Circuit City's Hard Sell
Retailer Must Convince Buyers That Chapter 11 Isn't a Closing or Liquidation

By Michael S. Rosenwald
Washington Post Staff Writer
Saturday, November 29, 2008

Circuit City's latest challenge strolled in to the company's Rockville Pike store yesterday about 10 a.m. His name: Glen Howard. His target: a 32-inch Samsung flat-screen television. The price he saw at Best Buy: $499. The Circuit City price: $499.

With all the key particulars equal, many shoppers would probably just think that since they were in the store, they might as well buy it there. But this isn't the usual shopping season. Most retailers are feeling stress from the economy. And Circuit City is reorganizing in Chapter 11 bankruptcy. "The bankruptcy is in the back of my mind," said Howard, 48, of Bethesda.

What if there is a problem with the TV? Howard mused. What if he gets the extended warranty and the company doesn't make it? "This bankruptcy is hanging over their heads," he said.

But Howard's doubts, according to Circuit City officials, are unfounded. For starters, the extended warranties are provided by unrelated third-party companies and are not affected by the bankruptcy filing, according to Jim Babb, a Circuit City spokesman. The bankruptcy court is also allowing Circuit City to honor returns, exchanges and gift cards.

"This is not a closing or liquidation," Babb said. "Chapter 11 of the Bankruptcy Code allows a company to reorganize its business affairs so that it can continue to operate." He added, "In fact, we believe our continued ability to deliver exciting products and services at great values to our guests is critical to our future success. "

The company has to wage a huge battle to get consumers to understand that, analysts said.

"It's really all perceived risk, not actual risk," said Stephen Baker, a retail analyst with the NPD Group, a marketing research company. "One of the issues prior to going into Chapter 11 was the concern that people would think they wouldn't be around and that would hurt them. From a retailer's perspective, it's not the right time to raise any doubts in the consumer's mind."

Especially with a Best Buy location less than a mile away. That's where perceptions were playing out in the computer aisles. Syed Husain, a University of Maryland student, was hunting for laptops. In previous years, he would also have examined the options at Circuit City, he said, but this year he would not.

"Circuit City is actually better on pricing," he said.

The financial problems didn't bother Kevin Lee, 34, of Rockville. He went to Circuit City for the same 32-inch TV that Howard walked away from, enticed by a two-year, no-interest deal. He already had a Circuit City credit card -- issued by Chase. "I want the TV," he said. "It's a good deal."

Both electronics retailers were crowded, though traffic seemed to be down from previous years. Circuit City's salespeople were selling aggressively. In the computer aisles, they offered three-year service plans. One salesman, trying to persuade a woman to buy one, said it would cost about 50 cents a day. Nearby, a customer was disappointed that a laptop he wanted was sold out. He said to the salesman, "I'm gonna go to Best Buy. You think it will be cheaper there, anyway?" The sales guy thought not. "It will probably be more expensive," he said.

A big question for Circuit City and Best Buy this holiday shopping season is whether shoppers, feeling so squeezed for cash, will bypass the large electronic retailers in search of bargains at Wal-Mart, Target and Costco or online shopping outlets such as Amazon, which offer free shipping on many products. Wal-Mart's local Black Friday newspaper ad featured three flat-screen TVs on its cover, proclaiming, "Unbeatable prices!"

Herman Sykes, 34, of Waldorf, was standing in the aisle at Kohl's as his wife shopped for items for their 14-year-old son and 9- and 8-year-old daughters. "It's all about bargains now," said Sykes, a plumber. "There's so much uncertainty." The family's next stop was Wal-Mart, not Circuit City or Best Buy.

"We're bypassing Circuit City and Best Buy and shopping more at Wal-Mart and Target," he said. "Right now, the market being what it is, you've got to watch your finances."

David Morris, a senior analyst at Mintel , a marketing research company, said there was potential for a company such as Best Buy, which has squeezed Circuit City, to become squeezed by Wal-Mart. "In this economy, Wal-Mart's value quotient resonates with a broader consumer base," Morris said. "Retailers like that are best positioned in the market. Does that mean there's added competition for a retailer like Best Buy? Yes."

But that doesn't necessarily mean Best Buy will be hurt, he said. For one thing, Best Buy does not have a reputation for being a luxury, high-market player. "They play to the value customer," Morris said.

Generally, electronics buyers find Best Buy salespeople more knowledgeable than those working at the discounters, Morris said. "If you go into Best Buy, the salesperson isn't going to know everything, but he or she will know more than the average representative at discount stores," he said. "Or in some cases, there are no reps at all."

Still, Best Buy recently warned its investors that it had recorded lower-than-expected revenue. It also said, "The uncertainty regarding future consumer spending has limited the company's ability to project revenue for the critical holiday shopping season."

In a news release, Best Buy President Brian Dunn said: "In 42 years of retailing, we've never seen such difficult times for the consumer. People are making dramatic changes in how much they spend, and we're not immune from those forces."

Staff writer Dion V. Haynes contributed to this report.