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Aggressive TV Price Cuts Lead to Store Closures for Circuit City

Circuit City is closing stores in North America and reshuffling its corporate ranks to compensate for disappointing margins on its flat panel TV business.

Along with closures of more than 60 stores in Canada and a handful of underachieving stores in U.S. cities, the electronics retailer has streamlined its reporting structure. Executive VP and chief merchandising officer Doug Moore has left the company, while David Matthews, former president of Circuit City’s multichannel direct sales operations, has been promoted to an unnamed position.

Circuit City is closing stores in North America and reshuffling its corporate ranks to compensate for disappointing margins on its flat panel TV business.

Along with closures of more than 60 stores in Canada and a handful of underachieving stores in U.S. cities, the electronics retailer has streamlined its reporting structure. Executive VP and chief merchandising officer Doug Moore has left the company, while David Matthews, former president of Circuit City’s multichannel direct sales operations, has been promoted to an unnamed position where he will oversee the company’s merchandising, marketing, services and supply chain teams.  Former president of retail sales George Clark will take over as executive VP of multichannel sales, in charge of all domestic and international retail stores and Circuit City Direct.

The store closures will primarily affect operations north of the U.S.-Canada border. The company will shutter 62 Canadian stores operated as The Source by Circuit City, as well as a support center in Barrie, Ontario. South of the border, seven underperforming Circuit City stores in cities such as Muncie, Ind., will close, along with a distribution center in Louisville, Ky. The retailer will also cease operations of Rapid Satellite, and online reseller of DirecTV service that Circuit City bought in 2005 and has subsequently tried to sell.

Circuit City CEO Phil Schoonover said the moves were designed to counter an unexpected downturn in prices and margins for hot-selling LCD and plasma TVs. He also warned that this round of store closures, resulting in the loss of about 400 jobs in the United States and Canada, will be followed by further unspecified cost-cutting actions in the next six months.

Circuit City executives began warning of the downturn early in the year, to the puzzlement of Wall Street analysts and industry observers. The company had actually boasted of record sales in December, including “strong double-digit comparable store sales growth in flat panel televisions.” Why then was the company unable to capitalize on those sales? The answer  points too overly aggressive pricing and possibly some ill-advised choices in inventory management.

According to Sam Bhavnani, principal analyst with market research firm Current Analysis, Circuit City dropped its  prices for large (37 inches and up) flat panel TVs to levels that were significantly lower  than its leading competitors. On a cost-per-inch basis, Circuit City’s average price on these TVs was only $51/inch in January 2007, compared to $62 for rival Best Buy. Relative to discounter Costco, Circuit City was charging only $5/inch more in January 2007. A year ago, its prices were $11/inch more than Costco’s.

There are also indications that Circuit City’s inventory levels on certain flat panel TVs were extremely high during the run up to the 2006 holiday sales season, leading the retailer to discount heavily at the expense of healthy margins. For example, promotions such as the sales of 32-inch Olevia LCD TVs for as low as $475 during the Black Friday period undoubtedly contributed to the retailer’s shrunken profits. The departure of chief merchandising officer Moore could signify where the company laid the blame for those ill-fated product decisions.

Circuit City currently operates 655 retail locations in 158 U.S. markets, along with more than 800 retail stores and dealer outlets in Canada.

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