NPD Group Blog » A Death in the Family

A Death in the Family

Friday, January 16th, 2009
By Stephen Baker, Vice President, Industry Analysis

Today’s announcement of Circuit City being forced to liquidate is the end of a long tale and should prompt a lot of soul searching on the part of all of us with an interest in selling technology to consumers. Clearly today’s result was much more the product of the financial morass we find ourselves in as a country than anything to do with the specific worsening of Circuit City’s situation. This result was likely preordained once they were forced to go into Chapter 11 in the middle of the worst credit crisis in the last 70 years.

A strong and compelling argument could be made that if that action had been taken in the fall of 2007 this would not have been the end result. However, for various reasons, Circuit was not willing to make the fresh start Chapter 11 permits and shake off the baggage of years of missteps at that time. Instead, they hoped that they could turn the company around without having to undergo the drastic downsizing that it is now obvious needed to occur. By waiting they found themselves trying to refresh the company with no sales opportunities to build upon.

Whether credit crisis, shopping crisis, or inside industry crisis, (saturation and technology reaching a plateau would have made sales growth challenging in 2008 regardless of the economy), it appears with our second major electronics retailer bankruptcy in the last couple of months we are on the verge, or in the midst of, a third wave of consolidation and revamping of consumer technology retailing.

The first wave was in the early 1990s as national and large regional chains like Fretter, Silo, and Highland left the market as competition grew, margins compressed, and the sheer number of CE stores outstripped the consumer market’s then limited to capacity to absorb that much retail space.

The second wave was in the late 90s as a number of once strong regional chains like Campo, Adrays, Tops, and SunTV were pushed out of business by the relentless advance of Best Buy and Circuit City and the growing importance of the PC to technology retailing and the paucity of interesting CE products. For chains used to fat 40% CE margins and highly paid commissioned sales forces the 5% PC business and the lack of anything resembling an upgrade cycle in the TV business meant a swift collapse. (Does anyone remember the deadly dull CES shows of the late 90s with 27” tube TVs and car audio dominating the landscape?)

Today the growth of the past few years has caught up to the remaining consumer chains. The rapid slowing of the TV upgrade cycle and the falling prices that have accompanied it, aggressive online competition, the rise of the discounters, and the overall saturation of technology in consumers’ homes is now causing a third wave of retail failures of which Circuit City is now a casualty.

The end result of this wave is likely to be a much more developed retail oligopoly. With as much as two-thirds of all Circuit City’s volume likely to go to Best Buy and Walmart, (according to an NPD survey conducted in November, more details are available as to what products and causes are making this occur), it is increasingly apparent that those two will grab overall retail technology market share that far outstrips the next size level of retailers.

Despite the success of online retail this past holiday it is increasingly important for vendors to have their products seen and shown in physical retail. In these tough economic times consumers want to buy inexpensively but want to be sure that what they are buying is what they really need. And as interoperability concerns grow, retail storefronts will remain the most productive place to display and sell the consumer on the benefits of technology. Even if consumers try in-store and buy online, the need for a physical place to try will only increase.

The loss of Circuit City takes a shopping option away from the consumer, a selling option away from the industry, and a merchandising option away from everyone. The ability of Circuit to provide those options to the industry will be sorely missed.

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