Short Circuit

On Wedneday, there was an article in the WSJ about the replacement of highly paid workers with lower paid ones. One of the companies highlighted was Circuit City.

[The top salespeople] simply made too much money at a time when the company was desperate to economize. Circuit City then hired about 2,100 lower-paid hourly workers to replace Mr. Wood and the [3900] others, who had represented 20% of its sales force.

In doing so, the retailer made an increasingly common cost-saving move: swapping expensive labor with lower-paid workers. The approach, which is generally legal, doesn’t eliminate the position but rather the high-paid person in it. The technique is especially attractive to service businesses such as retail. Like so many companies today, they face massive pressure to cut their labor costs. [link to article – subscription needed]

Later in the article, they gave some additional perspective on the situation:

Circuit City’s executives realized they could no longer afford to pay big commissions to its sales staff, while its rivals paid less. Ten years ago, Circuit City’s $3.27 billion in annual revenue was twice the size of archrival Best Buy Co. But its sales approach — small stores with limited inventory and a commissioned sales force — proved unworkable as customers flocked to self-service stores with big inventories. Last year, Best Buy’s sales hit $19.6 billion, more than twice Circuit City’s $9.5 billion.

Here are my thoughts:

  1. I don’t understand why a company eliminates an experienced salesforce and replace them with clerks.
  2. Making yourself more like the competition has never been a likely road to success. In this case, Circuit City is choosing to staff the floor the same way Best Buy does. While this will improve profitability, I don’t see how this helps them close a $10.1 billion gap.
  3. I have been into Circuit City a total of three times in my life and I have never purchased a single item from them. They never gave me a compelling reason to do so. I ended up at Best Buy, Dell, CompUSA, or American TV to purchase the items I could have bought at Circuit City.
  4. Let me paint an alternate scenerio. Circuit City is a national recognized brand with a commissioned sales force. It is clear they are losing at the superstore game. I think they should move to a boutique model and move to high-end merchandise. Use the salesforce to educate and sell the technology. Cater to the early adopters and the premium prices they are willing to pay. Leverage the relationships with vendors. Move to some place where no one else is.
  5. I am always amazed how media outlets seem to talk about the same issue at the same time. In this week’s Fortune, it is an article called “Down and Out in White Collar America” . The cover of Fast Company invites you to read “A Guide for the Perplexed Exec”. There is usually a trigger, but I don’t see what created all the media attention now.
  6. Finally, there is a wider trend at work here and it has been going on for some time. It began in the 80’s with blue collar jobs moving to lower cost locations. As new contracts were negotiated , new workers are being brought in at significantly lower wages. White collar jobs started make the same move in the 90’s. A major software deployment I managed in 1997 involved programmers from India. Services from tax returns to reading medical images are being done in other countries.

    The easy answer to those that are affected and displaced is “move up the value chain”. I don’t think everyone in America has the ability to do that and I believe these trends are going to have long term effects on the standard of living in this country.