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All Eyes Are On Circuit City, Tweeter

10/28/2008 02:00:00 AM Eastern

While the CE industry is already holding its collective breath over the coming holiday season, the wild cards that are Circuit City and Tweeter are adding to the anxiety.

The fates of the No. 2 CE specialty chain, and to a lesser extent Tweeter, could have far-reaching effects on their suppliers and competitors, and hasten an industry-wide restructuring anticipated by some industry observers.

An immediate concern is that possible store closings and fire sales by Circuit City, suggested in a Wall Street Journal report last week, would flood the market with deeply discounted product and put added promotional pressure on retailers.

With credit markets frozen, Circuit might be forced to close more than 20 percent of its stores and liquidate $350 million in inventory to keep the company afloat through Christmas, the article quoted sources as saying.

Jim Ristow, executive VP of Home Entertainment Source (HES), the specialty A/V division of the Brand Source buying group, outlined three possible scenarios for the chain during a fourth-quarter Webinar presentation for members last week:

• the retailer could restructure under Chapter 11 bankruptcy protection and emerge as a different company, although obtaining a bridge loan in this environment is difficult;

• Circuit could be acquired after entering Chapter 11, allowing the new owner to close 300 to 400 of its approximately 700 stores, including those with poor locations and bad leases, or;

• management could opt for liquidation.

The last alternative would displace billions of dollars in CE merchandise and further squeeze manufacturers, who are already contending with high inventory levels and lowered forecasts from big-box customers, Ristow said.

While Circuit City is still reportedly paying vendors and receiving shipments, he said he expects the chain to be “the most predatory” in its fourth-quarter pricing and to do “more unnatural things” during the holidays.

Richard Sharp, former chairman, president and CEO of Circuit City, acknowledged “the company's recent struggles” during his induction into the CE Hall of Fame last week. (See p. 22) Sharp, whose day-to-day involvement with the chain ended in 2000, hopes that “Circuit City survives and prospers” and that “the industry gives them a chance” to turn things around, because the CE business will be hurt “if we lose a chain like Circuit City.”

Gary Shapiro, president/CEO of the Consumer Electronics Association (CEA), spoke with TWICE at his event last week and downplayed the impact of a Circuit City failure. “I like a lot of people at Circuit City and I know that a lot of suppliers are focused on them now,” he told TWICE in an upcoming interview. “Everyone wants competition at retail. Even some retailers want that competition.

“Whatever happens to [Circuit City] will happen to them, but it will not make or break the consumer electronics industry in the long term. Circuit City is a painful moment for the industry because it has such a legacy, but it is a short-term painful moment. [The industry] will survive no matter what happens with Circuit City, and five years from now we will be hearing about another retailer having another painful moment.”

Tweeter, which earlier this month replaced CEO George Granoff with an outside chief restructuring officer, is facing similar choices, HES's Ristow said.

Neither George Schultze, principal of the eponymous investment group that owns Tweeter, nor Granoff's interim successor, Craig Boucher, would comment for this article.

Contributing to CE retail's woes is an over-stored marketplace, which has grown more crowded as Best Buy accelerated its build-out and discount chains like Wal-Mart, Target and Costco expanded and upgraded their CE assortments, observers say. This, plus the precarious economy, could lead to another retail shakeout akin to the early 1990s.

“Weaker dealers will go out of business or consolidate, and vendors will cut production or restructure” during a downturn that will last quarters rather than weeks or months, HES's Ristow told dealers.

But a shakeout could also create opportunities for new businesses and models. “There were a lot of retailers around 20 or 25 years ago who are not around now,” said CEA's Shapiro. Since the turn of the century, the industry has seen “Amazon and eBay come onto the horizon,” along with “independent retailers with custom installers, wireless retailers ... as new technologies come up so do new types of retailers.”