How To Ruin A Retail Company

November 10, 2008

A prime case study on how to ruin a retail company:

Profits from sales were down a bit, because some retail sales changed to the Internets.
Management switched salespersons from commission based pay to meager hourly wages.
Sales droped further.
Management fired long-term, experienced and expensive salespersons and hires unqualified but cheaper people instead.
Sales drop further.
Overpaid management gets fired.
New management finds the company is bankrupt.

Circuit City Fires 2,000 Workers to Cut Costs, Feb. 6, 2003
Circuit City Stores Inc. has fired 2,000 people, including salespeople at its outlet near Gateway Mall in Springfield, in a move to cut costs.

The electronics retailer announced it is firing 5 percent of its work force and also converting commissioned sales people to hourly pay.

Circuit City to Fire 3,400, Hire Less Costly Workers, March 28, 2007
Circuit City Stores Inc., the second-largest U.S. electronics retailer after Best Buy Co., fired 3,400 of its highest-paid hourly workers and will hire replacements willing to work for less.
…
"Firing 3,400 of arguably the most successful sales people in the company could prove terrible for morale," Colin McGranahan, an analyst with Sanford Bernstein & Co., wrote in a note today. "The question remains as to whether Circuit City can rebuild in time for the all-important holiday season."
…
Circuit City shares rose 35 cents to $19.23 at 4:18 p.m. in New York Stock Exchange composite trading.
…
In 2003, Circuit City switched employees from commission- based pay to hourly pay, matching an earlier move by Best Buy. That switch had a "dramatically negative impact on sales," McGranahan said today.

Circuit City, Electronics Retailer, Seeks Bankruptcy , Nov. 10, 2008
The petition for Chapter 11 protection in U.S. Bankruptcy Court in Richmond, Virginia, listed $3.4 billion in assets and $2.32 billion in liabilities, driving the shares down 56 percent before the New York Stock Exchange halted trading.
…
Circuit City fell 14 cents to 11 cents at 9:30 a.m. before the start of trading on the New York Stock Exchange. The NYSE halted buying and selling of the shares after the stock’s early plunge.
…
On Sept. 29, Circuit City reported a loss of $239.2 million that was more than triple from a year earlier after sales fell for the sixth straight quarter.

Without well motivated sales-persons any specialized retailer can only lose.

Here the shareholders lost too. No tears for them. Why did they not stop the disastrous management plans?

Only long term Circuit City CEO Philip Schoonover, who was only fired six weeks ago, made a fortune by ruining the company. He got more than twice per year of what successful retail chain CEO’s got. From the second link:

Chief Executive Officer Philip Schoonover was paid $8.52
million in fiscal 2006, including a salary of $975,000. Best Buy
CEO Brad Anderson received $3.85 million, including a $1.17
million salary.

Under-payed salespersons are bad for any company. Overpaid management is much worse.

Posted by b on November 10, 2008 at 17:03 UTC | Permalink

Comments

“Underpaid salespersons are bad for any company. Overpaid management is much worse.”
You can extend “salespersons” to “kitchen help”, “engineers”…
Thanks for clearly stating what few of the bigwigs want to admit. Somehow, people in executive management who produce nothing of value have promoted themselves to rulers of the world.
A long time ago, when I trained in management, I was taught that the purpose of a manager is to obtain the necessary resources for the workers under him to do their jobs. If that meant fetching coffee and buying dinner, sobeit.

Posted by: Obelix | Nov 10 2008 17:24 utc | 1

Why didn’t the shareholders stop management from firing all the decent workers? It appears to me they got what they wanted:

“Firing 3,400 of arguably the most successful sales people in the company could prove terrible for morale,” Colin McGranahan, an analyst with Sanford Bernstein & Co., wrote in a note today. “The question remains as to whether Circuit City can rebuild in time for the all-important holiday season.”
…
Circuit City shares rose 35 cents to $19.23 at 4:18 p.m. in New York Stock Exchange composite trading.

Our insane stock system rewards firing workers under any and every circumstance. The only shareholders suffering are the “greater fools” who didn’t dump CC when they had the chance.

Posted by: EGrise | Nov 10 2008 17:35 utc | 2

Let’s face it, b, there are many more reasons CC failed besides this. Sure, it may have hastened their demise considering how buinesses are currently structured, but how businesses are structured, and the capitalistic economy in which they propagate, operate, and ultimately fail, dcitate this as a natural outcome, as Debs, giap and Malooga have pointed out many times.
Corporations are Totalitarian. They bring out the worst in people and they reward, nay breed, sociopaths. There can only be one direction for such collectively structured behavior….down, down, down.

Posted by: Obamageddon | Nov 10 2008 17:39 utc | 3

Best Buy switched its salespeople to salary from commissions and the company does well. Having salaried salespeople makes for a much more pleasant, less intimidating shopping experience.

Posted by: Peter | Nov 10 2008 18:05 utc | 4

None of that’s going to make a whole hell’uva lot of difference while joe-q-public is losing their jobs, experiencing dwindling incomes etc etc.
CC is just the latest. In last month or so Mervyn’s, Linen’s & Things, and probably several others that don’t come immediately to mind have gone toes up.
I’m not so sure these big retail electronics joints are going to be major distribution point in the near future. Personally, I’m in fairly good shape $$ wise: I got money out in Feb., hedged my retirement $$ in ’04 (after Enron) successfully… unless we have (not entirely unlikely) currency collapse, me & wifey are in decent shape.
But… I’m not spending on anything we don’t need. Work on the house, new computers… doing/building it all ourselves. Buying food @ farmer’s markets.
I’m expecting the worst. I think this sentiment is based on being well informed prudence rather than fear.

Posted by: jdmckay | Nov 10 2008 18:21 utc | 5

It strikes me as ironic that labor unions over the years have lost a great deal of credibility for giving pay raises to poorly performing workers, while CEOs, as a whole, have yet to lose an ounce of credibility for driving their companies into the ground.
Irony aside, Corporate America, as exemplified by Circuit City, has once again sent the message that those at the very top will be rewarded handsomely for doing a lousy job, while those at or near the bottom will be punished severely for doing magnificent work!

Posted by: Cynthia | Nov 10 2008 21:44 utc | 6

Waiting for Godot…

Posted by: Uncle $cam | Nov 10 2008 22:00 utc | 7

It strikes me as ironic that labor unions over the years have lost a great deal of credibility for giving pay raises to poorly performing workers,
Did they ever? Or is this just propaganda? The Unions fought and fight to increase wages for all decent workers. I never saw a union campaign to increase wages for “poorly performing workers”.
Do you have a link for any such a campaign you assert?
Maybe someone has interest in asserting that any worker demanding higher wages is “poorly performing”?
Why would you fall for that ploy?

Posted by: b | Nov 10 2008 22:59 utc | 8

My bad, b! Let me modify what I wrote to read: labor union have been WRONGFULLY accused of giving pay raises to poorly performing workers. But, CEOs, OTOH, should be RIGHTFULLY accused of running their companies into the ground. So, instead of labor unions, CEOs should be the ones losing a great deal of credibility.

Posted by: Cynthia | Nov 10 2008 23:48 utc | 9

“Human resources” is just a euphemism. Labor costs are like any other cost, like paper clips or toner for the copier, to be reduced to a minimum.

Posted by: ralphieboy | Nov 12 2008 9:08 utc | 10

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