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Could Circuit City Be Preparing for Sale?

1 Mar, 2004 By: Holly J. Wagner

Circuit City is making business changes that could help the chain return to profits, but some analysts believe it's preparing for a sale.

A recent move to eliminate a “poison pill” clause that would let shareholders prevent a sale or takeover takes effect in May 2005. Some analysts think it will be difficult to find potential suitors among the competition in a mature market, but others believe that firms like SunComm Capital, which bought Musicland from Best Buy, or even Sears, which has sought to get a better foothold in home electronics, could court 600-store Circuit City.

Competitor Best Buy is the least likely suitor, one analyst said, because by Circuit City executives' own admission, the big-box behemoth is already in superior locations in most Circuit City markets. That was backed up by comments from Circuit City EVP and COO John Froman at an investment conference last week.

“Our chief competitor has come into all our markets now, opened lots of stores and outpositioned us with better real estate,” Froman said.

Along with identifying stores that must be moved within markets, the chain identified 100 new markets in the United States that executives believe can support new superstores and is pursuing sites in those markets. The chain's remerchandising program, which has proved costly, aims to get product out of warehouses and onto the sales floors and to stock potential add-ons right beside the primary product, such as putting cables next to DVD players.

“As product becomes cheaper, more prevalent and more available over the Internet, customers become more familiar with it, and we also see a migration to more of a take-with environment where customers are able to help themselves, and less of an environment for assisted sales, which is where we have traditionally been strong,” Froman said.

But efforts may have backfired with consumers. “The problems you have with Circuit City is, it's a company that keeps modifying its store layouts, but in ways that are less and less exciting to its customers,” one observer noted.

Meanwhile, the chain is trying to stop the drain of sales to competitors like Best Buy and Internet retailers. “You go in a store, pay the high prices, and the dorks that work there don't know a thing about what they're selling,” wrote one Internet poster.

That could be a challenge for the chain going forward. Having shed 3,900 commissioned sales representatives in favor of 2,100 hourly sales reps, outsourced call center work to India late last year and closed 19 underperforming stores in February, Circuit City's revitalization plan is focused on better real estate and on upselling.

“You cannot survive in our industry on selling a DVD player without the cables and the accessories and the appropriate additional hardware that goes with it,” Froman said.

Among other efforts to turn the chain around, Circuit City put its $220 million advertising and marketing account, which has been in the hands of ad firm Foote, Cone and Belding for the last three years, up for review Wednesday, according to published reports.

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