Circuit City adjusts to changes - CE & Entertainment

DSN Retailing Today, April 21, 2003

When Circuit City announced two months ago that it was eliminating its commissioned pay structure there were a lot of unanswered questions, not the least of which was just how the company had prepared to make the transition and whether or not it could really not suffer sales declines from disruptions at stores. With the program well under way, Jeff Wells, senior vp of human resources. and loss prevention, addressed these changes more in depth with DSN Retailing Today.

Circuit City has developed a pattern of making big changes rather abruptly. Its announcement two years ago to stop selling appliances in stores seemed to come out of the blue and these new initiatives and the accompanying job cuts were delivered in much the same manner. A press release was issued the evening before the announcements and stores were closed that morning to explain and implement the changes immediately, while executives spoke to analysts.

But according to Wells, Circuit City actually began studying consumer behavior and how it might relate to the commissioned pay structure in November 2002.

"The more research we did, the more it became evident that the consumer really needed different things than our commissioned sales system was able to provide," he said. "The customer wanted to browse and to shop and wanted to have a high quality of help when they felt they needed it."

In fact, the results indicated sales were actually inhibited by a more involved or aggressive associate-one who is quick to get the customer what he or she needs, complete the sale and move on to the next commissionable transaction. "We found that our browse time was significantly less than other retailers," said Wells. "The customer came in and left very quickly. It became painfully evident to us that if we were really going to deliver the customer service that we wanted to, a dual compensation system was not going to get us there," he said.

One of the immediate misperceptions was that Circuit City would be losing its most knowledgeable or successful employees, but according to Wells, the company retained 70% of its commissioned sales associates by converting them to an hourly rate that was roughly equal to what they were earning annually in commission.

In all, the retailer eliminated 3,900 commissioned sales positions (approximately three per store), but has been hiring 2,100 new associates at an hourly wage for a net reduction of 1,800 store employees. In more than 400 stores, a third manager will be added primarily to assist in customer service, according to the company. Ten service centers have also been closed and the company estimates a cost savings of $130 million per year from converting the pay structure.

But Wells said the salary changes are less about reducing overhead and Circuit City's cost structure and more about increasing same-store sales.

Circuit City has not yet released March sales, but comps were down 10% in February but trending higher than expected as of mid-March, according to Wells. "We expected to have drop-offs in a number of indicators in February," said Wells. "But in March we are way ahead of where we thought we'd be. I think we've fully recovered back to our pre-February level of performance."

Granted world events may affect this trend, but the statement is in line with management's initial claim to analysts: That the pay scale changes and employee reductions would not disrupt stores much past February. A statement received with skepticism by analysts.

"We think the workforce reduction and new compensation plans will reduce service levels and incentives to sell high-ticket products, thereby accelerating the mix shift in favor of commodity products and increasing Circuit City's need for top-line [growth]," wrote JP-Morgan equity analyst Danielle Fox in a research note. "In our view, these changes call into question what now differentiates Circuit City from Best Buy and the discount stores."

"This is not about trying to replicate Best Buy," Wells said. "But a question of finding the right model for the long term. There were a lot of variables that went into that decision."

For example, when the company tested eliminating the longstanding practice of attaching special commissions to certain products, same-store sales increased in the low single digits. "We know there's a huge power in how this affects top-line sales," he said. "We will actually improve our overall sales."

Benefits will also be realized with the addition of more part-time workers. "More part-timers give us the flexibility to schedule during peak times," said Wells. And commissioned staff are paid for the sale, not the hours worked. With largely full-time employees, "it sometimes looked like there was a small army of people in the store," he said.

And as for what will differentiate Circuit City from the competition, "part of the difference still remains our people," he said. "Who will hopefully be more friendly and have the same amount of knowledge."