Circuit City was the largest consumer electronics retail chain in the US in the 1990s and 2000s. The stock was a super star performer and the company even made it into Jim Collin’s book “Good to Great” as one of the best companies in the US.
In 2009, Circuit City filed bankruptcy. The book now describes the full story from the founding in the 1960s to the fall in 2009. The book is written by Alan Wurtzel, the son of the founder Sam Wurtzel, who also served 13 years as CEO from 1973 to 1986 and as a board member for couple of more years until 2001.
So clearly his story about the company is not as neutral as a “normal” author might have written it but he states that at the very beginning of the book.
Pretty early in corporate life, around the 1970s, Circuit City (then called Wards) had already an existential crisis as their previous business model (mostly selling to “department like” stores in larger stores) stopped to work. They then completely changed strategy. In the 1970s to the 1990s they perfectly rode the wave of consumer electronics with their “super stores” which relied on sales via dedicated sales professionals working on a commission.
Then, starting in the mid 2000s, Circuit City lost track, especially against Best Buy and had finally to file for bankruptcy in 2009. Funnily enough, Best Buy had its own crises but somehow recovered.
Wurtzel is very critical on his successors, especially that they never really used the cashflow for improving stores but rather did share buy backs and acquisitions.
The unique aspect of the book in my opinion is that the author very much focuses on strategic planning and the interaction between Management and the Board. He describes in very good detail what kind of strategical mistakes were made by the management and how the board failed in challenging and correcting the flawed strategy. There was a lot to learn for me and I think it would be interesting for people who regularly speak to management. Just asking how they handle strategy might get some surprising results. Wurtzel for instance is of the opinion that an annual strategy process tends to become “mechanical” and inefficient and that strategy should only updated on a 2 year basis.
The book is also a reminder that retail is a very difficult industry. Retailers can grow very quickly and profitable, but if something changes profoundly in the competitive landscape, turning around businesses becomes difficult. In Circuit City’s case, the larger self-service Best Buy stores seem to have been the nail in the coffin. Circuit City never got up to really take a big investment and completely remodel the stores. Instead, in order to keep investor happy, they used the cash to buy back stocks. Wurtzel correctly points out that stock buy-backs make only sense if you have “truly” free cash flow. If you just avoid or shift necessary Capex, then buying back shares is not a good idea.
Circuit City also had a very strong corporate culture, especially with regard to its sales personal. The problem with that culture was that it also seemed to prevent the shift to a non-commission, self-service structure like Best Buy. So yes, strong culture is a competitive advantage, unless it prevents a necessary change in the business model. Interestingly, Circuit City started a used-car dealership called CarMax based on the same prinicpals which was spun off from Circuit City and still is doing well (14 bn USD market cap).
The Circuit City story reminds me a little bit about Tesco. Tesco also tinkered around little by little in its stores in the UK while they didn’t fully realize the threat of the discounters. Let’s wait and see how they will do.
In any case, I can highly recommend this book to anyone who is interested in the retail industry and/or company strategy.
P.S.: There is even a documentary on the rise and fall of Circuit City called “The tale of two cities”. Some clips of that movie can be viewed on Youtube here.
value and opportunity 