PRINT THIS STORY:

CHANGE TEXT SIZE:

FIGHTING BACK

Circuit City revamping stores to reclaim customers lost to Best Buy

By Gregory J. Gilligan

Redesigning TV departments, a lucrative sector of Circuit City’s stores, was a priority. Sales of large-screen and digital TVs are growing.

Circuit City knows its stores need updating. Many, it acknowledges, are old, drab, uninviting.

Having lost ground to rival Best Buy in recent years, the Richmond, Va.-based consumer electronics chain is taking a two-step approach to revising its look. This spring the company embarked on a plan to renovate the television departments and upgrade the lighting at 300 of its more than 600 stores. At press time those renovations were set for completion by early this month. Circuit City also plans to remodel all the other departments at those units next year or in 2004, resulting in their total renovation by 2005, said W. Alan McCollough, Circuit City’s chairman, president and CEO.

“We’re just trying to get the stores renovated so that we can get them done the easiest and the fastest way,” McCollough said. “We will continue to work at it.”

Meanwhile, Circuit City is deciding what to do with the other 300-plus stores. They were left out of this year’s remodeling program for a number of reasons: Some leases are set to expire over the next couple of years, and some stores were too small to be remodeled, while the trade area of others had shifted, making them not worth fixing up.

“We are looking at every single store to make a determination,” said John W. Froman, the chain’s executive vice president and COO, who is responsible for store operations, real estate and construction. “A goodly number of the stores don’t make the hurdle for renovation,” he said, adding that most are likely to be closed and relocated.

The chain’s extensive analysis of those stores this summer involved looking at sales performance, appearance and visibility, and noting which tenants were best for Circuit City to be next to. Froman wouldn’t say which tenants he prefers, but noted that “we learned there is a big difference.”

Circuit City also analyzed trade areas to determine how much consumers were likely to spend on electronics items. At many older locations, Froman said, the research revealed that the trade areas had shifted, indicating that it was time to reopen elsewhere.

In a number of cases Circuit City had been the first consumer electronics retailer to enter a market, but Best Buy, now the largest consumer electronics chain in the United States (in sales terms), had since opened a store in a better location within the same market. Now, Froman said, Circuit City is turning the tables as it begins relocating some older stores to recapture those customers.

Froman and his real estate team hope to complete their analysis this fall and make some specific decisions about store locations.

The relocated stores will be built to look like the chain’s latest prototype, which is more contemporary in appearance. This new look, which the chain began using two years ago in its newer stores, is brighter and uses more earth-tone colors. There are hip-looking murals on the walls, and the stores are designed so more products can be taken right off the shelf to a central checkout.

About 80 stores have been built or completely remodeled to reflect this design.

Circuit City has already said it will close 10 older stores this year, replacing them with newer ones in new locations. The decision to relocate stores was applauded by Colin McGranahan, an analyst at New York City investment research firm Sanford C. Bernstein & Co.

“You can’t do anything except move them,” he said, noting that their fortunes cannot be restored in their current locations.

Many Circuit City stores haven’t had a face-lift in years, McGranahan said, and a number are older than those operated by Best Buy, which opened the majority of its stores over the past seven years.

Retailers should generally spend about 0.5 percent to 1 percent of annual sales on remodeling and updating stores, McGranahan suggested. For Circuit City, that would come to about $50 million to $100 million a year.

“Circuit City underinvested in its store base, and now it faces a more intensive remodeling or relocation campaign over the next few years,” McGranahan said. “They are playing catch-up.”

Circuit City’s original plan, first announced in mid-2000, called for remodeling all its stores over three years, at a cost of about $1.4 billion. But that program was halted in early 2001, because the initial renovations were costing more than budgeted and taking longer to complete. The chain then decided to renovate substantially fewer stores in 2001 than previously planned, testing a few different remodeling formats to see which renovations would be most cost-effective.

Earlier this year Circuit City made yet another shift. This time the chain decided to focus on updating the look of the all-important TV departments in 300 stores first and then renovate the rest of those same units later. The renovation is opening up the television departments, doing away with the rows of TV sets placed high on shelves and scrapping underutilized demonstration rooms. The design allows customers to see almost the entire department from nearly any point in the store rather than having it hidden behind rows of sets.

The new look also gives shoppers the sense that Circuit City has considerably more TV sets to sell, even though the number is about the same or only slightly more.

To replace the demonstration rooms, the company has moved two big-screen TVs with surround sound and some contemporary-looking chairs to an open area in the center of the television department to draw shoppers to the area. The price tag to remodel the departments, upgrade the lighting and relocate 10 stores this year is about $130 million; the renovations cost $325,000 to $350,000 per store.

Circuit City decided to do the renovations in stages because it was less disruptive to shoppers, McCollough said, noting that “doing it this way doesn’t change our long-term objective.”

Also, the biggest sales gains at stores that were completely remodeled last year came from the television area, McCollough said, though he declined to give figures.

Moreover, the TV department is an important and growing part of the store, because TV sales have long been considered the company’s bread and butter. For the fiscal first quarter ended May 31, the video segment (which includes TV sets, DVD players, VCRs and the like) commanded 40 percent of Circuit City’s sales, up from 37 percent for the comparable period a year ago.

The timing is critical, McCollough pointed out, because consumer demand for big-screen sets and digital televisions is strong and growing. This is likely to continue as the country switches from analogue broadcasts to digital TV, which is expected to happen by the end of 2006, he said.

Also, the Consumer Electronics Association predicts that sales of big-screen TVs will grow at a double-digit rate in 2002 from last year.

“I don’t want to miss out on that demand,” said McCollough. “There’s nothing I see that leads me to believe that the television business won’t continue to be strong.”

The renovation of television departments makes a statement and puts the spotlight on a key category, noted Bernstein’s McGranahan. “You definitely get a ‘wow’ effect.”

Circuit City officials say it is too early to tell if their investment is paying off, but they are encouraged by the initial results, and they believe that the changes will help get the company back on track.

The consumer electronics retail sector had been one of the fastest-growing segments in recent years through consumer purchases of big-screen televisions, DVD players, satellite television systems and wireless communications equipment. But some retailers, including Best Buy and RadioShack, saw sales slow in July as shoppers became concerned about the stock market and the economy.

Circuit City sales have been down over the past two years as the chain has continued to lose market share to rival Best Buy and exited the appliance business. But analysts believe that the changes Circuit City has made in the past year are slowly helping to turn things around.

“You don’t make a change and then see the benefits the next day,” said McCollough. “These things take a little time to really see what is possible.”

Gregory J. Gilligan covers the retail industry for the Richmond Times-Dispatch.

© 2008 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |