Circuit City Files for Bankruptcy
With the chain's future in doubt and the economy in tatters, Best Buy,
Wal-Mart, and online retailers look to pick up share in electronics
By Matthew
Boyle and Aili McConnon
Circuit City once made a living by putting smaller gadget retailers out of
business. Now the nation's second-largest consumer electronics chain has joined
its dearly departed brethren by filing for Chapter 11 bankruptcy.
The beleaguered Richmond (Va.) retailer said on Monday, Nov. 10, it plans to
stay in business while interim CEO James
Marcum works on a restructuring with turnaround specialists at FTI
Consulting (FCN).
But successful Chapter 11 reorganizations in this space are rare, analysts say.
Generally, consumers aren't likely to buy a gift card or an extended warranty
from a store that's gone bankrupt. Examples abound of retailers that have gone
into reorganization, emerged, then gone back to court. For example, Tweeter,
another struggling electronics chain, emerged from Chapter 11 last year but just
filed again and now plans to shut its 94 remaining stores.
Circuit City (CC)
has lost more than $5 billion in stock market value over the past two years, and
a bankruptcy
filing has been anticipated for months (BusinessWeek.com, 7/2/08). Its
business was gradually stolen away by discounters such as Wal-Mart (WMT),
specialty chain Best Buy (BBY),
and online sites like Amazon.com (AMZN)
and Buy.com.
In July, a proposed $1 billion acquisition by Blockbuster (BBI)
fell apart. CEO Philip Schoonover quit in September under pressure from activist
shareholder Mark Wattles.
Wal-Mart has
vastly stepped up its commitment to consumer electronics over the past five
years. Last year, Wal-Mart generated $17 billion in consumer electronics sales,
while Best Buy did $28 billion and Circuit City did just under $11 billion,
according to Pali
Capital. Wal-Mart's market share has surged thanks to its low-price
mantra—just this past weekend, the retailer unveiled discounts on hundreds of
items, including Blu-ray DVD players marked down to under $200.
Good News for Best Buy
Should Circuit City ultimately close all of its 1,400 stores (it already
announced plans to close 155 last week), that would leave approximately $10.5
billion in electronics goods up for grabs, according to Credit Suisse (CS)
analyst Gary Balter. While Wal-Mart, Target, and online retailers have been
gaining market share, some retail experts still see a role for a strong
specialty electronics chain. They say Best Buy has appeal for consumers looking
for knowledgeable buying advice as well as installation and service from the
retailer's Geek Squad division.
Best Buy has locations in 85% of Circuit City's markets, so it is
well-positioned to capitalize. "We believe Best Buy should take a
disproportionate share of that business," Balter wrote in a note to clients on
Monday. "This is a major positive for Best Buy."
Lately, Best Buy has made a concerted effort to woo women with in-store
personal shopping assistants, to differentiate itself further from the mass
merchandisers. "The assistance you will get at Best Buy, you just can't get it
at Wal-Mart," says Pali Capital Managing Director Stacey Widlitz.
The news is not so good for consumer electronics suppliers. Among Circuit
City's largest unsecured creditors are Hewlett-Packard (HPQ),
Samsung
Electronics, and Sony (SNE).
With one fewer customer, these firms now have reduced leverage in dealing with
huge retailers, says Howard Davidowitz, founder of retail consultancy and
investment bank Davidowitz
& Associates in New York. "If you are a supplier, this is really bad
news," he says.
Holiday Blues
That's nothing new, though; consolidation has vastly reduced the number of
merchants in this space for some time now, tilting the balance of power from
manufacturers to retailers. (Some manufacturers, like Apple (AAPL),
have even chosen to become retailers.) Last year, the top five consumer
electronics retailers accounted for 55% of sales, compared with 42% 10 years
ago, according to economist Shawn DuBravac of the Consumer Electronics Assn.
Circuit City's woes add to what was already shaping up to be a
decidedly non-jolly holiday season (BusinessWeek, 11/6/08).
Retailers and manufacturers alike are bracing for their worst fourth quarter in
years, as cash-strapped and credit-crunched shoppers eschew big-ticket items
like plasma TVs. The Consumer Electronics Assn. expects fourth-quarter sector
revenue to rise 3.5%, a steep drop-off from the 12.5% gain posted in last year's
fourth quarter.
"With consumers so far underwater, that's a problem if you're selling
discretionary merchandise," Davidowitz says.
Boyle is
deputy Corporations editor for BusinessWeek. McConnon is a
staff editor for BusinessWeek in New York.