R.I.P., Circuit City

On November 10, 2008, Circuit City, the nation’s second-biggest electronics retailer, filed for bankruptcy. It’s going to have a lot of company in bankruptcy court. More than a dozen U.S. retailers filed for bankruptcy in 2008, including Linens ‘n Things and Sharper Image. Already in 2009, KBtoys.com has followed suit, and more such filings are expected following what may have been the worst holiday-shopping season in 40 years.

What makes Circuit City’s collapse worthy of some special note, however, however, is the fact that this company, en route to its financial meltdown, tried to balance its books at the expense of its workers, a tactic that other companies may yet be tempted to follow, despite Circuit City's evident lack of success.

In March of 2007, Circuit City decided to fire approximately 3400 senior store employees who were making, on average, about $15 per hour. Some of these workers were replaced by new hires, while others were actually invited to return to work at $10.22 per hour. These layoffs represented approximately 8% of the in-store work force, or on average, 5 staff members per store.

The job cuts were "one of the most brazen examples of corporate America run amuck,'' said Greg Tarpinian, executive director of Change to Win, a coalition of seven international unions representing about 6 million workers. "It's workers as disposable commodities, put in and put out based on whatever happens to the stock price.''

Not surprisingly, this heartless move not only damaged Circuit City’s reputation, it failed to provide any lasting benefit to the company’s bottom line. By replacing its most experienced salespeople, Circuit City lost effectiveness in both sales and customer services. As a result, Circuit City's customer satisfaction rating has steadily declined, dropping 5.5% overall since 2003, and it now trails competitors Best Buy, Costco, and Wal-Mart, the first two by a considerable margin.

Nor did Circuit City’s stock price benefit. It dropped from over $19 per share on the date of the layoffs to $4 per share a year later, and it had dropped all the way to a quarter before the company filed for bankruptcy.

None of this stopped Circuit City from generously rewarding its management team for their lack of success, of course. In 2006, according to Bloomberg.com, then-Chief Executive Officer Philip J. Schoonover (he was forced out last September) raked in $8,520,000 in total compensation. In addition, at around the same time as the layoffs, the company's board approved "retention awards" of $1 million for each of its 3 executive vice presidents and $600,000 for each of its 10 senior vice presidents. Circuit City said the awards were intended "to ensure the stability of the company's leadership team by providing an incentive" for the officers to stay.

In court documents, Chief Financial Officer Bruce H. Besanko said that three factors led to Circuit City’s bankruptcy filing: erosion of vendor confidence, decreased liquidity and the global economic crisis. Maybe. But he should have added one more factor: a fundamental lack of respect by Circuit City’s management for the company’s own workers, who were the one company resource that might have been able to restore its tarnished reputation and save it from failure.

Circuit City is still selling gift cards, and it is promising to do its best to honor those cards if customers actually try to use them. Had Circuit City been willing to match its own workers' level of commitment, instead of kicking those workers to the curb as soon as times got hard, perhaps its promises would not ring quite so hollow.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future