By Steven Pearlstein
Friday, March 30, 2007; D01

Add to your list of dumb business moves two announced by area companies in the past week:

Giant Food, the region's largest grocer, said it would eliminate fish counters at 50 stores -- ones with fresh fish arranged neatly on ice, with someone behind the counter. Instead, the fish will be packaged and offered in refrigerated cases, next to the chicken and pork chops.

And Circuit City, of Richmond, said it had fired 3,400 employees across the country -- 9 percent of its workforce -- not because they did anything wrong, or because the company no longer needed them, but because their hourly pay was a bit higher than what a newly hired employee could command.

What we have here are the latest examples of what happens when you subject retail organizations to the incessant demands of Wall Street to produce not just good long-term value for shareholders but an unbroken string of double-digit earnings growth. It's also what happens when you put financial people, rather than merchants, in charge of a store.

Let's start with Circuit City, which is recovering from a near-death experience because of stiff competition from Best Buy and Wal-Mart. Now that things are looking up, top executives decided to reward the people who helped engineer the turnaround with a pink slip and a piddling severance check, telling them they'd have to wait 10 weeks to reapply for their old jobs, at lower pay. "Retail is very competitive, and store operations just have to contain their costs," spokesman Jim Babb explained to my colleague Ylan Mui.

But if retail is as competitive as Babb says, you'd think a merchant might want to keep its best salespeople -- you know, the ones who know the most and have records of selling the most. That would be particularly true at stores where customers have lots of questions that need answering -- for example, those at a chain that sells major home appliances, flat-screen TVs and digital cameras.

But you have to hand it to Circuit City. Without spending a dime for advertising or public relations, it managed to send a powerful message to its major constituencies.

It has made clear to consumers that it doesn't give a fig about service or being a good member of the community.

It has let store employees know they have jobs, not careers, and shouldn't expect much of a raise, no matter how long they stay or how well they perform.

And investors now know that their company is so cavalier about reputational risk that, for $100 million or so in annual cost savings, it is willing to become the symbol of everything that is rotten about American capitalism. So far, Wall Street's reaction has been to discount Circuit City shares by about 5 1/2 percent.

The cutback at Giant Food's fish departments is more modest and less offensive, but in its own way just as wrong-headed.

To hear it from Giant executives, many of the chain's fish counters don't do enough volume to justify the direct cost of having someone behind the counter, nor the opportunity cost of using the space to sell something else. Packaging the fish in plastic not only lowers costs but keeps the fish fresher.

There is, however, circularity to this argument. Because Giant didn't sell much, it didn't offer much variety, and what fish it did offer sat there too long. The lack of variety and freshness, in turn, caused sales to fall further.

The same dynamic can work in the opposite direction. Other supermarkets have discovered that if you invest in the fish department by offering fresh product that is well displayed and sold by knowledgeable clerks, you can sell more fish, at higher prices. And once the volume increases, it becomes possible to offer a wider variety, which attracts even more customers.

The late Izzy Cohen, who ran the family-owned chain for decades, understood there were higher margins to be made if you invested in product and service. But ever since Giant was sold to the Dutch retailer Royal Ahold, that wisdom seems to have been lost. A single-minded focus on cost cutting and consolidation led to a noticeable deterioration of service, which eroded not only the loyalty of customers but that of Giant's famously loyal employees. Before long, these trends began to feed on themselves, with falling same-store sales leading to more cost cutting, leading to further declines in service, sales, profits and market share. By the end of last year, things had gotten so bad that several hedge funds with large stakes in Royal Ahold began demanding that Giant be sold.

When I read news of the fish-counter closures, I was about to write off Giant for good. Competitors like Costco, Wal-Mart, Whole Foods and Wegmans are nibbling away at its market share from the bottom, with low prices, and the top, with dazzling stores. Even arch-rival Safeway has found a winning formula that includes soup and olive bars, improved delis and produce sections, organic foods, an improved and expanded line of prepared foods and -- you guessed it -- staffed counters for both meat and fish.

But a visit to a prototype store in Urbana yesterday morning convinced me it may be too early to count Giant out. The produce, deli and prepared food departments are spacious, well stocked and pleasantly displayed. Service is good. While there's not quite the sense of theater that you find at a Whole Foods or a Wegmans -- and no fish counter -- you don't find their prices either.

Belatedly, Giant may have rediscovered how to make money by investing in customer service rather than cutting it. Maybe Izzy can finally rest in peace.

Steven Pearlstein can be reached atpearlsteins@washpost.com.