Here's one way to answer that question: Go back in time to April, 2006
Do a quick Google search for Circuit City earnings at that time and you can find the following article:
Circuit City Stores Inc., the second-largest U.S. electronics retailer, said fourth-quarter profit jumped 65 percent on holiday sales of flat-panel televisions, notebook computers and MP3 players. Net income increased to $141.1 million, or 80 cents a share, on a 13 percent gain in revenue to $3.9 billion, the Virginia-based company said. Sales at stores open at least a year climbed 12 percent. Circuit City limited markdowns in the quarter and had lower expenses after closing fewer stores. The company expects demand for advanced televisions to continue, and forecast a revenue gain of up to 11 percent for the fiscal year.
April 2006 was an exciting time for Circuit City, but if you come back to the present, a very different picture emerges. As of October of 2008, Circuit City was merely a penny stock.
Why did that happen? They were a very good retail company, with a fantastic network of stores, good products and a growing net income. They were selling goods and services the way successful retailers had been selling for decades. That didn't change in two years.
What did?
Did the buyers change? Was it because of consumers like me?
I built a new PC recently and upgraded my home networking. Unlike a few years ago, the Electronics buying experience has changed fundamentally. I conduct price comparison using Google Products, look for deals at FatWallet.com, and get cash-back from Microsoft Live. I don't go to stores anymore. Even when there are good stores. I buy on-line.
Imagine again that we could go back in time to April 2006
What would have happened if instead of the release above, the CEO told the analysts that despite a reasonable, quarter they planned to reduce stores by half and redefine themselves as an online e-tailer. Would Wall Street favor such a move?
If that had happened, could Circuit City have had results similar to Amazon.com in 2008.
(they beat Wall St. expectations during one of the worst recessions since the 1930's).
So if we extrapolate to the future...
We can feel pretty certain that companies will not survive just because of their size or their current earnings. The time has come when companies can not stop innovating and redefining themselves. In 2006, it was not a secret that more and more customers were moving to on-line purchases. Companies must be willing to change, and Wall Street needs to understand the imperatives to change. Otherwise, large successful companies like Circuit City will have shorter and shorter lives before they are put out of business.
Innovation is more than a corporate initiative, it's a survival imperative.
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Excellent Post Sridhar! You seem to have put your finger on one of the key problems of innovation. How do you innovate when your company is doing well, your strategy is in line with mainstream thinking, and your investors are looking for more of the same? Isn't it interesting that an innovative online retailer, Amazon did so well in the last quarter of 2008, when other retailers were facing liquidation or bankruptcy? This is a clear case where an innovator ultimately prevailed because they understood how customers were changing.
ReplyDeleteAnd yet, most investors were losing their patience and love of innovation before things turned around. To illustrate, I tracked down a Business Week article from Feb. 3rd, 2006, the same year that Wall Street was in love with Circuit City. There were many other articles, blogs and opinion pieces going back to the beggining of the decade that felt Amazon was going too far on their innovation. Take a look:
"Amazon's Costly Bells and Whistles
The online retailer is stepping up spending on new Web features and services. That's crimping profits and trying investors' patience.
Amazon.com (AMZN) Chief Executive Jeff Bezos insists it's still Day One on the Internet, so he must keep spending to pursue new growth opportunities. But investors are getting increasingly impatient for a new day to dawn -- when the pioneering online retailer's investment in technology will finally start paying off..."
It's a good thing for investors that Amazon stayed the course, but just think if Mr. Bezos had listened to investors, pundits and business experts who advised him to stop investing in improvements on the platform, focus on selling books, or even open up a few stores in shopping malls: retail would have still moved to the Internet and retailers like Circuit City would still have gone out of business, but Amazon investors would not have benefited as much as they did in 2008.
So, I'd argue that comparing Circuit City and Amazon are like comparing apples and oranges. Amazon is and has always been an e-tailer. Circuit City was at heart a retailer, with all the pains of retailing, and a small subset of their business was e-tailing... most of which they had outsourced in some capacity. It certainly wasn't core to what their identity was. Add on top of that some crazy mismanagement and you have the failure of what was once a very successful company.
ReplyDeleteInnovation played a role in their failure, but I'd target a lack supply chain innovation (the Wal-Mart model comes to mind as successful supply chain innovation) over e-tailing. There is no doubt a seismic shift in buying patterns of electronics consumers towards online research and purchasing, but that doesn't seem to be hurting Wal-Mart even in a down economy, who now sells more HDTVs in the US than everyone else combined.
Circuit City certainly could have succeeded, even without any Internet presence at all, had they been able to run their business more effectively. I see the same issues plaguing the newspaper industry, but that's a whole other example of how to badly run a business. :)
B&M,Brick & Mortar, stores give you few advantages - touch and feel, instant gratification, knowledgeable sales person. I could be in the minority but when I bought my first TV, I took advantage of Tweeter to compare the models and bought it online at sonystyle.com. Many customers might use B&M stores for identifying the product they need and buy it online(assuming it is cheaper). If i was running circuit city, I would reduce the number of large stores and partner with existing non-electronic retailers like Jewel Osco, Walgreens to lease some space for display of electronics(almost like radio shacks). These small stores can also be In-store pickup points for online orders. The advantage is your normal 50 year old customer who believes internet is evil can drive to a large store and buy. To someone who likes the price point of internet but wants to take advantage of product returns and customer service can use your smaller stores for picking up online orders, customer service and product returns. I think there is an opportunity here with circuit city closing down. New smaller players like radio shacks can enter the market.
ReplyDeleteI also like the Apple model for retailing, the purpose is more to educate the users than to sell. Microsoft, sony, samsung will follow the same model. Customers will get the "touch and feel" and education from these stores but buy it at whoever offers it for cheap.