During the development from 1949 to 2000, Circuit City achieved aggressive expansion and became the leading company in the industry of electronics retailer. However, fiscal 2000 was an important transition year for the company. The more and more intense competition and the decreasing profitability for years made the company face with unprecedented challenges. These problems were caused by the following reasons:
1. Overexpansion. The company expanded its business and took more and more market share in the cost of decreasing profitability.
2. Being distracted from core business. The company paid a high price of $114 million for its investment on Divx without any achievement in this trial of diversification.
3. Sticking on old service model and outdated winning strategy. When the demand of consumers changed, the company still insisted on its old service model which was successful in the past, but couldn’t retain and attract customers any more.
Till fiscal 2000, Circuit City was still the leading company in consumer electronics industry. However, Best Buy, which was extremely competitive with Circuit City, had surpassed Circuit City in sales and operating profit, and was growing in a much faster speed. The stock price of Best Buy was approaching that of Circuit City. It showed that the competition from Best Buy was more and more fierce.
The sales and profit of Circuit City in appliance market decreased because of the increasing competition from discount retailers, such as Sears, Wal-Mart, and Home Depot.
With development for so many years, the stores had been out of fashion. Its brand image was not attractive and distinctive to customers as before.
The problems existed in Circuit City were caused by both external factors, such as bad economy, and mistakes of internal operation and strategy, including overexpansion, being distracted from core businesses, and sticking on old service model and outdated winning strategy.
It’s easy to find that one of the leading strategies of Circuit City was continuous expansion and taking market share as much as possible. To achieve its objective of rapid expansion, it kept opening new stores and capturing more market share. It did enlarge the size of the company rapidly in this way, however, focusing too much on the expansion hurt the profitability of the company because the aggressive expansion caused the increase of the operating cost. From Exhibit 1, we see that the number of Circuit City stores increased from 185 to 616 from the year of 1991 to 2000, but the operating profit didn’t get significant increase. Actually, from 1993 to 1999, the profitability was decreasing year by year. The average net income per store was decreasing from 1995.
Exhibit 1 Circuit City Financials
Fiscal Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Sales ($ millions) 2,367 2,790 3,270 4,130 5,583 7,029 7,154 7,997 9,338 10,599
Operating profit (% sales) 4.4 4.8...