Circuit City could be cautionary tale for cost-cutting businesses

Visitors walk out of the newly redesigned Circuit City store in Richmond, Va., last week.  The struggling consumer electronics retailer said Wednesday it has increased it's credit line by $800 million and extended the expiration date to 2013.
Visitors walk out of the newly redesigned Circuit City store in Richmond, Va., last week. The struggling consumer electronics retailer said Wednesday it has increased it's credit line by $800 million and extended the expiration date to 2013. AP

NEW YORK -- Corporate leaders who think they can slash expenses without customers noticing might want to give Circuit City Stores Inc.'s top brass a call. The electronics retailer is living the nightmare of cost-cutting gone bad.

The Richmond, Va.-based company has been in a downward spiral since it announced last spring that it would lay off thousands of experienced workers it candidly said it could replace with cheaper new hires.

Once known for its customer service, Circuit City slashed its work force by 3,400 last year and squeezed out $150 million in general expenses. So far this fiscal year, it has lost more than $300 million, and its stock price fell to $3.60 last month, the lowest since the early 1990s and down from a 52-week high of $22.02.

Too bad that service matters in that corner of the retail market. Shoppers quickly noticed and fled -- leaving Circuit City's sales and profits plunging. Its same-store holiday sales were down 11.4 percent.

It's a business school case study being written before our eyes.

Companies everywhere should remember this management mishap as they wrestle with cost cuts of their own amid slowing economic growth, rising inflationary pressures and a fatigued consumer.

The December jobs report from the Labor Department showed employers have grown wary about current conditions: Private-company employment declined while total payroll growth at private and public employers was the smallest since August 2003.

Staffing changes are just one way for companies to curb expenses and preserve or juice up profits. They also could start closing stores or slashing product lines.

Regardless of the actions they take, they had better know how their customers will react and consider the message they are sending to the public, said management consultant Peter S. Cohan, who runs his own firm in Marlborough, Mass.

That's what Circuit City got wrong when it hatched its plan last March to slash 3,400 of its higher-paid and most experienced sales staff and replace them with lower-paid workers. The company declined to give specifics about its pay scale, but estimates put the wages of laid-off workers at about $14 to $15 an hour versus about $9 for their replacements.

Circuit City was upfront about its plan. Had it worked, management would have been lauded. But the retailer "violated a basic principle of good business," said Cohan, who also teaches management at Babson College. "They (executives) were so focused on cutting costs that they failed to take into account the real value of good salespeople."

The result: Although there was a great appetite across the retail landscape for electronic gadgets during the holiday season, many shoppers chose Best Buy and other merchants instead of Circuit City for such products as televisions, camcorders, DVD hardware and digital photo products.

Its December sales slump was the latest bit of bad news for Circuit City, which had warned right before Christmas that its fourth-quarter results would disappoint. Even before this hiring mess, Circuit City had been struggling to keep pace in the competitive electronics marketplace, reporting a loss of $8.3 million for its fiscal 2007, which ended last February.

By breeding an environment that doesn't reward the knowledge or loyalty of its staff, then "why would workers have the incentive to put in any extra effort?" asked Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

The changes have turned off consumers. As Baker notes, "they saw this happen and thought of themselves. Since when is making $14 an hour too much?"

Customers have posted their frustrations with the retailer online, in blogs and in chat rooms. Many tell of a noticeable apathy among Circuit City's workers.

This mess isn't lost on Circuit City's management. In announcing its disappointing December sales, CEO Philip Schoonover -- who some online call "Soonover" in reference to calls for him to be ousted -- said the company wanted to empower its "sales associates with the necessary knowledge and tools needed to improve both sales and margin."

Company spokesman Jim Babb said Schoonover's remarks were meant to "redouble the company's commitment to provide training" to its sales staff of 40,000, as part of its ongoing program to keep its workers up to date on new technology and store operating procedures.

Still, chances are its lower-paid new hires will take a good bit of time and bundles of money to get their experience up to par. So much for those cost savings.