WEBVTT - The Circuit City Story Part 2 0:00:04.160 --> 0:00:07.160 Get in touch with technology with tech Stuff from how 0:00:07.240 --> 0:00:14.920 stuff works dot com. Hey there, and welcome to tech Stuff. 0:00:14.960 --> 0:00:18.440 I'm your host, Jonathan Strickland, senior writer at how stuff 0:00:18.440 --> 0:00:21.239 works dot com. And today we're going to continue the 0:00:21.280 --> 0:00:24.280 story we began in our last episode about the electronics 0:00:24.320 --> 0:00:28.120 retail company Circuit City. Now, in our last episode, I 0:00:28.160 --> 0:00:32.240 covered how Samuel Wertzel and Abraham Haste founded the Wards 0:00:32.280 --> 0:00:35.360 Company back in nineteen forty nine, which would grow and 0:00:35.440 --> 0:00:39.680 evolve and eventually become circuit City. I left off in 0:00:39.840 --> 0:00:42.639 nineteen eighty four. That was the year that they officially 0:00:42.680 --> 0:00:46.040 adopted Circuit City as the name of the overall company, 0:00:46.280 --> 0:00:50.000 and Samuel Wertzel had retired and his son, Alan Wortzel 0:00:50.280 --> 0:00:54.600 had become president and CEO of the company. So in night, 0:00:55.360 --> 0:00:59.840 Alan Wortzel really concentrated on implementing a new plan based 0:01:00.000 --> 0:01:03.760 off the success of the Circuit City superstore concept that 0:01:03.960 --> 0:01:07.360 originally was just called the Wards loading Dock. Now, that 0:01:07.400 --> 0:01:11.640 plan involved creating an almost cookie cutter approach to store space, 0:01:12.080 --> 0:01:14.440 and if you've ever been to more than one Circuit 0:01:14.520 --> 0:01:17.800 City during its heyday, you probably noticed the layout was 0:01:17.880 --> 0:01:22.840 remarkably similar um probably almost identical and that was by design. 0:01:23.720 --> 0:01:27.600 Wortzel my experiment with changes at one location, just to 0:01:27.640 --> 0:01:30.760 see how they would do, and then perhaps implement some 0:01:30.920 --> 0:01:34.039 changes across the board, but by and large they remained 0:01:34.280 --> 0:01:38.640 almost identical. Now, the store layout embodied some of the 0:01:38.680 --> 0:01:42.880 same sales philosophies that Samuel had established back when he 0:01:42.959 --> 0:01:46.039 had first started the Wards company. You might remember in 0:01:46.040 --> 0:01:49.320 that last episode I talked about how he used various 0:01:49.360 --> 0:01:53.080 manipulation techniques to increase sales, not in a way to 0:01:53.160 --> 0:01:58.280 be dishonest or to uh, you know, otherwise trick a 0:01:58.360 --> 0:02:02.680 customer into buying something, but rather to entice a customer 0:02:02.760 --> 0:02:05.760 into spending as much money as possible. There's a fine 0:02:05.840 --> 0:02:11.359 line there between an admirable work ethic and kind of 0:02:11.360 --> 0:02:15.080 creepy manipulation. And he walked it carefully, or at least 0:02:15.160 --> 0:02:18.320 appeared to well. Alan wanted to do the same thing, 0:02:18.639 --> 0:02:22.160 and he incorporated that into the store design itself. This 0:02:22.200 --> 0:02:24.720 is gonna sound really familiar to anyone who's been to 0:02:24.880 --> 0:02:28.880 a big box store, because now it is standard practice. 0:02:29.600 --> 0:02:31.360 What they would do is they would put all the 0:02:31.400 --> 0:02:34.480 popular brands, all the big ticket items that people were 0:02:34.480 --> 0:02:37.760 really interested in in the back of the store. That 0:02:37.800 --> 0:02:40.040 meant that customers would have to walk through the rest 0:02:40.080 --> 0:02:42.240 of the store in order to get there, and they 0:02:42.280 --> 0:02:45.320 would see lots of other stuff on the way. So 0:02:45.440 --> 0:02:48.280 this was an effort to try and boost sales of 0:02:48.320 --> 0:02:53.400 slightly less popular items by having people walk through. You 0:02:53.440 --> 0:02:57.440 see the same thing today, like most electronics departments in 0:02:57.520 --> 0:03:00.919 a lot of stores are towards the back or somewhere 0:03:01.160 --> 0:03:03.600 deep in the middle of the store, and it means 0:03:03.639 --> 0:03:05.440 you have to walk through other departments to get there. 0:03:06.160 --> 0:03:08.320 And as you're doing that, you're thinking, all right, I 0:03:08.880 --> 0:03:10.839 do need to buy a new two piece bathing suit 0:03:11.840 --> 0:03:15.600 or something similar. I mean, I think that way too 0:03:15.600 --> 0:03:20.200 frequently anyway. The late seventies and early eighties marked a 0:03:20.280 --> 0:03:24.720 new age in consumer electronics, and Circuit City was benefiting 0:03:24.760 --> 0:03:27.640 from that. When it started off as just a television 0:03:27.680 --> 0:03:32.360 appliance and radio business. Suddenly those store shelves got way 0:03:32.400 --> 0:03:36.160 more crowded with other stuff. New gadgets were joining them. 0:03:36.200 --> 0:03:39.560 You had VCRs and both the vhs and the Beta 0:03:39.600 --> 0:03:44.280 Max formats. You had laser disc players, you had cassette players, 0:03:44.720 --> 0:03:47.960 record players. Later on you would have CD players. You 0:03:48.000 --> 0:03:52.120 had cordless phones, microwave ovens, much much later, like in 0:03:52.160 --> 0:03:56.840 the late nineties, DVD players would join that. So this 0:03:57.440 --> 0:04:02.840 succession of new products ended up giving Circuit City the 0:04:03.600 --> 0:04:08.080 base to succeed. And because the superstores were so large, 0:04:08.080 --> 0:04:10.640 they could carry a wide variety of products all in 0:04:10.760 --> 0:04:14.400 one location, and the storage space, the warehouse space in 0:04:14.440 --> 0:04:16.280 the back of the store was big enough to allow 0:04:16.320 --> 0:04:19.440 the stores to purchase items from vendors in large amounts 0:04:19.440 --> 0:04:22.800 in bulk essentially, and that lowered the cost of purchase, 0:04:23.320 --> 0:04:26.919 and then that meant they could maximize their profit margins 0:04:26.960 --> 0:04:29.560 when they sold it at a higher price to the 0:04:29.640 --> 0:04:35.919 customer when they made that sale. Now, Wurtzel led the 0:04:35.960 --> 0:04:40.600 company into an intense phase of expansion. Circuit City began 0:04:40.640 --> 0:04:44.200 to move into new markets like Atlanta and Florida. The 0:04:44.240 --> 0:04:48.039 company would open numerous stores in a relatively small region, 0:04:48.200 --> 0:04:51.680 so they'd open maybe five or six stores in a 0:04:51.720 --> 0:04:55.600 metropolitan area. This accomplished a few goals, all of which 0:04:55.640 --> 0:04:58.920 were benefiting the company and a few were benefiting the consumer. 0:04:59.279 --> 0:05:01.960 For one, adding lots of stores in the city meant 0:05:02.000 --> 0:05:05.039 customers wouldn't necessarily have to travel so far to get 0:05:05.080 --> 0:05:08.000 to a specific store. You know, if there's just one 0:05:08.040 --> 0:05:11.240 location in the city, you have to travel to that location, 0:05:11.320 --> 0:05:14.440 no matter where you may be. If there are multiple locations, 0:05:14.440 --> 0:05:17.520 you have some choices. That being said, Circuit City had 0:05:17.560 --> 0:05:22.120 made it a practice to purchase cheap land, so they 0:05:22.120 --> 0:05:25.159 were mainly looking at places that weren't necessarily in the 0:05:25.200 --> 0:05:29.279 most populated or convenient spots. That was another reason to 0:05:29.560 --> 0:05:34.719 open several stores. It helped balance that because customers would 0:05:34.760 --> 0:05:37.120 still have to travel a bit. They the stores didn't 0:05:37.160 --> 0:05:40.760 tend to be in areas that were convenient to residential 0:05:40.839 --> 0:05:45.400 areas for example. Now it also meant that they didn't 0:05:45.440 --> 0:05:48.800 have to spend as much money promoting and advertising any 0:05:48.839 --> 0:05:52.479 individual store because they could group stores together in a 0:05:52.600 --> 0:05:56.640 single advertising campaign for whatever city it might be, and 0:05:56.800 --> 0:06:00.320 all the stores would benefit from this, and that ended 0:06:00.400 --> 0:06:04.320 up being a kind of a money saving effort for 0:06:04.360 --> 0:06:08.440 the company and cutting costs. And this was all new 0:06:08.880 --> 0:06:11.640 back then. It's something that we see a lot of today, 0:06:11.760 --> 0:06:14.279 or at least we have seen a lot of today. 0:06:14.320 --> 0:06:16.760 You might argue, we don't see it as much, mainly 0:06:16.800 --> 0:06:20.159 because of the move to online market places. We'll talk 0:06:20.200 --> 0:06:22.520 more about that a little bit later in this episode. 0:06:23.640 --> 0:06:28.560 So they were keeping the company's bottom line healthy by 0:06:28.600 --> 0:06:34.080 managing these costs by consolidating costs and by maximizing the 0:06:34.120 --> 0:06:37.479 amount of exposure they were getting to customers. But some 0:06:37.600 --> 0:06:41.400 sad stuff was happening to around this time in the 0:06:41.520 --> 0:06:45.000 co founders of the Wards Company, the company that became 0:06:45.080 --> 0:06:49.080 Circuit City, Samuel Wurtzel and Abraham Has. Both of them 0:06:49.120 --> 0:06:52.640 passed away that year. They lived long enough to see 0:06:52.960 --> 0:06:56.040 this little humble TV retail shop they had opened way 0:06:56.120 --> 0:06:59.920 back in n grow into a substantial chain of elect 0:07:00.080 --> 0:07:04.560 ronic superstores that were in multiple states across the US, 0:07:04.839 --> 0:07:08.360 But then they both passed away in nineteen eighty five. 0:07:08.720 --> 0:07:12.480 In nineteen eighty six, Alan Wertzel retired as CEO of 0:07:12.560 --> 0:07:15.560 Circuit City. Now he would remain on the board of 0:07:15.600 --> 0:07:19.120 directors until two thousand one, so he was still active 0:07:19.200 --> 0:07:22.760 with the company. He just wasn't acting as CEO anymore. 0:07:23.400 --> 0:07:26.480 At the time of his retirement, the chain included nineties 0:07:26.520 --> 0:07:30.760 stores and sales were hovering around the one billion dollar mark. 0:07:31.640 --> 0:07:36.400 In fact, from nineteen eighty three to ninety seven, Circuit 0:07:36.480 --> 0:07:40.040 City had the best return on investments on the New 0:07:40.120 --> 0:07:44.080 York Stock Exchange, meaning if you invested money in Circuit City. 0:07:44.160 --> 0:07:48.000 In nineteen eighty three, your return was better than any 0:07:48.000 --> 0:07:50.160 other investment you could have made that year, and it 0:07:50.240 --> 0:07:53.800 remained so for the next four years, and even since 0:07:53.880 --> 0:07:56.640 nineteen sixty five. It had been listed on the Fortune 0:07:56.680 --> 0:08:00.480 five hundred list of companies nineteen sixty five on. It 0:08:00.600 --> 0:08:04.240 consistently made that list and would continue to do so 0:08:04.480 --> 0:08:09.320 up until But that gets a little bit ahead of 0:08:09.320 --> 0:08:11.520 where we want to be right now. I'll get into 0:08:11.520 --> 0:08:13.800 more of the troubles that led to the fall from 0:08:13.840 --> 0:08:18.920 Grace in a bit now. Alan Wurtzel's successor was a 0:08:18.920 --> 0:08:21.680 man named Richard Sharp, and in the last episode I 0:08:21.760 --> 0:08:24.840 mentioned that Sharp had been hired on at an executive 0:08:24.960 --> 0:08:29.720 vice president level outside the company, so that was kind 0:08:29.760 --> 0:08:32.440 of counter to some of the company's core values, which 0:08:32.440 --> 0:08:36.199 included promoting from within. Instead of promoting from within, They 0:08:36.240 --> 0:08:41.800 found this very intelligent, capable hardware and software guy and 0:08:41.880 --> 0:08:45.600 brought him on. His performance was impressive. He had designed 0:08:45.600 --> 0:08:48.400 a computer system for Circuit City that made operations much 0:08:48.440 --> 0:08:51.079 more efficient and effective, and when he stepped in as 0:08:51.120 --> 0:08:54.120 president and CEO of Circuit City, the company was on 0:08:54.160 --> 0:08:57.280 the rise. He would end up pushing it farther, going 0:08:57.280 --> 0:09:01.280 into the stratosphere. Though a lot of people have argued 0:09:01.360 --> 0:09:04.080 later on that it might have been his leadership that 0:09:04.200 --> 0:09:07.360 ultimately set the company on the path to self destruction. 0:09:08.320 --> 0:09:10.760 I'll let you guys kind of decide what you think 0:09:10.800 --> 0:09:12.600 once we get to this the end of this episode. 0:09:12.760 --> 0:09:16.720 I'm not entirely sold on the idea that Sharp was 0:09:17.080 --> 0:09:19.760 the beginning of the end. I think he made some 0:09:19.840 --> 0:09:23.800 decisions that were ultimately poor ones, but I don't know 0:09:23.840 --> 0:09:27.480 that they were ones that Circuit City couldn't have rebounded from. 0:09:27.520 --> 0:09:30.480 And uh so we'll get into that a little bit. 0:09:30.559 --> 0:09:34.320 Let's talk about who he was first. So Richard Rick 0:09:34.600 --> 0:09:38.440 Sharp was born on April twelfth, nineteen forty seven, just 0:09:38.520 --> 0:09:42.040 two years before Samuel Wertzel founded the company that would 0:09:42.040 --> 0:09:45.559 become Circuit City. He grew up in the Washington, D c. 0:09:45.840 --> 0:09:50.000 Area and attended George Washington High School and Alexandria, Virginia. 0:09:50.760 --> 0:09:53.360 He first went to college to study electrical engineering at 0:09:53.360 --> 0:09:56.560 the University of Virginia, but discovered that that really wasn't 0:09:56.600 --> 0:09:58.680 his cup of tea. He wasn't so much interested in 0:09:58.720 --> 0:10:01.840 electrical engineering as he was in computer science, so he 0:10:01.960 --> 0:10:04.920 dropped out of college and for a short while he 0:10:05.000 --> 0:10:09.840 pursued some slightly less academic interests like playing poker and 0:10:10.280 --> 0:10:14.680 shooting pool. Um I usually do the opposite, shooting poker, 0:10:14.720 --> 0:10:18.200 however terrible. I don't recommend it. He wasn't idle for 0:10:18.280 --> 0:10:21.400 long and soon he was attending the College of William 0:10:21.400 --> 0:10:23.920 and Mary studying computer science and then went on to 0:10:23.960 --> 0:10:27.559 attend the Harvard Business Schools Management program. When he was 0:10:27.600 --> 0:10:30.360 twenty seven years old, he founded a hardware and software 0:10:30.400 --> 0:10:32.920 business development company, and he was really good at what 0:10:33.000 --> 0:10:35.440 he did. He impressed the folks at Circuit City, which 0:10:35.440 --> 0:10:37.720 is why they hired him on at that executive vice 0:10:37.720 --> 0:10:42.280 president level. He joined in nineteen two, and just four 0:10:42.440 --> 0:10:45.960 years later he became the leader of the company. By 0:10:46.040 --> 0:10:49.880 n he became the chairman of the board. Now, while 0:10:49.880 --> 0:10:53.840 the company was opening new locations in Georgia and Florida, 0:10:54.080 --> 0:10:58.760 it also was working towards eliminating unnecessary drains on profits. Now, 0:10:58.760 --> 0:11:01.840 among those drains were of those Lafayette stores I mentioned 0:11:01.840 --> 0:11:05.120 in the previous podcast. These were the stores located in 0:11:05.120 --> 0:11:08.920 the New York area and originally they had sold stereo equipment. 0:11:09.440 --> 0:11:13.800 When Circuit City, back then the Wards Company, purchased those stores, 0:11:14.160 --> 0:11:17.400 there were only eight by they had fifteen, but they 0:11:17.440 --> 0:11:20.360 weren't performing well. They were unprofitable, so the company shut 0:11:20.440 --> 0:11:23.840 down the stores and they would continue having trouble penetrating 0:11:23.880 --> 0:11:26.760 the New York market because the New York market was 0:11:26.760 --> 0:11:29.440 already saturated with lots of stores that would engage in 0:11:29.520 --> 0:11:32.520 price slashing. That was not really a model that Circuit 0:11:32.559 --> 0:11:36.320 City was suited for. Circuit City was still using commission sales, 0:11:36.679 --> 0:11:40.080 and the commission sales depended upon sales people trying to 0:11:40.120 --> 0:11:44.720 sell products at the highest price they could. Doesn't really 0:11:44.760 --> 0:11:48.520 work for price slashing, So the Circuit City experience was 0:11:48.520 --> 0:11:54.559 supposed to be haggle free, but you could often argued 0:11:54.640 --> 0:11:57.240 down a salesperson from the price that was on the ticket, 0:11:57.280 --> 0:12:00.520 at least in the old Wards Company days, and Circuit 0:12:00.520 --> 0:12:02.640 City just couldn't survive in the market where other business 0:12:02.720 --> 0:12:07.600 owners were regularly cutting prices in order to compete for customers. Also, 0:12:07.640 --> 0:12:11.239 in nineteen six, Circuit City shut down one other relationship 0:12:11.320 --> 0:12:14.320 it had earlier established, that would be the discount store 0:12:14.360 --> 0:12:17.000 in California called Zods. I mentioned them in the last 0:12:17.000 --> 0:12:21.200 episode two uh they At that point, Circuit City had 0:12:21.240 --> 0:12:25.120 been operating four different lines of stores. You had the superstores, 0:12:25.200 --> 0:12:28.400 you had the smaller Circuit City stores, you had Zodis 0:12:28.440 --> 0:12:30.720 and you had the Lafayette stores. By getting rid of 0:12:30.720 --> 0:12:34.800 the Lafayette and Zodis, they were able to consolidate Circuit 0:12:34.840 --> 0:12:38.680 Cities strategy and simplify matters. From a managerial standpoint, The 0:12:38.720 --> 0:12:42.120 money the company reclaimed from operating those businesses could be 0:12:42.160 --> 0:12:46.640 reinvested by opening more superstores in California and the southeastern 0:12:46.720 --> 0:12:50.960 United States in nine seven and eighty eight. The company 0:12:51.000 --> 0:12:54.240 prospered and grew, and it was fueled by this demand 0:12:54.400 --> 0:12:57.840 for consumer electronics like the VCR, which by that time 0:12:57.880 --> 0:13:00.640 was viewed as a standard component in your typical home 0:13:00.720 --> 0:13:05.360 theater system. Sales grew over one billion dollars a year 0:13:06.200 --> 0:13:09.280 and the number of stores increased to one hundred fifty. 0:13:10.280 --> 0:13:13.200 Circuit City had already experimented with mall store fronts in 0:13:13.200 --> 0:13:15.240 the past and decided to try and give it another 0:13:15.280 --> 0:13:18.880 shot with a new idea new brand. This time. The 0:13:18.920 --> 0:13:22.920 company planned to open twenties stores, and they branded them Impulse. 0:13:23.440 --> 0:13:24.960 And I think that's a pretty clever name for a 0:13:25.000 --> 0:13:28.920 store that specialized in selling small electronic devices, particularly the 0:13:29.000 --> 0:13:32.160 kind you might purchase as a gift or a stocking stuffer. 0:13:33.160 --> 0:13:36.959 It's the very definition of an impulse by Now, whether 0:13:37.000 --> 0:13:39.960 the executives at Circuit City intended that meaning to be 0:13:40.040 --> 0:13:42.360 part of the name or not, it definitely was the 0:13:42.400 --> 0:13:46.040 foundation for their sales strategy and it worked and a 0:13:46.080 --> 0:13:48.760 few years later the company made plans to open dozens 0:13:48.800 --> 0:13:52.520 of other stores and malls within their territory. That's good 0:13:52.559 --> 0:13:55.280 to mention that more than a billion dollars in sales 0:13:55.400 --> 0:13:59.000 is not the same thing as a billion dollars in profits. 0:14:00.000 --> 0:14:02.240 Profits are what you get when you deduct your costs 0:14:02.320 --> 0:14:06.800 from your revenue. Now, Circuit Cities profits by nine, we're 0:14:06.920 --> 0:14:10.520 just under seventy million dollars. Not still a heck of 0:14:10.600 --> 0:14:12.880 a lot of money, but it shows how much work 0:14:12.960 --> 0:14:15.240 the company had to do in order to make that 0:14:15.320 --> 0:14:19.720 kind of profit. A billion dollars in sales for seventy 0:14:19.800 --> 0:14:23.120 million dollars in profit. Also, the company managed to do 0:14:23.160 --> 0:14:26.600 this while there was another economic recession and effect. So 0:14:27.320 --> 0:14:30.760 how did it do that? Well? Mainly their success hinged 0:14:30.800 --> 0:14:34.480 on new consumer electronic products coming out. So, as you 0:14:34.480 --> 0:14:36.800 guys are probably aware, I've been going to c e 0:14:37.080 --> 0:14:40.840 S also formally known as the Consumer Electronics Show every 0:14:40.920 --> 0:14:44.000 year in Las Vegas, Nevada Since two thousand eight, Circuit 0:14:44.080 --> 0:14:46.520 City would be a company that would pay very close 0:14:46.560 --> 0:14:50.400 attention to trade shows like c s. The company depended 0:14:50.520 --> 0:14:53.600 upon new compelling products to come out so that they 0:14:53.600 --> 0:14:57.240 could offer them in their retail stores. In fact, stores 0:14:57.280 --> 0:15:00.320 like Circuit City are why those trade shows ex cist. 0:15:00.960 --> 0:15:04.400 Now sometimes we in the tech media I include myself here, 0:15:04.480 --> 0:15:07.840 we forget this as we walk around waiting to be 0:15:07.880 --> 0:15:12.160 blown away by a groundbreaking product or a new category 0:15:12.360 --> 0:15:16.600 defining technology. But the real reason those trade shows exist 0:15:16.720 --> 0:15:19.160 is to let retailers get a look at the products 0:15:19.200 --> 0:15:21.960 that will soon be available for customers so that they 0:15:21.960 --> 0:15:24.400 can create a sales strategy for the near future and 0:15:24.400 --> 0:15:27.400 figure out which products they want to carry in their stores. 0:15:27.480 --> 0:15:31.080 That's the real reason for those trade shows. The press 0:15:31.200 --> 0:15:34.520 is presence is really just icing on the cake. Who 0:15:34.520 --> 0:15:37.600 has the stuff we report on ends up being advertising 0:15:37.760 --> 0:15:41.440 for both the companies making the cool products and the 0:15:41.440 --> 0:15:44.400 ones that are going to end up selling them. Back 0:15:44.440 --> 0:15:47.480 in the eighties and nineties, those retail establishments were primarily 0:15:47.560 --> 0:15:51.800 superstores like Circuit City, So in many ways, circuit cities 0:15:51.840 --> 0:15:56.560 booming years can be attributed to advances in consumer electronics 0:15:56.640 --> 0:16:00.160 from the migration of cassette players to CD players to 0:16:00.360 --> 0:16:03.600 the similar trend of VCRs to DVD players much later. 0:16:03.920 --> 0:16:07.520 Circuit City also got into the personal computer retail business, 0:16:07.680 --> 0:16:12.560 beginning in nineteen eighty nine. Now by the company's sales 0:16:12.560 --> 0:16:16.960 had hit two billion dollars, Circuit City began opening smaller 0:16:17.000 --> 0:16:20.040 stores and markets that seemed to be too small to 0:16:20.120 --> 0:16:23.840 support a full superstore, and a few years later the 0:16:23.840 --> 0:16:27.760 company introduced a new department in superstores that sold music 0:16:28.400 --> 0:16:32.520 like actual albums as opposed to just the the equipment 0:16:32.560 --> 0:16:35.200 that plays music. This was a move that put a 0:16:35.200 --> 0:16:39.280 ton of pressure on smaller independent music stores and music chains. 0:16:39.880 --> 0:16:42.680 I remember a lot of those, both the chains and 0:16:42.760 --> 0:16:46.000 the independent businesses that used to specialize in selling music. 0:16:46.200 --> 0:16:48.320 In my neck of the woods, we had a regional 0:16:48.400 --> 0:16:52.720 chain called Turtles Records and Tapes. I remember fondly going 0:16:52.760 --> 0:16:54.880 into Turtles because that was where not only would you 0:16:54.880 --> 0:16:59.120 buy albums, you could purchase tickets to concerts there. And 0:16:59.160 --> 0:17:02.120 then there were the truly independent mom and pop shops. 0:17:02.160 --> 0:17:04.119 Turtles was still a chain, but there were lots of 0:17:04.160 --> 0:17:07.160 independence stores too, and all of these were pressured by 0:17:07.240 --> 0:17:11.119 the superstore movement into their territory. Now that we've crept 0:17:11.240 --> 0:17:14.280 up into the early nineties, it's a good time to 0:17:14.359 --> 0:17:17.040 talk about some of the competitors that rose up to 0:17:17.160 --> 0:17:20.720 face Circuit City. But first, let's take a quick break 0:17:20.880 --> 0:17:31.320 to thank our sponsor. Okay, you can't really talk about 0:17:31.400 --> 0:17:35.800 Circuit City without mentioning their chief competitor, which I would 0:17:35.840 --> 0:17:38.639 argue was Best Buy. I could do a full episode 0:17:38.680 --> 0:17:41.080 on the best Buy story, but let me give you 0:17:41.080 --> 0:17:45.000 the cliffs Notes version. Do they even still have cliffs Notes? 0:17:45.240 --> 0:17:48.159 Do you guys get that reference? Well, anyway, here's a 0:17:48.200 --> 0:17:51.919 summary to tide us over. Best Buy began as a 0:17:52.040 --> 0:17:56.280 chain of music stores in Minnesota in nineteen sixty six 0:17:56.320 --> 0:17:59.639 that was founded by a man named Richard Schulz and 0:17:59.640 --> 0:18:03.320 a d Really. The store was called Sound of Music. 0:18:03.960 --> 0:18:06.280 I don't know if the Hills are alive in Minnesota, 0:18:06.520 --> 0:18:09.399 but they did have the Sound of Music stores in 0:18:10.400 --> 0:18:13.800 One of those stores was damaged in a tornado. The 0:18:13.840 --> 0:18:17.199 store held a special tornado sale and they called it 0:18:17.280 --> 0:18:20.720 a best Buy sale. Uh. The event was so successful 0:18:20.760 --> 0:18:24.000 the company decided to hold one every year. Um that 0:18:24.080 --> 0:18:27.280 being a special sale, not holding a tornado. The company 0:18:27.440 --> 0:18:30.439 didn't schedule tornadoes. I don't think you would want to. 0:18:30.520 --> 0:18:35.800 Those things are terrible, but the sales went over like gangbusters. Eventually, 0:18:35.800 --> 0:18:38.680 the company changed its name to best Buy, the same 0:18:38.760 --> 0:18:41.439 name as those sales that made it famous, and that 0:18:41.480 --> 0:18:43.960 made more sense than Sound of Music anyway, because by 0:18:43.960 --> 0:18:46.200 that time the stores were also beginning to carry lots 0:18:46.240 --> 0:18:49.719 of unrelated stuff, things that had nothing to do with 0:18:49.800 --> 0:18:54.680 audio or music. Throughout the eighties, best Buy began to grow, 0:18:54.920 --> 0:18:57.639 and by the early nineties it had expanded into a 0:18:57.720 --> 0:19:01.919 national chain. Circuit Cities Will dominated the market at that time, 0:19:02.119 --> 0:19:05.320 and it seemed like no one at the company really 0:19:05.480 --> 0:19:09.520 took best Buy seriously. In fact, Alan Wurtzel said that 0:19:09.720 --> 0:19:12.639 at that time, no one at Circuit City really considered 0:19:12.760 --> 0:19:16.000 any competition as being anything more than just an annoyance. 0:19:16.600 --> 0:19:19.320 Now you could call that hubrists or arrogance, but at 0:19:19.320 --> 0:19:22.119 the time it seemed like Circuit City was firmly on 0:19:22.200 --> 0:19:29.040 the prosperity highway and hindsight is best Buy meanwhile, benefited 0:19:29.119 --> 0:19:33.520 from Circuit City success because Best Buy executives were able 0:19:33.560 --> 0:19:37.840 to learn from the path that was forged by Circuit City. 0:19:37.880 --> 0:19:41.159 They could employ the most successful strategies and avoid the 0:19:41.200 --> 0:19:44.800 pitfalls that Circuit City had identified during its growth phase. 0:19:44.800 --> 0:19:47.640 Because Circuit City was sort of the pioneer, best By 0:19:47.760 --> 0:19:50.000 following behind could say, oh, well, we want to go 0:19:50.080 --> 0:19:52.119 this way, but we won't make the same mistake that 0:19:52.200 --> 0:19:55.600 they did. We can avoid that, save money, and expand faster. 0:19:55.760 --> 0:19:57.720 So it gave best Buy a chance to catch up 0:19:57.800 --> 0:20:02.080 quickly to Circuit City. With companies like best By biting 0:20:02.240 --> 0:20:05.280 at circuit Cities heels, the company became motivated to get 0:20:05.320 --> 0:20:10.040 into the price slashing business in order to stay competitive. Now, 0:20:10.080 --> 0:20:13.280 at this point, Circuit City was still in the lead, 0:20:13.600 --> 0:20:16.840 and Richard Sharp had decided that the company should diversify 0:20:16.920 --> 0:20:22.160 what it offered. What if the company could sell used cars. Well, 0:20:22.200 --> 0:20:25.679 that's a step too far for just a Circuit City brand, 0:20:25.720 --> 0:20:29.000 but it provided the inspiration for Sharp to guide Circuit 0:20:29.040 --> 0:20:33.160 City into launching a new company that was a subsidiary 0:20:33.400 --> 0:20:36.160 and its specialized in selling used cars. And I bet 0:20:36.200 --> 0:20:40.119 you've heard of it, because in September three, the first 0:20:40.320 --> 0:20:45.840 CarMax location opened in Richmond, Virginia. And yes, CarMax originated 0:20:46.000 --> 0:20:49.880 as a Circuit City company. And while Circuit City would 0:20:49.880 --> 0:20:53.760 eventually die in two thousand nine, spoiler alert, car Max 0:20:53.880 --> 0:20:56.760 is still around, but in those early years, CarMax had 0:20:56.760 --> 0:20:59.280 a rough start, and since Circuit City had a stake 0:20:59.359 --> 0:21:03.200 in the company, it also hit Circuit City pretty hard. 0:21:04.240 --> 0:21:08.000 Also launching CarMax wasn't going to stave off those competitors 0:21:08.000 --> 0:21:10.520 like Best Buy. To do that, Circuit City stores began 0:21:10.560 --> 0:21:13.119 to engage in that price slashing, at least in the 0:21:13.160 --> 0:21:16.240 markets where Best Buy stores were trying to get a foothold. 0:21:16.720 --> 0:21:19.840 So if you happen to live in a city that 0:21:20.000 --> 0:21:23.399 had both Best Buy stores and Circuit City stores, you 0:21:23.600 --> 0:21:26.080 benefited from this because you could get a better bargain 0:21:26.119 --> 0:21:28.679 for your product if you shopped at Circuit City. But 0:21:28.720 --> 0:21:31.680 if you lived in a place where only Circuit City existed, 0:21:32.040 --> 0:21:34.680 you didn't see that benefit because there was no need 0:21:34.760 --> 0:21:38.000 for them to slash prices. Best Buy wasn't there to 0:21:38.000 --> 0:21:42.000 to siphon off any of the business. The two companies 0:21:42.040 --> 0:21:46.600 had very different sales strategies. At Best Buy, employees were 0:21:46.600 --> 0:21:49.520 trained to be able to answer basic customer questions and 0:21:49.560 --> 0:21:53.199 assist when necessary, but largely customers had kind of a 0:21:53.240 --> 0:21:56.320 help yourself approach, like walk into a store, see the 0:21:56.359 --> 0:21:58.120 thing they wanted to buy, put it in a cart, 0:21:58.200 --> 0:22:00.240 and go to check out. That's all it would work. 0:22:00.240 --> 0:22:02.920 At best Buy. You might get asked by an employee 0:22:02.920 --> 0:22:04.840 if there's anything he or she could do to help 0:22:04.880 --> 0:22:07.280 you find, but that would be about it until you 0:22:07.320 --> 0:22:10.920 made your purchase. But over at Circuit City, salespeople were 0:22:10.960 --> 0:22:14.439 still working on commission, so the experience was very different. 0:22:14.480 --> 0:22:17.840 You walk into a circuit City, you would see demonstration 0:22:17.920 --> 0:22:21.520 models of various products, but for the most part, you 0:22:21.560 --> 0:22:24.800 couldn't pick anything up. Everything was in boxes in the 0:22:24.840 --> 0:22:27.920 warehouse and you would talk to a salesperson who would 0:22:27.960 --> 0:22:30.800 make a sale established whatever the price was that you're paying. 0:22:31.359 --> 0:22:33.680 Then they would go into the back and get the 0:22:33.720 --> 0:22:36.280 thing that you were interested in buying, bring it out 0:22:36.280 --> 0:22:38.679 to you, and then you would go and purchase it. 0:22:38.760 --> 0:22:43.239 So very different models, and it meant that over at 0:22:43.280 --> 0:22:46.119 Circuit City, a salesperson made more money if they made 0:22:46.280 --> 0:22:50.000 more sales. They had an incentive to sell more to 0:22:50.160 --> 0:22:53.320 more customers, and best Buy that wasn't the case. People 0:22:53.359 --> 0:22:56.880 were on an hourly wage, no commissions, so the customer 0:22:56.920 --> 0:22:59.840 experience at Circuit City was very different from Best Buy. 0:23:00.040 --> 0:23:03.520 If you walk into a circuit City and you encountered 0:23:03.520 --> 0:23:06.480 a salesperson who didn't have a particularly subtle approach. You 0:23:06.560 --> 0:23:10.240 might feel pressured when shopping for electronics, which a lot 0:23:10.240 --> 0:23:14.800 of folks react negatively toward. Circuit City executives felt that 0:23:14.840 --> 0:23:16.760 their approach was actually the best one, which is why 0:23:16.760 --> 0:23:19.480 they stuck with it for so long. It motivated their 0:23:19.480 --> 0:23:24.359 sales force and it drove revenue because salespeople were selling 0:23:24.359 --> 0:23:28.080 those higher margin products, the things that cost more money 0:23:28.080 --> 0:23:30.919 and you would make more profit from because the cost 0:23:31.320 --> 0:23:33.840 to the consumer was much higher than what it cost 0:23:33.920 --> 0:23:37.320 Circuit City to purchase from a vendor. The company at 0:23:37.320 --> 0:23:41.040 that point was valued at more than a billion dollars, 0:23:41.080 --> 0:23:44.400 and they continued to grow and open up news superstores 0:23:44.480 --> 0:23:48.800 in various markets. Meanwhile, best Buy was starting to gain ground, 0:23:48.920 --> 0:23:53.040 and by it was competing with Circuit City and about 0:23:53.240 --> 0:23:57.080 half of the larger company's markets. So half the stores 0:23:57.119 --> 0:24:00.159