November 26, 2008 News & Features » Cover Story


Broken Circuit 

A national financial crisis pushed Circuit City into bankruptcy, but years of missteps and inattention to the founding father's vision — electronics at bargain prices — sealed its fate. 

click to enlarge circuitcitycover.jpg

Back in 1949, Richmond's Broad Street was a stylish shopping destination flanked by high-toned Thalhimers and Miller & Rhoads department stores.

Boasting lavish window displays, they sold such wide-ranging items as men's suspenders, shoes, bras and beds. Shoppers arrived from as far away as North Carolina via streamlined rail cars pulled by diesel locomotives in magnificent purple or citrus-colored livery.

But change was in the air and Samuel S. Wurtzel knew it. The New Yorker happened to be in town for vacation and was having his hair cut. Chatting with the barber, Wurtzel, who owned an import-export business, learned that WTVR was nearly finished with a new 1,049-foot television tower. Billing itself as “The South's First TV Station,” Channel 6 was about to go on the air.

Television sets! Richmond needed lots and lots of televisions, which weren't ordinary household features. Wurtzel moved his family to Richmond, founded a company and named it after them. It was called Wards — W for Wurtzel, A for son Alan, R for wife, Ruth, D for son David and S for Samuel, himself.
Thus began one of the most remarkable companies in Richmond's corporate history. Wards would morph into an early mass-market retailer called Loading Dock and then Circuit City. As it expanded throughout North America and spawned innovative auto retailer CarMax, Circuit City became a major force shifting America's retail landscape away from big, downtown department stores and street-corner, mom-and-pop operations to big-box behemoths anchoring car-centric strip malls.

So powerful would Circuit City's performance and brand become that the company won accolades in the bestselling 2001 business book “Good to Great.” One dollar invested in the company in 1980 would have yielded $80 just 10 years later, a performance better than Coca-Cola or IBM, according to author Jim Collins.

Unfortunately, Circuit City is an icon of failure as well. After starting to stumble in 1990s, it pingponged from one bad management decision to another. It flirted with products such as early DVD rentals too soon, dropped appliance sales, chucked its credit-card business, spun off high-flying CarMax, fired its experienced sales force, sucked up to Wall Street analysts by going on ill-advised expansions and played musical chairs with its top executives.

Trying desperately to break out of a death spiral, the company declared Chapter 11 bankruptcy Nov. 10.

Odds are against the company's survival. “I think it's highly unlikely,” says Stacey Widlitz, a retail industry analyst with Pali Capital in New York. The retailer's real estate situation is too dicey with too many expensive stores in dodgy locations, she says, and vendors have been forced to cut the company off. “They've been going through a turnaround for many years now,” she says. “It's too little, too late.”

Flotsam of its wreckage, at least for now, includes more than 7,800 lost jobs out of a 46,000-strong work force, including 700 layoffs at the company's two taupe-colored headquarters buildings on Mayland Drive near Gaskins Road in Henrico County.

Company officials decline to comment for this story.

To be sure, Circuit City is trying to find a way out of its mess. Earlier this year, it had considered a $1.3 billion buyout by movie rental company Blockbuster but the deal fell through. Then a hedge fund, Wattles Capital Management, won a bitter proxy fight and gained three seats on Circuit City's board to try to affect change. The three newcomers squabbled over a new rescue plan, and by October, Philip J. Schoonover, chief executive since 2006, was out and replaced by James A. Marcum, a retail turnaround veteran brought in by Wattles.

Marcum was planning a fresh comeback just as the worst financial crisis in decades hit. As fallout from the subprime mortgage disaster lowered company debt ratings and made credit extremely expensive, commercial borrowing froze up. Circuit City had been counting on big holiday sales to prop up its anemic cash kitty. But big electronics vendors, themselves under tight credit pressure, were afraid to provide goods to a shaky Circuit City, tipping the company into Chapter 11.


It wasn't always this way. The dominant theme in Circuit City's remarkable but sad tale has been consistent innovation. From the 1950s on, its executives noted shifts in technology, tastes and demographic trends quickly and came up with suitable new products, adjusting sales approaches along the way.

The original Wards, for example, centered on hawking newfangled black-and-white television sets. But it soon included household appliances such as stoves and refrigerators. The Wurtzels marshaled their expertise in selling TV sets, expanding beyond their four-store base in Richmond to offer licensed sales departments specializing in televisions within other large department stores across the country. Other innovations included offering customers loaner televisions if their sets could not be quickly repaired.

After taking the family business public in 1961, the Wurtzels began expanding. Buying Richmond Carousel Corp. in 1965, they expanded into selling auto supplies, clothing, toys and household goods. Sales soon reached $123 million.

As stereo components became more sophisticated, the Wurtzels added more stores and licensed outlets all over the country. The 1960s were years of huge changes in taste and markets. Top 50 hits on traditional AM radio stations matured into cool, hipper programs on better-sounding FM stations. Advancements in vinyl, long-playing records made hi-fi not merely playthings for suave James Bond types but ordinary must-haves for college kids.

Fast forward to 1974. Pop radio songs included “Jungle Boogie” by Kool and the Gang. On television, then still limited to three networks and a few independent channels, “Happy Days” made its premiere.

After closing two original stores in Richmond, the Wurtzels launched one of the nation's first megastores. Renamed Wards Loading Dock, the store was a 40,000-square-foot behemoth with thousands of electronics products, including stereos, receivers, eight-track and reel-to-reel tape players, televisions and major appliances. The Wurtzels had developed an important business model: low-cost megastores in middle markets could thrash smaller, mom-and-pop competitors.

Yet a decade later, Wards Loading Dock and the Wurtzels were in trouble. The store concept that seemed so cutting-edge in the 1970s was getting stale in the 1980s. Revenues faltered and, after a number of stores selling the company's TVs went out of business, Wards also faced possible bankruptcy. So Wurtzel, then chief executive, reinvented the Wards concept again.

The Circuit City Superstore was born in 1984. Wurtzel took the Loading Dock idea to the next level as an even bigger superstore with national outlets. More innovation followed. Circuit City developed proprietary point-of-sale machines such as cash registers, software and scanners. The company's technology allowed it to track sales instantly and electronically so sales commissions could be tabulated — an innovation at the time. Soon, Circuit City employees believed that no one knew retail sales better than they did.

Leading the advances in point-of-sale technology was a new executive vice president the company had hired from Applied Systems Corp., which had starting selling Wards' point-of-sale software and hardware such as mini- and microcomputers, then novelties. He was Richard L. Sharp, a Washington, D.C., native and founder of ACS who developed close personal ties with Alan Wurtzel.

Sharp had been something of an electronics geek as a teenager and he parlayed that interest into studying electrical engineering at the University of Virginia and computer science at the College of William and Mary. Wurtzel knew that expanding the superstore concept would depend enormously on proprietary electronics systems that could bring conformity and efficiency to his organization. In 1982, he recruited Sharp, who leaped up the corporate ladder to CEO in 1986 and then chairman in 1990.

Under Sharp, stores went from the dozens to the hundreds, and the company entered the tough New York City market as well as Los Angeles and San Francisco. Revenues grew from $175 million to an eventual $12 billion. Soon, Circuit City became the No. 2 electronics retailer in the country and garnered national attention for its strong management skills.

Business author Collins touted Circuit City as a stunning example of remarkable returns that allowed it to jump from being merely “good” to “great.” He wrote: “From 1982 to 1999, Circuit City generated cumulative stock returns 22 times better than the market, handily beating Intel, Wal-Mart, GE [General Electric], Hewlett-Packard and Coca-Cola.”

Sharp became a powerhouse in another way. His Sharp Foundation has distributed hundreds of thousands of dollars to charities, and he's been a director or trustee of Johns Hopkins and the University of Virginia Medical School, the Boys and Girls Clubs of Metro Richmond and Virginia Commonwealth University's engineering school. Another favorite beneficiary of white-haired, hawk-faced Sharp, 61, is the Republican Party, whose candidates have benefited greatly from his contributions. President George W. Bush even attended a private fundraiser at Sharp's home in Goochland County in 2005.


One of Circuit City's biggest successes, and, indirectly, one of the causes of its downfall, was a hot idea hatched in the early 1990s to sell used cars in a new way.

Some of Sharp's lieutenants, including Austin Ligon and Mark O'Neil, started kicking around ways to use the Circuit City experience to sell used cars. The team started with focus groups of consumers. The stunned executives were met with silence when they asked lab-rat customers what they liked about the buying process, according to an account written by Ligon.

So they focused on what customers did not like and thought up ways to change things, emerging with a way of selling cars by first asking buyers to choose exactly what model, make, color and accessories they wanted. The seller then locates exactly that vehicle throughout the CarMax inventory using bar codes. The process would get help from the sophisticated, proprietary point-of-sale software that Circuit City developed with Sharp's help. After adding a car-financing component they launched their concept: CarMax.

CarMax opened its first huge outlet in Richmond in 1993. It was such a big hit with customers that during the next three years, Circuit City opened outlets in Raleigh and Charlotte, N.C., Atlanta and Orlando. Management took the stock public in 1997 and CarMax went on a tear across the United States. Within a few more years, CarMax would emerge as the No. 1 used car retailer in the country.


Circuit City watchers might debate when the company started to fall apart, but the starting date was likely in the late 1990s when CarMax was blossoming and the electronics side was gaining an even bigger national footprint with an increasing number of stores. One important milestone was in March 2000 when its stock peaked at $60 a share. It was downhill from there.

At the time, Sharp seemed twisted in different directions. He was absorbed with launching CarMax and was diversifying into new product areas that didn't work out, such as home-security systems and heating and air-conditioning installation. The company played with redesigning its stores into more of a “warehouse” format.

In 1997, Circuit City flirted with a new way of watching movies, launching a DVD-movie system called Divx. The movie-cassette industry was then dominated by the familiar VHS format. Divx offered higher quality than VHS, and its encrypted DVDs, which could be purchased over the phone, expired after a certain period, eliminating the need to rent movies from chains such as Blockbuster.

But the format failed to win the support of Hollywood producers, limiting its movie offerings and thus killing the business. After spending $205 million to develop and launch the system, Circuit City shut down Divx in June 1999. It would be the first in a decade-long series of missteps.

Complacency set in. Sharp, then chief executive and chairman, turned his focus to CarMax. In 1997, W. Alan McCollough became president and chief operating officer of Circuit City.

“We became more focused on pleasing Wall Street than coming up with a lot more competitive products,” says Alan Wurtzel, the son of the founder who retired as chief executive in 1986. “We weren't making the investments we needed to stay competitive.”

Circuit City forgot the core values that built the business and “wasn't aggressive enough on pricing,” Wurtzel says. By 2000, McCollough replaced Sharp as chief executive just as stores were adjusting to rafts of new goods, such as DVDs, digital cameras and large-screen televisions.

While battling Wal-Mart, Kmart and other competitors, Circuit City executives somehow didn't seem to notice an upstart retailer from suburban Minneapolis, Best Buy. But the scrappy competitor had scored some firsts. It embraced DVD technology in 1997 while Circuit City was stuck with Divx. It made inroads by using the Internet for sales and grabbing the high-end consumer electronics market. By 2007, Best Buy had 600 stores, had launched in-store Geek Squad home-computer help, set up shop in China and had been named Retailer of the Year by Forbes magazine.

In what would prove a fateful move, Sharp left Circuit City to oversee CarMax when it was split away in 2002. “When Sharp left, he took a lot of managerial talent with him,” says Tom Arnold, a business professor at the University of Richmond. “For Circuit City, Car Max was a distraction and then it became a succession problem.”

“They didn't seem to know if Circuit City was a mature company that didn't need to grow any more or if they needed to expand,” Arnold says. “They expanded, but they never took a good look at their business model.”

The company seemed rudderless. It continued a massive store expansion campaign. “And when you announce 30, 40 or 50 store openings a year,” Wurtzel says, “you had better make that bogey when you are so committed to Wall Street.” Many of the stores, Wurtzel says, were located in dicey neighborhoods, scaring customers away.

Analyst Widlitz says that in the 1990s, Circuit City “signed on to some expensive real estate deals” involving 250 to 300 stores — the company ended up with about 1,500 — that were difficult to update.

McCollough took other questionable steps. Instead of embracing Circuit City's tried-and-true system of commissioned salespeople, he canned 3,900 of the company's biggest earners and shifted to a noncommissioned sales force. He dumped the store's profitable credit-card business by selling it to Bank One, now Chase. That gave the company its first loss in 15 years because of discontinued operations from the credit-card sale.

Circuit City compounded its errors by messing with its branding, according to veteran business reporter J. Garland Pollard IV, a former Richmonder who operates a blog about product branding in Sarasota, Fla. The company is failing, he believes, because it forgot its fundamentals — it stopped being a low-price leader and started worrying too much about image branding and hiring inexperienced sales people. When Circuit City opened in 1984, its motto: “Circuit City — Where the Streets are Paved with Bargains.”

“It's such a Richmond thing,” Pollard says. “You get successful and you get arrogant and you think you are better than everybody else.”

By 2005, the fact that Circuit City was stumbling became quite clear in financial circles. In February, a Boston hedge fund, Highfields Capital, offered to buy the company for $17 a share, claiming that management had failed to maximize shareholder value. The Circuit City board declined the offer, but soon after McCollough retired as chief executive.

The job was given to Philip J. Schoonover, a star player at Best Buy and a former executive with TOPS Appliance City and Sony Corp. of America. Schoonover, who was recruited in 2004, added the title of chairman in 2006.

With Schoonover's arrival came a game of musical chairs in the executive suite as he brought in his own people. Of 13 high level executive jobs, including those of chief financial and operating officer and various senior vice presidents, only one had been in his position before 2005. The board of directors was only somewhat more stable, with about half of the directors predating 2004.

Innovation seemed anemic, with the exception of launching the new Firedog computer service to compete with Best Buy's Geek Squad and a new line of home theater products. But the store expansions continued apace and Schoonover continued the slaughter of the sales staff, canning 3,400. He eliminated sales jobs that paid $12 an hour, and replaced them with workers making $8 an hour.

By early this year, Circuit City was facing its second loss in two years. Dallas-based Blockbuster, with plenty of its own problems, approached with a takeover offer of nearly $1.3 billion.

According to Richmond professor Arnold, the offer touched off board room intrigue because not all directors were privy to details. Among those upset were directors associated with Wattles Capital, a hedge fund that held 6.5 percent of Circuit City's shares. Miffed about the secrecy and annoyed at the company's lackluster performance, Wattles sought five director seats.

Among Wattles' complaints was that besides losing money, Circuit City's management continually sought a “silver bullet” to end its problems rather than “focusing on basic retail execution, such as having the right products for sale, priced strategically, displayed well, and sold by the right people. As a result, Circuit City's performance is now significantly worse than when the turnaround first began,” Wattles wrote in an open letter to Circuit City's shareholders. Wattles won three board seats and set Schoonover up for departure.

By summer, Circuit City's sales had plummeted, its stock was in a steep dive and it was quickly eating up its cash reserves. At the end of August, available cash had dwindled to $92.5 million, down from $297.4 million at the end of February. Incredibly, according to Arnold, the retailer kept launching new stores. “If you are in such trouble,” he says, “you don't just keep on expanding.”

Finally, Schoonover resigned in late September. He was replaced by Wattles maven James A. Marcum, who'd helped turn around two retailers in the West. Without providing Marcum for media interviews, Circuit City officials said Marcum was making a “strategic review” and coming up with a comeback plan, although details have yet to be released.


But Marcum was facing an even bigger problem — desperate Circuit City was about to slam into the worst financial crisis in decades. Not only would such venerable Wall Street investment companies as Lehman Brothers and Merrill Lynch go out of business or be bought out, commercial paper, the lifeblood of everyday business, froze up. Banks simply stopped lending. Credit was cut off. And that scared the hell out of the vendors Circuit City relied upon, such as Hewlett-Packard, Sony and Samsung, to which Circuit City already owed millions.

Circuit City badly needed a holiday sales bump, but with vendors balking at the chances that their precious goods could get trapped in closed stores, the company took dramatic steps.

Shortly after Sharp was installed in the Consumer Electronics Hall of Fame at a dinner Oct. 21 at the swank Four Seasons Hotel in Las Vegas, where the menu included lobster bisque and beef filets, Circuit City announced it was closing 155 stores and laying off 17 percent of its work force. Four days later, on Nov. 7, the company laid off 700 Richmond workers, about 20 percent of its management staff.

On Nov. 10, it filed for Chapter 11 bankruptcy, listing debts of nearly $500 million. Trading its stock on the New York Stock Exchange has been suspended. But Ricardo Salinas Pliego, said to be Mexico's third-richest man with assets in excess of $4 billion, has picked up a 28 percent stake in Circuit City by bottom-fishing.

Going bankrupt has its own logic. It offers Circuit City and its vendors some protection as the holiday sales season approaches. It may well be that the company emerges from bankruptcy as a viable, although much smaller, entity. Business school studies show that about one quarter of companies that go bankrupt successfully reorganize and about half of those are still functioning five years later.

Arnold puts Circuit City's survival chances at 50-50.

Those chances, however, may be overly optimistic. Richmond has seen seven major bankruptcies in the past 20 years. Of them, Miller & Rhoads, Best Products Co., This End Up and Heilig-Myers have vanished. Only Schwarzschild Jewelers, a much smaller operation, continues to operate under its original name. According to BusinessWeek, competitors are licking their chops at Circuit City's store base. Best Buy is likely to swoop in, along with Wal-Mart, Target and some online distributors. About $10.5 billion in electronic goods could be up for grabs.

One-time star performer CarMax is feeling the pinch too. The credit crunch and slack auto sales have forced CarMax to ax 610 workers, 4 percent of its work force, nationwide. In Richmond, the layoffs involve 15 workers at two stores following a second-quarter sales decline of 13 percent to $1.84 billion. When asked for an interview, Chris Wilmore, a CarMax public-relations specialist replies: “Thanks for the opportunity, but we wouldn't be making anyone available.”

To Wurtzel, the demise of Circuit City, the pride of his family, is a bitter pill. “I feel terrible for both the people who have lost their jobs and will,” he says, “and for the legacy of my father.” S



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