|This company has recently filed for protection under Chapter 11 of the U.S. Bankruptcy Code.|
NOTE: On January 16, 2009 Circuit City announced that it would liquidate the business
Circuit City (OTC: CCTYQ) is a big-box consumer electronics (CE) retailer. It is the third largest CE retailer behind Best Buy and Wal-Mart, generating over $11.7 billion in sales during the 2008 fiscal year. The company also offers repair and installation services under the brand 'Firedog,' and now emphasizes their growing phone and online store. Circuit City has an international presence in Canada, following the 2004 purchasing of InterTAN stores, which were re-branded as The Source by Circuit City.
Circuit City management initiated a turnaround process in 2003, generating a profit from 2004 to 2007. However, more recently, in fiscal 2008, Circuit City once again found itself under serious pressure. The company's sales fell 5.5% to $11.7 billion and lost $321 million on net for FY08. During the same year sales at Circuit City's main rival, Best Buy, grew 11.4% while posting net income of $1.4 billion. A significant part of Circuit City's recent troubles have been as a result of lost sales to Best Buy, but profits have also fallen as a result of a decrease in warranty sales and an increase in sales of low-margin PCs and falling margins on flat-panel televisions.
Circuit City is also under increasing pressure from discount retailers like Wal-Mart, Target, and Costco, who are able to leverage their pricing advantage to capture increasing market share. These companies are able to capitalize on the rapid product cycles that characterize the CE market, where new innovations quickly force down prices of previous technology, lowering prices and sales margins.
In April of 2008 Blockbuster (BBI) announced an unsolicited bid (of about $1 billion in cash, approximately $6 to $8 a share) to acquire Circuit City. However Circuit City's management initially questioned the validity of the offer and declined to allow the potential suitor to examine company's records for a few weeks before giving in to Blockbuster's request. After reviewing the electronics retailer's financial condition Blockbuster announced on July 3, 2008 that it would no longer be pursuing an acquisition of Circuit City. Despite Blockbuster's pull out, Circuit City is continuing to look for a buyer, as the company's struggle with profitability and sales continued in the first half of fiscal 2009; Circuit City posted a net loss of $164 million for the quarter and a further loss of $239 million in the second quarter, as sales fell 8.5% On November 10, 2008 Circuit City filed for bankruptcy protection, due to increasing pressure from the global economic crisis, with falling vendor and consumer confidence. .
Circuit City does business in five major categories:
Consumer electronics retailers attempt to differentiate themselves from discount or online retailers through service offerings—most prominently, extended warranties, installation, and repair. Circuit City offers the latter two through their in-house brand firedog, which was launched in October 2006 and competes directly with Best Buy's Geek Squad and their Magnolia Hi-Fi home theater installation offerings. Through the first three quarters of fiscal 2008, warranty and service revenue accounted for approximately 7.6% of net sales company-wide.
Circuit City has not released detailed margin information regarding their extended warranty program, but it can be assumed that as a high premium, low loss insurance, it represents considerable profit for the company. Margins on installation and repair services are likely not as high, but still represent a considerable value add to a sale. Installation has also been shown to reduce return rates versus self-install purchases.
Despite the launch of firedog, and an increased focus on customer service as a differentiation from discount retailers, Circuit City's customer satisfaction ratings are poor, trailing Best Buy and Costco considerably, and lagging even Wal-Mart. Circuit City's satisfaction rating has steadily declined since 2003, dropping 5.5% overall.
The company's continuing viability as an independent entitiy remains open to question as does its attractiveness to a potential acquirer
News that Blockbuster (BBI) has made an unsolicited bid to acquire Circuit City broke on April 13, 2008, initially offering over $1 billion for Circuit City, valuing the company between $6 and $8 a share. However on July 3, 2008 Blockbuster (BBI) announced that it was no longer interested in acquiring Circuit City. Despite Blockbuster rescinding its bid for the company, Circuit City has hired Goldman Sachs Group to assist the retailer explore "strategic alternatives" to the company's current state, most of which involve being acquired by another company
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The consumer electronics market is propelled by innovation, which creates new product cycles and pushes current cycles forward more quickly than other retail markets. This creates demand through the introduction of new technology, as well as through driving down prices of the previous generation of technology. CE retailers like Circuit City and its main competitors are extremely dependent on product cycles; during the strong cycles created by the introduction of the VCR, the CD player, and the DVD player, they outperformed the vast majority of retailers in all markets. However, as demand for these products slows, sales growth for CE retailers slows as well, unless these cycles are replaced or refreshed by new innovations.
Rapid product cycles also leave CE retailers vulnerable to rapid price drops, which cut into profit margins. As these products become commoditized, discount and online retailers, such as Wal-Mart and Amazon.com, can take market share. Product cycles of particular import to Circuity City currently include the falling prices and margins on PCs as well as decreasing margins on HDTVs.
Seasonal cycles also affect product cycles. The holiday season in particular can have an unpredictable effect, as both sales and price competition tends to increase. As an example, the holiday season of 2006 saw prices on flat panel TVs falling much faster than expected as vendors became locked in a price war. Video game software is also seasonally dependent, as publishers often time major releases to coincide with traditionally strong sales periods, such as the holidays or the summer, as well as positioning big-name titles to compete against the prominent releases of their rivals.
CE sales have been strong over the last three years due to the strong market for cellular phones, LCD and plasma flat panel televisions, portable MP3 players, and digital cameras. These five product cycles accounted for 26% of total CE sales and 90% of total incremental sales growth in 2005. Flat panel televisions, in particular, are extremely important to success in the current CE market, as demonstrated by the crowding-out effect their popularity is generating, and Circuit City has identified digital television sales as a priority.
Flat panel TVs are of particular importance to CE retailers because of warranty and service opportunities. Recent surveys have demonstrated that CE customers are considerably more likely to purchase warranties or installation for flat panel TVs than they are for most other electronics. Only 24% of customers indicated they "usually" purchased an extended warranty for consumer electronics; in contrast, 58% responded that they were "somewhat likely" or "very likely" to purchase a warranty for a flat panel TV costing $1000 or more, with 42% responding similarly for flat panel TVs less than $1000. Service offerings helped Circuit City return to profitability between 2004 and 2007, but warranty and service sales have dropped so far in fiscal 2008 as customers seem to be choosing Best Buy over Circuit City.
Other product cycles of importance are video game hardware, software and accessories; of particular import are the newest consoles from Nintendo, the Wii, and Sony, the PlayStation3. However, current production shortages on the Nintendo Wii could limit the positive impact of the console's popularity during the 2007 holiday shopping season. On Sony's end, the company recently cut prices on its PlayStation3 which could help spur sales of the console which often lead to increased sale on higher margin software and accessories.
As the third largest consumer electronics retailer in the United States, Circuit City will likely take a large portion of the $1 Billion in expected revenue from converter box sales around the time of the Analog to Digital Television Transition date of February 17, 2009.
Circuit City's most direct competition is Best Buy (BBY), which currently has a considerable lead in market share, customer satisfaction, and in efficiency of operations, as demonstrated by its higher sales per store and per square foot. Circuit City also tends to lag Best Buy in expansion and development; for example, the firedog service comes years after Best Buy acquired Geek Squad and Magnolia. So far in fiscal 2008 Circuit City has fallen even farther behind Best Buy. Circuit City has operated at a $325 million loss for the first three quarters of FY08 due to falling sales and decreases in profitability, while Best Buy has experienced a 17% increase in revenue and an 18% increase in operating profit. Apart from Best Buy, other CE retailers, such as Radioshack (RSH) and CompUSA, hold considerably less market share, and are currently undergoing restructuring processes of their own.
Circuit City also faces growing competition from large-scale discount retailers, such as Costco, Target, and particularly Wal-Mart, which has the second-largest presence in the CE market. The company also competes with specialty retailers, like Gamestop (GME) in the video game market. Online discounters like Amazon are also gaining mindshare as a destination for consumer electronics.
Circuit City faces some pressure from top-tier vendors, who can control prices, limit release of certain product, such as video game consoles, and in some cases (for example, Sony and Apple) have established their own retail presence). Dell, as a major player in computer sales, can also be considered as a competitor.