Size counts in CE market; superstores short Circuit City's future - consumer electronics

Discount Store News, March 21, 1994 by Pete Hisey

Superstores Short Circuit City's Future

Are the wheels coming off at Circuit City? Despite a terrific February (comp store sales were up 18%, the highest montly figure in years), the CE juggernaut has suffered a wholesale exodus of its store managers and regionals, has failed completely to deliver the price war it promised at the winter Consumer Electroncis Show, and continues to struggle with its computer products and music software businesses.

Blame it on the box. Circuit's 30,000-sq.-ft. superstore, which debuted in the mid-'80s, now seems almost quaint compared to rivals like Best Buy's 50,000-sq.-ft. megastore and The Incredible Universe's 185,000-sq.-ft. giga-store. Now, with its field organization depleted, Circuit plans its most aggressive expansion ever, with 60 stores set to debut this year. Despite rumors of a new 58,000-sq.-ft. unit, most of the stores this year will utilize the same smaller format.

Circuit was also late and half-hearted in its attention to computers and music software.

Its 8,000 music skus pale beside those at Best Buy and the Universe, each of which stock upwards of 60,000--and Circuit stocks the 8,000 only in stores that directly compete with its larger rivals. Most stores still carry none, and those that do generally offer about 2,000 skus, which isn't enough to scare even a Kmart or Wal-Mart.

Despite promising to turn its attention to computers, the category still accounts for only about 5% of sales, compared to nearly 34% at the Best Buy at The Incredible Universe, and Circuit's software selection, at about 50 to 80 titles, is a drop in the ocean compared to its rivals, who stock 1,000 or more.

Meanwhile, the regionals that Circuit walked over as it became the nation's first truly national CE chain have been pruned of their weaker elements (Highland, The Federated) and are firing back. The Good Guys has drubbed Circuit in California, and will soon oppose it in the Pacific Northwest. BrandsMart USA in southern Florida and Lechmere in the Northeast have also more than held their own.

Coupled with Best Buy's national expansion, Circuit City by year-end will face significant competition at about 50% of its store locations, up from about 25% a year ago, according to analyst David Childe of Johnson Rice & Co. As Best Buy and Circuit continue to attack each other's markets, that figure will rise to the 85% level.

Best Buy's new DC in Virginia, Circuit City's backyard, gives the chain unlimited access to the entire eastern United States, where Circuit City has operated essentially in splendid isolation.

Omniously, Best Buy has won nearly every head-to-head competition in which the two have engaged. Best Buy powered into Atlanta, a Circuit stronghold, last year, and the result appears to be a clear win for the Minneapolis retailer. Circuit's similar invasion of Chicago last fall, a market which Best Buy had entered only a year before, was far less successful; Johnson Rice's Childe reports that Best Buy's comparable store sales suffered at first, but quickly bounced back.

"Given an entrance into the market of the magnitude of Circuit City's, one would have thought that Best Buy's comps in Chicago would have stayed flat-to-down for more than three months, Childe noted.

Best Buy has evidently prevailed in other competitive markets as well, including Dallas, Houston, San Antonio, and St. Louis, where comp store figures, despite Circuit's entrenchment, have been stronger than the chainwide average. Sales in new stores, with no comparable history, have nevertheless been "as good as or better than established stores," Best Buy vp Wade Fenn said.

At the same time, the price advantage Circuit has historically enjoyed is eroding. The company, along with Sears, reportedly receives a discount of roughly 2% from some major suppliers compared to the buying price for Best Buy, but vendors have rethought that "most famous nation" status, irritated by Circuit's ongoing price war threats and violation of minimum advertised price agreements. By 1995, Circuit's price advantage should have evaporated, giving Best Buy a significant 1 percentage point boost in its net margin, from 2.6% to 3.6%, an increase of about 38% in profitability.

There's more. Circuit has relied on commissioned sales help even as its competitors, particularly Best Buy, moved to more efficient and customer-friendly salaried help, with a better mix of females in the workforce (important in appealing to the female shopper, who likes the Circuit City model almost as much as used car lots). Best Buy's Fenn noted that the percentage of females in the work force has risen from 10% in the chain's Concept I stores of late '80s to 40% to 45% today. The non-commissioned sales force, by concentrating on product knowledge and customer service, is encouraged to develop management skills and is therefore far more promotable, giving Best Buy a far deeper middle management bench to support rapid expansion.

And, Circuit City relies heavily on the sale of extended warranties, which account for about 75% of the chain's operating profits (most of the rest appears to come from its in-house credit card). Customers are getting more and more skeptical of these plans, which rarely if ever pay off (nearly any consymer electronics product has a minimum life of five years, well beyond the term of most warranties, and those that malfunction generally fail within the first year, under the manufacturer's warranty). In short, three-quarters of Circuit City's profitability is in peril.