Can Circuit City Make It?

A pitch letter was written on April 11th on some thoughts from Marketing Professor Tony Gao, a retail industry expert from Northeastern University’s College of Business Administration.

"The focus of the recently announced reorganization efforts Circuit City is on cost cutting, particularly trimming of overheads, or sales, general, and administrative costs. On surface this is where it lacks in a comparison with Best Buy. The two leading electronics retailers have similar gross margins but the share of SGA in sales for Best Buy is 19% while that for Circuit City is 23%, at a 4 percentage point difference. And the net profit margin for Best Buy is 3.8%, while Circuit City scored a .1% loss, at a similar 4 percentage point difference.

“But I think there are more revenue and operations related questions to ask? Why didn’t the higher SGA/sales ratio for Circuit City translate into a higher gross margin? Why didn’t its lower rent from less central store locations result in a cost advantage? Why didn’t their higher paid employees result in higher customer satisfaction on the store floor?

“In general, 2006 was a tough year for electronics retailers including Best Buy, Circuit City, Radio Shack, CompUSA, and Tweeter. I think one reason people often overlook is the close link between electronics sales (particular for large sized Plasma and LCD TVs) and house sales and 2006 was a difficult years for the housing market, causing a ripple effect in the electronics market.

“Circuit City should also look at the revenue side of the profit formula. From this perspective, I note that Best But has been more successful running store promotions as a way to lure customers in this cut-throat competitive business, has better mobilized it sales force on the floor, and a more diverse product portfolio to support its price war with some electronics retailers.”

Below is Prof. Gao’s bio. Please let me know if you’d like to talk to him in greater depth about this issue.
Tao (Tony) Gao, Assistant Professor, Marketing Group. Professor Gao received a Ph.D. in marketing from Virginia Polytechnic Institute and State University, an M.E. in business management from Harbin Institute of Technology (Harbin, China), and a B.E. in industrial and management engineering from Hebei University of Technology (Tianjin, China). Previously, he held faculty positions at Washburn University, Hofstra University, College of William and Mary, and Hebei University of Technology (China). He also worked with the China branch of Mitsubishi Corporation (a general trading company in Japan) in the areas of international trade and joint venture developments. Professor Gao conducts research primarily on the development, governance, and consequences of buyer-seller relationships, customer value and risk perceptions, international business strategies, and business ethics. He has published in Journal of Business Research, Journal of Business Ethics, Research in Marketing, International Review of Retail, Distribution and Consumer Research, Journal of Relationship Marketing, Journal of International Business and Economy, Latin American Business Review, and Multinational Business Review. For his dissertation work on industrial buyer-seller relationships, he was a former winner of the National Association of Purchasing Management (now Institute for Supply Management) Doctoral Dissertation Competition.