 july 1995.

"best buy and circuit sales rise." television digest, 9 march 1998.

"best buy, circuit city downsize." television digest, 23 september 1996.

christman, ed. "best buy, circuit city a potent combo; 2 chains change entertainment retailing." billboard, 17 june 1995.

"circuit city fires back at critics." discount storenews, 19 september 1994.

"circuit city projects $15b by year 2000." discount store news, 4 december 1995.

"circuit city stirs dvd brouhaha: will its new format jeopardize holiday sales?" discount store news, 6 october 1997.

"circuit city stores inc." the corporate directory of u.s. public companies. san mateo, ca: walker's, 1998.

"circuit city stores, inc." hoover's handbook of american business 1996. austin, tx: the reference press, 1995.

circuit city stores, inc. annual report. richmond, va: circuit city stores, inc., 1997.

dun & bradstreet information services, north america. the career guide 1997: dun's employment opportunities directory. bethlehem, pa: dun & bradstreet, inc., 1996.

haran, leah. "best buy, circuit city raising the stakes in electronics warfare." advertising age, 27 september 1995.

moukheiber, zina. "retailing: annual report on american industry." forbes, 1 january 1996.

"power retailers move northwest." television digest, 14 november 1994.

"retailers aim to avert price war." hfd-the weekly home furnishings newspaper, 22 november 1993.

rubinstein, ed. "sharp touts potential of carmax." discount store news, 4 november 1996.

stewart, morgan. circuit city telephone conversation, 27 may 1998.

toung, d.h. "circuit city/best buy-company report." argus research corp., 12 january 1998.

For an annual report:

on the internet at: http://www.circuitcity.comor write: office of the corporate secretary, circuit city stores, inc., 9950 maryland dr., richmond, va 23233-1464