by Meridith Levinson

Circuit City Rewires

News
Jul 01, 200515 mins
IT Leadership

When Circuit City expanded the big-box warehouse format to consumer electronics retailing in the 1980s, the company was on its way to becoming the place to go for TVs and stereos. By the late ’80s, it had sidestepped its then top competitor, Silo, and it soon put the squeeze on the likes of Tweeter and RadioShack. Circuit City was doing so well in the ’90s that business consultant Jim Collins, in his best-seller Good to Great, wrote: “From 1982 to 1999, Circuit City generated cumulative stock returns 22 times better than the market, handily beating Intel, Wal-Mart, GE, Hewlett-Packard and Coca-Cola.”

Today, Circuit City is in a markedly different position. By 2001, Best Buy had raced past the Richmond, Va.-based chain, usurping its position as the number-one consumer electronics retailer. Best Buy now has 608 stores compared with Circuit City’s 599 and nearly $25 billion in revenue to Circuit City’s $9.7 billion. Circuit City is now ranked by consultancy Retail Forward as the number-three seller of consumer electronics, behind Best Buy and Wal-Mart.

“[Circuit City] was the 800-pound gorilla,” says Joseph Feldman, a research analyst with the investment bank SG Cowen & Co. But “they woke up one morning and Best Buy had doubled its size with the same number of stores.”

Since then, Circuit City has been trying to catch up to Best Buy, or at least cement its position as a serious contender in consumer electronics retailing. Last year, its top executives announced plans to turn the company into a customer-focused business that delivers a personalized experience to all of its customers across all of its channels (stores, Web and call centers). Michael Jones, who took over as Circuit City’s CIO in January 2004, speaks passionately about the high-profile role technology will play in delivering personalized customer experiences. But before he can achieve his vision of store associates being able to recognize customers through their loyalty cards as soon as they enter the store, he has a lot of unglamorous groundwork to lay. Circuit City’s strategy hinges on a robust IT infrastructure that makes information readily accessible to decision-makers who need it. In fact, everything the company is currently doing to improve its business—from developing more effective promotions to deciding which products should be displayed at the ends of aisles in stores—hinges on data. “This is heavy analytical work. It’s fact-based, data-driven,” says Philip Schoonover, Circuit City’s new president who was hired in October 2004, ironically, from Best Buy.

Circuit City is just this year starting to invest heavily in the technology needed to act on this strategy. It’s upgrading its mostly proprietary point-of-sale (POS) system and building an enterprise data warehouse to replace siloed databases. But some analysts say Circuit City’s turnaround effort has been hampered by a stodgy, overly complacent leadership that lacks vision. Its top executives saw the Best Buy locomotive coming but failed to react as it steamed past them. Indeed, some analysts say they doubt Circuit City will ever catch up.

“They are many years behind [Best Buy],” says Bill Sims, a senior research analyst with Smith Barney. “I haven’t seen a vision, a strategy out of Circuit City yet that would enable them to successfully compete with Best Buy.”

Circuit City’s experience underscores the importance of vision, focus and leadership in sustaining a great company. It also highlights just how critical up-to-date systems are in running a business and how important it is for IT to proactively find the right technologies to support operations and enable innovation.

From Cash Registers to Crash Registers

This isn’t the first time in Circuit City’s history that the 56-year-old company has faced adversity. In the 1970s, Circuit City (then known as Wards) was on the brink of bankruptcy. The CEO at the time, Alan Wurtzel, got the house in order, launched the concept of the Circuit City warehouse superstore and set the company on a roll.

The company’s continued growth and success was enabled by a proprietary POS system built in the late 1980s. Circuit City had long believed in building its own systems because it felt no one knew its business better than its employees. And in fact, these systems gave the company a competitive advantage throughout much of the ’90s, CIO Jones says. The POS system, for example, supported the company’s commission-based compensation structure by keeping track of which associates landed which sales, says Dennis Bowman, Circuit City’s former CIO and senior vice president of supply chain. The commission-based compensation structure served Circuit City and its customers well for many years, until 2000, when the company started introducing new store formats that allowed consumers to select more merchandise on their own. In addition, the Internet provided a way for many customers to get detailed information about Circuit City products, so they were no longer as dependent on salespeople. And finally, increased competition eroded much of the profit margin that allowed Circuit City and other retailers to support commission-based selling. (Circuit City did away with all commissions by 2003. The move had a negative short-term impact on customer service, but it allowed the chain to keep customers in the stores longer and ultimately boosted revenue.)

Bowman says associates could also use the POS system to lock down inventory for customers who were interested in buying particular products but needed to first get their spouse’s approval. In addition, it enabled them to access inventories of other local stores to see if products that were out of stock in one store might be available in another. “It delivered an enormous amount of functionality to the stores that, at the time, didn’t exist in retail,” says Bowman. The POS system also provided the foundation for Circuit City’s multichannel commerce capability. Circuit City was one of the first retailers to allow consumers to check local store inventories online, and to purchase products online and pick them up or return them in stores.

But the POS system got old and overly complex because it was so heavily customized. Store employees venting on a website for retail workers claimed that the system was prone to frequent crashes and that lines sometimes formed at checkout because it was so slow. As the system (which was developed in Turbo Pascal for a DOS operating system) aged, it became harder and more costly to maintain.

“We had too many systems written in code for which you can’t find developers anymore,” says a former Circuit City executive who asked not to be identified. “These old systems should have been thrown out—and new, state-of-the-art technology put in—a long time ago.”

The IT department began upgrading the POS in 2001, but the project was funded in a way that prolonged it. IT had to reapply for funding for the upgrade every year. The IT department tried upgrading the POS system in 2001, but it never got the necessary funding to complete the job. Bowman says that he regrets not pushing his fellow executive committee members to devote adequate funds to such a large, complex project.

Location, Location, Location

By the time Circuit City began its attempted POS upgrade, it had bigger problems than cash registers locking up. Specifically, its real estate strategy had come back to haunt executives. The company had chosen second tier locations for its superstores when it was expanding in the 1980s to save on rent. Executives at the time figured that since its stores were destinations, consumers would go a little bit out of their way to get to them, says Frank Brown, a vice president with SunTrust Robinson Humphrey, an investment bank based in Atlanta. And they did. But when Best Buy started expanding in the 1990s and snatched up property in busy shopping centers, Circuit City began losing market share. So in July 2000, Circuit City remodeled some of its stores, beginning with locations in Jacksonville, Fla. The stores in Jacksonville didn’t get the return the company needed from the remodel to roll it out elsewhere, says SG Cowen’s Feldman. Circuit City tried again in Chicago and the Baltimore-Washington area, but again, the returns weren’t good enough. Sims says it took Circuit City a number of years to realize that the location of a store was more important than the look of a store. “They realized they had to start closing down stores or relocating them in order to be profitable,” says Sims.

Analysts say an undisciplined and unfocused executive team, led by longtime CEO Allen McCollough, exacerbated Circuit City’s problems. In particular, some say the team lacked the vision to compete in an increasingly crowded marketplace. “There have been and are some people that are very focused on doing things the way they’ve always done them and are not open to change,” says Geoff Wissman, a consultant with Retail Forward.

To make matters worse, the company pursued a series of side businesses that further fragmented the leadership team’s attention and distracted them from the core business. Instead of expanding in areas that would have complemented the core business (as Best Buy had done with its new boutique-style stores), Circuit City opened a bank to operate a private-label credit card financing operation, took a minority stake in a used car dealership and conceived a pay-per-view format for DVDs that consumers ultimately rejected.

“They were dabbling in a lot of different areas, and they took their eye off the ball,” Feldman says.

“In the 1990s, we saw too late the need for major investment in and renewal of our core business and exactly how to do it,” Bowman agrees. “By the time we got it right, we had a very, very good competitor who got it dead right and had a substantial lead.”

As Circuit City spun its wheels with remodels and ancillary businesses, Best Buy was investing in an ambitious customer-centric strategy that allowed it to identify its most profitable customers and tailor its stores with layouts and merchandise that meet the specific needs of the company’s five most profitable customer segments. (For more information on Best Buy’s strategy, see an excerpt of the book Return on Customer.)

In the meantime, IT fell by the wayside. “When the business flattened out and profits sank, all areas including IT were challenged more carefully than they were in the salad days of the 1990s,” Bowman says.

In other words, IT at Circuit City got short shrift. Its neglect came back to bite the company as it tried to get a handle on its business and use data to make decisions about merchandising, inventory planning and promotions.

The Data Dilemma

Current CIO Jones notes that while Circuit City has a lot of data, the company hasn’t been positioned to leverage that data to improve the customer experience and boost revenue. Data is stored across different locations, according to Jones. He says with existing technology it sometimes takes the IT department days to respond to routine requests for management reports. And because data is separated into multiple systems, each with its own definitions, the information synthesized from these disparate systems is not always reliable. For example, sales in one database might include warranties and other services while sales in another database might comprise only hard goods. Since businesspeople often doubt the numbers in the reports that IT produces, they rely on their own judgment and often change the numbers, Jones says.

The lack of authentic data has had a particularly deleterious effect on merchandising. Because merchants are making extremely important decisions about allocating goods to some 600 stores practically by hand and with flawed data, Circuit City’s forecast accuracy has been “horrible,” says the former executive. “We had to carry more inventory than we needed [which drives up costs].”

In addition to the forecasting problems, Circuit City couldn’t do the kind of business intelligence and customer analysis it needs to position itself as a viable competitor to Best Buy. In fact, a direct marketing effort was scrapped at Circuit City because the company didn’t have the IT to execute on a long-term study of customers’ purchasing patterns it had conducted from 1996 to 2001. Marketing staff wanted to use the company’s customer database to determine the likelihood that every customer who bought a core product would then buy another product, and then to map the probability of subsequent purchases. But the marketers couldn’t develop a target marketing campaign because the data about individual customer transactions was too hard to access.

Bottom Up, Not Top Down

As part of its turnaround effort over the past few years, Circuit City has sold off all of its noncore businesses to focus on its core: consumer electronics. It also has changed the pay structure for in-store employees, has begun relocating stores (it recently closed 19) and hired new management. And the company is finally starting to hone its customer-centric strategy. Circuit City is already improving the customer experience in its stores by, among other things, locating accessories and services close to big-ticket items so that customers can see more quickly what they might need to furnish their home office or outfit a home theater. For example, when a customer is looking at a high-definition television, nearby is a selection of furniture to hold the TV, the cables needed to hook it up, and DirectTV or Digital Cable service products. Circuit City is also making merchandising decisions based on what’s important to the customer. For example, its stores are beginning to feature products deemed most important to customers on the displays at the ends of aisles. And it is trying to nail the basics of customer service, for instance, by making sure that items are not out of stock.

This customer-focused strategy requires a considerable change management effort inside the company. “The ’we have all the answers, do as I say not as you think’ vintage top-down management style is probably behaviorally the most difficult to change,” says company President Schoonover. The company’s businesspeople often relied on their instincts or what worked in the past to determine what products to promote, how to promote them and where to place merchandise in stores. Schoonover says he wants the company to replace hunches with facts.

To speed the change management effort, Circuit City’s financial planning and analysis group is charged with training operational staff on the meaning of data and how to use it in decision making. Schoonover, who some analysts believe is being groomed to take over McCollough’s post as CEO, is also making sure that managers regularly spend time talking with customers and store employees; it’s a metric against which they’re now measured. Schoonover also has set up weekly meetings to discuss operations and make business plans based on what executives are hearing in the field from customers and store operators.

For his part, Jones is building the IT infrastructure to make sure that access to information is not a problem. Last August, he announced a technology overhaul focused on more standard and fewer proprietary systems—including new data warehousing capabilities from IBM that will provide business users with real-time access to information about customers, promotions, inventory and store performance. The new data warehouse will also support the company’s recent efforts to create more effective promotions, drive more traffic to stores and make better merchandising decisions.

Jones and his IT team are also installing a new Linux-based POS system from IBM that will support the new customer service strategy and multichannel commerce capability, a new fulfillment application that helps Circuit City coordinate its multichannel commerce capability, and a service- oriented architecture built on Web services that makes it easier for Circuit City to plug and play applications.

Last year, the company’s capital spending on IT totaled $37 million. This year it will rise to $112 million. Pieces of the ambitious new infrastructure are already in place. At press time, the POS system was being tested for quality assurance before being piloted. Jones hopes to have both that system and some of the data warehousing capabilities running by the time the company enters its peak season in the fall.

The changes Circuit City is making to its business are starting to take root, analysts say. “Through systems investments and new leadership, they’re on a better road today than they’ve been on over the past couple of years,” says Sims. While the company’s fourth-quarter and year-end financial results were hardly great in the grand scheme of earnings reports, they showed some improvement. Total sales for the fiscal year grew 6.2 percent from last year, and same-store sales grew a modest 0.7 percent over the same period. Analysts say these results show that the company’s efforts to use data to create more effective promotions and make better merchandising decisions are starting to pay off. But Circuit City is not out of the woods yet.

“They did a pretty good job in the [fourth] quarter in some areas,” SG Cowen’s Feldman says, “but there’s still a long way to go.”

Senior Writer Meridith Levinson can be reached at mlevinson@cio.com.