Circuit City, R.I.P.

Not that folks who read TPMtoday don't already know, but just for the record: Circuit City is closing down. The first thing to do is to offer best wishes to the 30,000 people who will be losing their jobs.

Beyond that, it is time to reflect again on the narrowing of distribution channels. A few years ago, the toy channel consolidated down to only Toys R Us (and Walmart), and now consumer electronics (which lost CompUSA and Tweeter in 2008) consists of Best Buy (and Walmart).

Here's a post from early 2007:

I've often advanced this theory (as have others), which says that we are moving toward a retail landscape in which there will be only two significant outlets in each channel. I've used as examples:

• Best Buy/Circuit City
• Home Depot/Lowe's
• Barnes & Noble/Borders
• Target/Wal-Mart
• Kroger/Super-Valu
• etc.

There are a corollary and a variant to this theory. The Manufacturers’ Corollary holds that there will be only two suppliers in each product category. The logic behind this is that suppliers will have to be large enough to deal with the retail giants, and is supported by the tendency of the retailers to want to improve efficiency by winnowing their supplier base. Supporters of this corollary point to P&G’s acquisition of Gillette. They argue that P&G was already bigger than its competitors, so the acquisition was not intended primarily to strengthen their hand vis-à-vis Unilever, but rather its purpose was to allow them to sit at the table with Wal-Mart as equals.

Which brings up the Wal-Mart Variant to the Two-Per-Channel Theory. It holds that the final two in each channel will be:

• Best Buy/Wal-Mart
• Home Depot/Wal-Mart
• Barnes & Noble/Wal-Mart
• Target/Wal-Mart
• Kroger/Wal-Mart
• etc.

It's certainly beginning to look like the betting should be on the Walmart Variant.

Will Circuit City go Chapter 11 next year?

Twice quotes an analyst who predicts that Circuit City will go into bankruptcy early in 2009:

“We believe a Circuit City bankruptcy has become a question of ‘when’ rather than ‘if,’” Bradley Thomas observed in a research note.

... [The analyst] said the challenging economic environment is accelerating the retailer’s trajectory toward Chapter 11, and will also diminish the likelihood that it can emerge from bankruptcy.

This is consistent with a Forbes report from a few weeks ago. After noting that CC had reported a bigger-than-expected loss and that sales were off 10%, they suggested that the Christmas season might be CC's finale if Wal-Mart decides to go in for deep discounting:

As the holiday season approaches, all industry eyes will be on Wal-Mart to see how low it sets the price bar for flat screens and other electronic toys. If the discount giant makes a Black Friday splash by advertising big screen television for as low as $599, which ARG President Britt Beemer thinks is possible, it will be a long Christmas season for Best Buy, and, potentially, a fatal one for Circuit City.

This suggests, as we've speculated before, that consumer electronics might be another category that falls victim to the Wal-Mart Corollary to the Two-Per-Channel Theory. This holds that, when Wal-Mart decides to dominate a particular category, the two survivors in that channel will be Wal-Mart and somebody else. The leading example of this has been toys, where Wal-Mart took over the top spot, leaving room for only Toys R Us to survive, while FAO Schwartz and Kaybee shrank to the role of niche players.

In consumer electronics, we've recently seen the disappearance of CompUSA and the severe downsizing of Tweeters.

Blockbuster withdraws offer for Circuit City

Blockbuster has decided not to make an offer for Circuit City:

The move comes less than two months after Circuit City reluctantly agreed to open its books to the movie-rental chain. In a statement, Blockbuster said that unfavorable market conditions and a closer review of the deal's finances led it to withdraw the offer.

The offer was for $6-$8 per share. The stock price dropped from $2.55 to $2.32 after Blockbuster withdrew.

Other reports, though, indicate that Blockbuster may come back to make another offer:

Blockbuster Inc, which abandoned its offer to buy Circuit City Stores Inc this week, may try to acquire the electronics retailer later, the New York Post said Thursday citing insiders.

One source told the paper that Blockbuster "verified the long-term benefits of a deal," and added that a there was a "real opportunity" to cut costs in combining the two chains' operations.

Presumably the new offer would be lower. Or it might even be a case of buying CC out of bankruptcy:

Will Circuit City join the long list of electronics retailers, like Tweeter Home Entertainment and Harvey Electronics, that have filed for Chapter 11 bankruptcy protection in the past year? Given that shares of the Richmond (Va.) company are trading at just over 2, Wall Street is betting that could be a possibility. "Circuit City is in very serious trouble, and any scenario is possible today," says Nick McCoy, senior consultant at TNS Retail Forward, a research firm.

BusinessWeek points out that waiting until the firm enters bankruptcy would allow a new owner to break leases on CC's many under-performing locations.

Blockbuster wants to buy Circuit City

Blockbuster has made an offer to buy Circuit City for $1.3 billion, although there's some question as to whether they have the money.

These are two struggling retailers -- Blockbuster's core business has been destroyed by Netflix and video downloads, while Circuit City hasn't been able to keep up with Best Buy and Wal-Mart. I can't recall a case where two weak stores adds up to one strong one. I recall saying when Kmart and Sears combined that it reminded me of two drunks thinking they can walk home successfully by leaning on each other.

Apparently, I'm not alone in my opinion:

Sanford Bernstein analyst Colin McGranahan called Blockbuster's strategic rationale "vague" and pointed to the "oddness" of the combination.

"Strategically the deal appears to us to be a long-odds attempt by Blockbuster to address its deep structural issues; we do not see significant synergies," McGranahan wrote in a research note.

Blockbuster says otherwise, of course:

Blockbuster said a merger of the two struggling retailers could cut costs, exploit the growing convergence of media content and electronic devices, and bring benefits from selling complementary products.

Could be. Blockbuster is going to have to come up with a very good story, though, to get the money. Their cash-on-hand is more than a billion short of what they're offering.

Big news: Excessive price cuts hurt profitability

These are a couple relatively old items that have been sitting around because I was feeling lazy over the holidays.

It appears that the huge price cuts Best Buy and Circuit City took for Black Friday had a negative impact on their bottom lines. Imagine that!

Circuit City took the worst hit, because they are the weaker of the pair:

Circuit City Stores ... lost money during the three months ended Nov. 30. Investors already knew that the consumer electronics retailer from Richmond, Va. has been battling cut-throat competition, but they had expected at least a little profit.

Consumer electronics retailers are frantically trying to beat each other to customers by slashing their prices on things like flat panel TVs, effectively crimping the entire industry's ability to make money....

But Best Buy was hurt, too:

The company’s gross profit rate for the third quarter was 23.5 percent of revenue, down from 24.4 percent last year, and operating income for its U.S. operations fell 6 percent to $186 million for the three-month period, which included the first three days of the Thanksgiving holiday.

Best Buy justified their moves with the market share defense:

However, CEO Brad Anderson defended the aggressive price moves, stating they helped Best Buy win market share, brand loyalty and new customers as the chain headed into the final and most earnings-rich quarter of its fiscal year.

Which has some validity, of course. Particularly if Best Buy is playing a game of chicken with Circuit City -- having deeper pockets and being overall stronger, they can afford to play the price-cut game harder and longer. But there are two problems with the game, as I see it. One is that there's another company that can play it better (and we all know who it is), and the other is that consumers' expectations are changed by such events. Now that we've seen that laptops can be sold for $250 and hi-def TVs for $600, we're not likely to flock into stores to pay triple those prices.