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Analysts: Best Buy, Wal-Mart Winners in Circuit City Shuttering

19 Jan, 2009 By: Erik Gruenwedel

Circuit City

Despite disparate customer bases, Best Buy Co. and Wal-Mart Stores each is viewed the winner following last week’s cease of operations by Circuit City Stores, say analysts.

Richmond, Va.-based Circuit City Jan. 16 threw in the towel after 60 years in business, resulting in the liquidation of 567 stores in the United States and unemployment for 34,000 workers.

The same can’t be said for the consumer, who, in the short term, likely will be greeted by minor discounts (about 10% to 20%) rather than the anticipated deep discounts on myriad of consumer electronics.

Indeed liquidators such as Great American Group, one of four companies hired to guarantee Circuit City at least a 70.5% return of its wholesale inventory cost, reportedly slapped discounts on suggested retail prices instead of current market prices.

Great American denied jacking up prices for liquidation.

Considered the Grim Reaper of retail, Great American president Andy Gumaer said his company attempts to balance a well-known deceased business' public farewell while at the same time trying to recoup the millions it paid for the assets.

“Some people get angry with the liquidator, and the truth is that we weren't the ones managing that company,” Gumaer said. “We were invited to bid, and the creditors knew we were bidding solely for the purpose of liquidation. Had all those customers been in there before our sale, [Circuit City] wouldn't be in the position they're in.”

With partners, Great American helped liquidate $1.8 billion in inventory for bankrupt Montgomery Ward, sold more than $2 billion in inventory for Kmart, and liquidated Tower Records in 2006.

“There's no question that in the last 10 years, any high-profile bankruptcy … we’ve been involved with,” Gumaer said.

Stacey Widlitz, analyst with Pali Capital in New York, believes Circuit City’s liquidation is a mixed blessing for Best Buy. She said the chain’s liquidation over the next three to six months would provide promotional and margin pressure for Minneapolis-based Best Buy.

“In the long run, this is a market-share game,” Widlitz said. “And simply not having Circuit around will allow Best Buy to gain share.”

She said Wal-Mart would likely benefit even more from the demise of Circuit City, due to third-party research that found 72% of Circuit City shoppers also frequent Wal-Mart, compared to 55% at Best Buy.

Widlitz said the discounters such as Wal-Mart, Target and Costco have been gaining consumer electronics market share at a much more rapid pace than Best Buy, including introducing more name-brand televisions over the past year.

“While Best Buy domestic comps were down 6.5% in December, nearly all the major discounters … called out CE products as being a bright spot for holiday,” she said.

Other analysts countered that Wal-Mart attracts a different audience than Best Buy, but any reduction of stores would help both chains.

“You have more and more companies either going out of business, as in the case of Circuit City, or concluding that there's no sign of an upturn any time soon,” Nigel Gault, chief U.S. economist at IHS Global Insight, told the Los Angeles Times.

Tom Arnold, professor of finance at the University of Richmond and longtime Circuit City observer, said Wal-Mart, e-commerce and other discounters aren’t burdened with Best Buy’s vaunted level of customer service and/or unique product offerings.  

“In a lean economy, price tends to matter more than premium service/product, which is not in Best Buy’s favor,” Arnold said.   

He said the chain’s halting of expansion to conserve cash might allow it to survive the recession without closing stores.

“A prolonged recession, however, may even see Best Buy close some stores to match decreased consumer demand,” Arnold said.

Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles, said any CE retailer, big and small, would benefit from Circuit City’s demise.

“Anybody that sells consumer electronics should benefit from one less big competitor,” Woo said. “You'll see continued struggles from smaller players [going out of business] and Best Buy enduring to compete aggressively with the mass merchants, most of whom also will be around a while.”

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