By Paul Gagnon, Director, North American TV Research
This morning, Circuit City announced that it failed to find a “White Knight” buyer to keep the business alive as a going concern. As a result, Circuit City will now liquidate its inventory and go out of business for good, pending bankruptcy court approval.
This event is not entirely unexpected with many in the CE industry casting doubt that Circuit City could emerge from Chapter 11 bankruptcy in a bad and deteriorating consumer demand environment. While attending CES, news broke that Circuit City had begun an auction process that paved the way for liquidation should a buyout fall through. Now Circuit City will completely liquidate and 30,000 workers will be looking for employment, a very sad and troubling thing indeed in this economy that continues to shed jobs.
Looking objectively at the implications for the CE industry, I see three primary effects.
- Retail volume will be further concentrated into the remaining big box retailers, such as Best Buy and Walmart. In particular Walmart has been quite successful in the TV space over the last 18 months and is placing pressure on traditional CE retailers with its low-price, low-margin model. It will be difficult for Best Buy to carry-on without making significant changes to their business model, which seems to be taking place. This was one of the downfalls of Circuit City, I believe: slow to change and changing for the worse in most instances. Overall Circuit City’s share will be distributed (eventually) among the remaining retailers, but short term as they liquidate, it could be a painful pricing environment.
- For CE manufacturers, the increased channel power for the remaining big box retailers will make it even more difficult for brands to recover margins and retailers like Walmart are not nearly as effective at selling advanced technologies that manufacturers need to introduce to improve profitability. Circuit City, however poorly they performed, was still an effective balancing force in the industry and provided manufacturers with leverage in negotiations with their other channel partners. I think here, regional A/V specialty retailers stand to benefit with their well trained sales staff and sheltered product strategy, but it could be a scramble over the next 12-18 months as displaced brands vie for the strongest regional retailers. The regional channel may even provide enough shelter for some brands to find a tenable niche to operate from.
- The pain being felt from the recession may significantly change consumer behavior in ways we can’t understand yet. Consumption has been a way of life for over a generation, but consumers are feeling the pressure to pull back in spending, or at least look for ways to save. Discount retail and online retail business models are doing well in this environment. Major CE retailers will have to find a way to offer competitive prices, but retain profitability. Walmart does this with sheer scale and supply chain efficiency, but how can other retailers emulate this? I think we’ll see a very different consumer emerge from the other side of this recession, one that uses the internet and technology to ensure they receive the best possible price and who extensively researches their purchase before even setting foot in a store. This was one area where Circuit City was becoming successful, introducing a web store that integrated very seamlessly with their brick and mortar operations. A good lesson for the remaining retailers.
These are some of the topics that DisplaySearch will address at our upcoming 11th annual US Flat Panel Display Conference in San Diego March 2-4, and we hope you will attend to participate in the discussion.
On a personal note, my wife and I each worked for Circuit City for several years, although that was more than eight years ago. I learned a lot about the CE industry from the consumer perspective in those years, which has proven invaluable to me through my career. We’re both sad to see them go and have had friends who’ve continued to work for Circuit City but who have been slowly leaving, looking for greener pastures. Good luck to those who remain.
