In today's SF Chron Business section:

Lessons in how Circuit City's job cuts backfired
Major retailer did not value service enough
Rachel Beck, Associated Press

Sunday, January 13, 2008

(01-13) 04:00 PST New York --

Corporate leaders who think they can slash expenses without customers noticing might want to give Circuit City Stores Inc.'s top brass a call. The electronics retailer is living the nightmare of cost cutting gone bad.

The Richmond, Va., company has been in a downward spiral since it said last spring that it would lay off thousands of experienced workers it candidly said it could replace with cheaper new ones.

Too bad that service matters in that corner of the retail market. Shoppers quickly noticed and fled - leaving Circuit City's sales and profit plunging. Its same-store holiday sales, reported on Monday, fell 11.4 percent. And its stock is now about 80 percent below where it was the day before it made the staffing announcement.

It's a business school case study being written before our eyes. Companies everywhere should remember this management mishap as they wrestle with cost cuts amid slowing economic growth, rising inflationary pressures and a fatigued consumer.

Corporate profits are expected to drop more than 8 percent in the fourth quarter from a year ago, resulting in a 0.31 percent contraction in overall 2007 earnings. That would be the first 12-month decline in operating earnings since the second quarter of 2002, according to Standard & Poor's data from 500 companies in its broad-market stock index.

The December jobs report from the Labor Department showed employers have grown wary about conditions. Private-company employment declined last month while total payroll growth at both private and public employers was the smallest since August 2003.

Staffing changes are just one way for companies to curb expenses and preserve or juice up profit. They also could start closing stores or slashing product lines.

Regardless of the actions they take, they better know how their customers will react and consider the message they are sending to the public, says management consultant Peter Cohan, who runs his own firm in Marlborough, Mass.

That's what Circuit City got wrong when it hatched its plan in March to fire 3,400 of its higher-paid and most experienced sales employees and replace them with lower-paid workers. While the company declined to give specifics about its pay scale, estimates put the wages of laid-off workers at about $14 to $15 an hour versus about $9 for their replacements.

Circuit City was candid about its plan; had it worked, management would have been lauded. But the retailer "violated a basic principle of good business," said Cohan, who also teaches management at Babson College. Executives "were so focused on cutting costs that they failed to take into account the real value of good salespeople."

The result: While there was a great appetite across the retail landscape for electronic gadgets during the holiday season, many shoppers chose Best Buy and other merchants instead of Circuit City for televisions, camcorders, DVD hardware and digital photo products.

Its December sales slump was the latest bit of bad news for Circuit City, which had warned right before Christmas that its fourth-quarter results would disappoint. Even before this hiring mess, Circuit City had been struggling to keep pace in the competitive electronics marketplace, reporting a loss of $8.3 million for its fiscal 2007 that ended last February.

By breeding an environment that doesn't reward the knowledge or loyalty of its staff, "Why would workers have the incentive to put in any extra effort?" said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

The changes have turned shoppers off. "They saw this happen and thought of themselves," Baker said. "Since when is making $14 an hour too much?"

Customers have posted their frustrations with the retailer online, in blogs and chat rooms. Many tell of a noticeable apathy among Circuit City's workers.

This mess isn't lost on Circuit City's management. In announcing its disappointing December sales, CEO Philip Schoonover - who some online call "Soonover" in reference to calls for him to be ousted - said the company wants to give its sales associates the "necessary knowledge and tools needed to improve both sales and margin."

Company spokesman Jim Babb said that Schoonover's comments were meant to "redouble the company's commitment to provide training" to its sales staff of 40,000, as part of its program to keep its workers up to date on new technology and store operating procedures.

Still, chances are its lower-paid new employees will take a good bit of time and bundles of money to get their experience up to par. So much for those cost savings.

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/01/13/BUFBUD4TG.DTL

This article appeared on page C - 3 of the San Francisco Chronicle

I agree. I'm sure we will soon start to see BestBuy hurting as well.

I do not believe that the staff cuts are the primary reason for the downfall of CC. I believe it was a big part of the reason, just not the primary part.

There are very few items that can be had at CC or BB that can't be had for less money online.

I haven't shopped there since they fired their 'older' staff in order to save money on payroll. It's just wrong.

The change in staff was a major reason for CC's downfall. I experienced it firsthand. They dont know what products they sell, and they make no attempt to sell you anything. BB employees are schooled on selling and upselling, and will find something to sell you. Most people still buy things in stores. When grandma or aunty or uncle want to get junior that electronic gizmo, they go to a B&M and expect someone there will know what they are talking about. It's just not the case with the employees at CC these days. The SAME thing happened to compusa not too long ago! How can these executives not have seen where that huge mistake led them?

kronus said:The change in staff was a major reason for CC's downfall. I experienced it firsthand. They dont know what products they sell, and they make no attempt to sell you anything. BB employees are schooled on selling and upselling, and will find something to sell you. Most people still buy things in stores. When grandma or aunty or uncle want to get junior that electronic gizmo, they go to a B&M and expect someone there will know what they are talking about. It's just not the case with the employees at CC these days. The SAME thing happened to compusa not too long ago! How can these executives not have seen where that huge mistake led them?

BB did the exact same thing a few months later. I know a few people who were laid off and then rehired at BB for the same reasons.

FrugalFreak said:I avoid CC and choose BB all because of one has MIR's and one doesn'tYou need to change your ID to AngelFreak.

The truth is no one knows. Unless someone can alter space-time and analyze the alternate timeline.

mugimba said:pretty simplistic response, Circuit City was in trouble long before it cut its staff.

I agree. I never wanted to visit CC even before their staff cuts. My recollection of their staff is a bunch of wallet slashers waiting to steer you to their highest commission product. That was several years ago and don't know if they every changed that model. Their online has been OK - reasonable shipping times.

CC was losing the war with BB before the said decision was implemented. Also, CC sales used to be commission based but they changed it because BB used that against them putting out ad saying they are not commission based and therefore are not biased. In some way, one can argue CC is trying to be more like BB, which really doesn't explaine why the move made the situation worse.

I sure hope CC survives. They are the only national B&M that can acts as a counter-balance to BB.

I am your typical do all your research online, find the best price and then go pick it up.

However, have you been to CC lately? It's impossible to check out. There are 10 people sitting around. 1 person working returns and 1 person at the customer service desk checking people out. At BB, the checkouts are always at the front and always manned by at least 3 people. Whoever designed the CC checkout process with checking stations throughout the store should be shot. Especially since you never know which one will be manned if any.

I love business darwinism and CC can EAD.