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Shopping Centers Today -> January 2001
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City slicker
Circuit City gets more than new look with $1.4B remodeling plan
By Gregory J. Gilligan
 Circuit City's CEO, W. Alan McCollough, is trying to change the face of consumer electronics retailing. |
Circuit City CEO W. Alan McCollough knows he is taking a risk by overhauling the way the stores look and operate. But the changes, he said, are necessary to accommodate shoppers in the 21st century."We undertook this thought process of what is the right thing to do for the future," said McCollough, who also serves as president of the Richmond, Va.-based consumer electronics chain. "This was not a desperation step at all. This is to me never being satisfied with the status quo."
Circuit City is undertaking a bold and ambitious plan to remodel all 570-plus stores and build new ones to follow an updated, stylish format.
The chain plans to spend about $1.4 billion over the next three years on its remodeling program. Some older stores will be relocated, while all new ones will be built to follow the updated format.
About 50 Circuit City locations now sport the revised look. In 2001, the company plans to renovate 140 stores, relocate 10 to 15 stores and open about 25 more stores that reflect the new format and shopping experience.
The makeover, unveiled first at a store in Jacksonville, Fla., last August, is about more than just looks. The company is trying to change the face of consumer electronics retailing.
"This is a risk for them, but it is one that makes sense," said John S. Glass, an analyst with the brokerage firm Deutsche Banc Alex. Brown. "By doing this, [Circuit City] will be a much stronger chain two or three years from now."
While the new store format looks just the same from the outside, with Circuit City's signature red tower and gray exterior walls, it is anything but typical once inside.
 Circuit City's new format allows customers to bring items directly to the checkout. |
The new format is bigger and brighter, and the colors are more brilliant.
"It has a lot of energy, excitement and charisma to it," Ken Gassman, a retail analyst at Davenport & Co. brokerage in Richmond, said of the new look.
Eye-catching contemporary prints hang on the walls. Each piece of art highlights a different part of the store, such as home office or televisions. In the portable audio section, for instance, the print is of a huge fish wearing headphones.
Light-tone wood for the racetrack aisle provides a warm, upscale look—a departure from the institutional feel many Circuit City stores have.
"There is definitely a wow factor to it," said David S. Strasser, a retail analyst with Salomon Smith Barney, New York City.
Customers can now grab more products right off the shelf and take them to a central checkout.There are even red shopping carts at the entrance, where an employee greets shoppers.
Gone are refrigerators, stoves and other major appliances, which accounted for roughly 14% of its business in 1999.
In stores that haven't been fully remodeled, a quick renovation took place in the space where appliances were sold.
By pulling the plug on appliances, it has opened up space for Circuit City to add merchandise it hasn't carried before and expand existing categories. The new strategy positions the chain exclusively as an electronics and home-office retailer.
There are more home-office products, including an increased assortment of software, peripherals and accessories. Circuit City also is selling 35mm and digital cameras and related products.
The new format dramatically increases the number of music CD titles and DVD movies. In some stores, the number of CD titles and movies doubles from what it was before.
Music software and DVD movies, which had the back center spot in older Circuit City stores and are the first categories customers see at rival Best Buy stores, now are off to the left.
Digital cameras, camcorders and related products are front and center in the new format, while big screen televisions are to the right.
And, for the first time, Circuit City sells the popular video game consoles such as Sega Dreamcast and Nintendo and the game cartridges and accessories.
"What we have done is a radical change to our store," McCollough said.
An increasing number of shoppers want to be able to pick up a product off the shelf and take it to a checkout. Before at a Circuit City store, an employee rang up the order on the sales floor and the shopper picked up the product at the front of the store.
In the new format, McCollough said, almost anything that can fit into a shopping cart will be self-service. Television sets, computers and large audio components still will be sold the old way. In some ways, the new format is similar to Best Buy, which operates bigger warehouse-style stores. Best Buy has sold all of its merchandise in a self-service format since 1989.
"Circuit City has done a good job at reformatting their store, but they had to, because Best Buy will eat their lunch if they didn't," said Glass from Deutsche Banc Alex. Brown.
But, Glass said, Circuit City's renovated stores don't have a warehouse feel to them like Best Buy.
Generating more sales per store was another key reason for making the changes, McCollough said. Circuit City sells a lot of computers, but in the past would often have to tell customers to go elsewhere for software, accessories or related products.
But by getting out of the appliance business, locating more merchandise on the sales floor and shrinking the size of the back room, a typical Circuit City should have about 30% to 50% more selling space. The changes should help boost sales.
Sales per store should increase by more than 30%, from an average of $19 million per store before to about $26 million. Sales at typical Best Buy stores, which are about 45,000 square feet, still are significantly higher, in the area of $38 million. Best Buy stores also have more square footage than Circuit City locations, which are closer to 34,000 square feet.
Circuit City's new strategy, however, comes with uncertainty. Earnings are expected to be lower for the fiscal year that ends Feb. 28 compared with the previous fiscal year, partly because of one-time charges and potential sales disruptions from the remodeling program. Heightened competition coupled with weakening consumer demand in the second half of the fiscal year also is to blame for the declining results.
Circuit City also didn't test the new store format before deciding to roll out the concept to all of its stores. And the remodeling, along with the company's exit from the appliance business, could alienate customers, analysts say.
"The big question is, will they get a return on their investment?" said Gary Balter, an analyst with Donaldson, Lufkin & Jenrette brokerage in New York City.
"I'm confident it will work," he added.
While McCollough said the shifts in the format and the store makeovers are long-term investments, some analysts say the changes are long overdue.
Circuit City, analysts say, didn't take such bold steps before because management's attention often was distracted as Circuit City ventured into selling automobiles with its CarMax division and developing a digital video disc system called Divx that failed.
There's also a new executive running the show these days—McCollough, who became Circuit City's CEO in June. He took over from longtime CEO Richard L. Sharp, who remains as chairman.
The chain even tinkered with the look of the store in a warehouse in Richmond. "We are occasionally asked why didn't we start this sooner, but I can't worry about the past," McCollough said. "The only question for me is, have we done the right thing for the future?"
Gregory J. Gilligan covers the retail industry for The Richmond Times-Dispatch.
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