April 16, 2007

Your Input Needed: Circuit City

Recall that Circuit City elected to eliminate higher-paying positions on the sales floor of their stores.

In a transcript of their fourth quarter earnings results, management states that "There is no data in the company’s analysis that the service level has dropped due to the absence of the top paid employees."

Here's where I'd appreciate your input.

  • Do you believe that a company can provide the same service levels without the store employees who were compensated the most (increased compensation would imply more talent or more experience)?
  • If you were Circuit City management, what would you do to compete against Best Buy and web-based electronics retailers? What would you do from a merchandising, pricing, service, in-store presentation, or strategic standpoint?

10 comments:

  1. Anonymous4:19 AM

    Time to short their stock...their management should read "Broken Windows, Broken Business" by Michael Levine. Absence of service will hurt, unless they're forever committed to trying to win just on price (a difficult sustainable competitive advantage).

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  2. Commissioned based pay is great insentive for their employees to make sales happen and to realy try and help the customers. Only issue with that is some employees get to aggresive. I think Circuit City works better with a commission based payment but just need to manage it better.

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  3. To your first question... the answer is yes. A company can provide the same (perhaps better) service if they lose their highest paid employees.

    The detail we are missing is compensation structure. If the employee pay is based purely on your length of tenure, you may not have a motivated and enthusiastic workforce. Similarly, if its 100% commission, you may have uber-pushy salespeople as mentioned above.

    Consistently under paying your salesforce will hurt in the long run. The important thing to do is implement an effective compensation model and reward employees who do a good job. The earnings quote of "There is no data..." is a CLEAR signal that their pay structure is flawed - I'd be embarrassed to make that statement.

    In the meantime I'll take Cramer's advice above and short the stock, but first I have to run to Best Buy to get an HDMI cable for my TV.

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  4. Thanks for the feedback, folks!

    It's an interesting world where you can maintain sales levels by paying folks even less than the small wage you were paying them.

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  5. Anonymous5:47 AM

    According to one of our employees who worked at Circuit City, they dismantled their commission system sveral years ago, at least in eastern PA. That said, they can probably have the same poor service level with or without the higher paid people. I have seen a noticeable increase in their employees' disinterest over the past few years (I am in their at least once a quarter).

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  6. Anonymous7:36 PM

    Kevin,
    Motivated employees is key once customers are in store, but circuit city has to concentrate on getting customers to store. Many good points brought up here on motivated employees, and a compensation structure that isn't purely seniority or commissions based. What's not exactly touched on is that when salaries are kept low, rely instead on incentives(not exactly commissions).
    INC has interesting article a couple of months ago regarding Sage software investing in salespeople for their VARs---three of the best ideas were 1. training and 2. personality tests to screen best sales people, and 3. constant feedback and encouragement to the sales staff(balance out the negativity they face every day). These lessons could carry to sales people in most industries.
    As for getting people in the store, well Circuit City determined it couldn't compete with BB on price, much like CompUSA and Gateway decided they couldn't compete with BB and Dell. Both CompUSA and Gateway tried instead to focus on style, and that just didn't do it---look at where those two companies are now.
    Another company tried same thing in the 90's, and really didn't get anywhere until they came up with a great new gadget that had world beat path to their doorstep. That's Apple and the Ipod. Let's face it, before Ipod, Apple was on brink of collapse...now Ipod fed new life into the company, even spurring a slick new ad campaign and interest in its "other" product--the MAC.
    So Circuit City---1. either get a new gizmo or licensing deal that Bestbuy will be at least a year behind in copying; or 2. Compete on price at least in some areas.
    Then once you get the foot traffic, a well trained staff directly influenced by incentives will do the rest.

    K

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  7. It's not 100% on topic, but the Knowledge@Wharton site recently featured an article (linked below) about a study linking staffing levels to performance on customer satisfaction and "perceived in-stock" surveys.

    http://tinyurl.com/358ae4

    Of particular note, the study's authors also tried to investigate staff quality as well as quantity. There may be followup research underway.

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  8. Anonymous10:28 AM

    Ken,
    Wow---great article. Thank you for sharing. Kevin--definitely worth a look and possible lead to a new discussion.
    K

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  9. Peter Hill7:11 PM

    This is a typical example of a poor management decision made to patch up a problem in the short run without addressing the underlying concern: a decaying brand.

    The issue extends beyond pure sales numbers. Long-term employees lend a sense of permanence to return customers, and if well-taken care of they are a company's best brand stewards. In a service industry, there is no justifiable business reason for discharging your best employees en masse simply because they are highly paid. These people are your lifeblood!

    Perhaps Circuit City needs to face the real reason why they are failing: poor merchandise selection and ill-trained, indifferent sales staff. But to own up to these problems takes nerve, and it's much easier to undertake some short-term accounting shenanigans.

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  10. Thanks for the input, Peter, I appreciate it.

    If you were management, under pressure from Wall St., required to do something today, what would you do?

    It's easy to let people go. It is really, really hard to come up with an alternative that fixes things in the short-term.

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