Richmond, Va. -- Majap mavens were surprised, rather than shocked, by Circuit City's seemingly spontaneous decision to pull the plug on appliances last month.
Industry observers agree the tip-off came last spring when the nation's No. 2 white-goods merchant began pulling appliances from its Florida stores and made a half-hearted effort to open freestanding white-goods shops as part of a statewide test of new formats.
What surprised competitors, suppliers and financial analysts was that the chain, still smarting from its Divx debacle, would walk away from a $1.5 billion business and plan to replace it with PCs and quick-turn, low-margin electronics.
In a conference call, Circuit City president/CEO Alan McCollough told analysts the decision was precipitated by a "significant degradation in our appliance business," which was exacerbated by dramatic price wars between Lowe's, Home Depot and Sears, and by poor seasonal air conditioner sales.
"The magnitude and speed of the decline were something we had never seen before," he said, "and there's no reason that we should expect this to change."
While appliance pundits acknowledge the coming bloodbath as Sears slugs it out with the home improvement chains, they fault Circuit for playing on the same under-$400 field, rather than using their commissioned sales force to trade up their business. Moreover, Circuit is seen as unabashedly emulating Best Buy's grab-and-go merchandising model, and CEO Dick Schulze's laser-like focus on digital products.
A more pressing issue for merchants and manufacturers is the fate of Circuit's 5 percent market share in majaps. While vendors say the excess production will be absorbed by their dealer networks, retailers are already laying claim to Circuit's sales -- and are taking steps to secure it.
"We're hoping to get an unfair share of it," declared Tina Settecase, VP/GMM of home appliances for Sears, retailing's 800-pound white goods gorilla. "Sears is in a better position to pick up market share. We take care of the customer from purchase to delivery to follow-up, and a very significant portion of the population is still looking for service and in-store support."
To press its nearly 38 percent market share advantage, Sears has stepped up previously announced plans to test freestanding appliance/electronics stores in Chicago and Philadelphia. "We've been looking at some sites for some time," CEO Arthur Martinez said in a conference call, after announcing solid second-quarter earnings that were sparked in large part by appliances.
"Everybody has their priorities," Settecase said of Circuit's ailing appliance operation. "Theirs was below 15 percent of their entire business. You need a commitment to that category. It's relatively complex, not a take-with business."
Within days of Circuit's announcement, No. 4 majap merchant Best Buy -- amid speculation that they'd soon follow suit -- demonstrated its commitment to the category by adding Whirlpool's premium KitchenAid brand to its assortment. Senior VP/general merchandise manager Mike London said the move "supports our efforts in appliances," which represent 8 percent of Best Buy's total revenue.
According to Best Buy merchandise manager David Kielly, the deal had been in the works for months, and the timing of the announcement was purely coincidental. "I don't think anybody would have anticipated what Circuit did," he said. Nevertheless, he stressed, "It's not our intention to do what they did. We have every desire to be in and grow our share of the appliance business."
He added that Best Buy "has a good opportunity" to pick up some of Circuit's market share given the similarity between the two specialty stores, although Sears, as the appliance kingpin, will also stand to gain. "We think we'll do okay," he said.
Lowe's is also widening its Whirlpool pipeline as it girds for battle with Home Depot, which is busy rolling out GE and Maytag majaps to its nearly 1,000 stores. The chain, which says it has surpassed Circuit in appliance sales to become the second-largest white goods retailer, has also added KitchenAid to its offerings, as part of a stepped up program with Circuit's largest white goods supplier.
To Doug Kelly, divisional merchandise manager for sixth-ranked P.C. Richard & Son, competing on price with these national players was the crux of Circuit's problem. "It's a mix issue," he observed. "You can't just sell at the entry-level opening price point and make a profit. You need a broad mix, and you need a directed sales force to step up to that mix. Otherwise, it's just a white box."
Appliance distributor Marty Friedman, president of Eastern Marketing Corp., said he saw the writing on the wall when he visited Circuit headquarters two years ago. "The category seemed foreign to them," he recalled. "They had nice young ladies who knew the kitchen, but no experienced people buying appliances and no interest in trading up. The group guys discovered that the way to be successful is through add-on sales and secondary and tertiary lines. If you only sell what the customer wants, you can't stay in business."
Independent dealers also succeed through service. Explained Bob Lawrence, executive director of the AVB/Brand Source buying group, "White goods is a difficult category. You've got deliveries, callbacks and after-service, and expectations are way up there with the consumer. It requires a lot of hand-holding."
While Lawrence sees Circuit's departure as "a huge opportunity for us," and is accelerating the group's Brand Source branding campaign, he doesn't envision any single beneficiary of the vacuum. "There's a certain type of customer that will buy at Lowe's -- that will put it in the back of their pick-up and drive away -- and there's another type that wants full service."
But Warren Mann, executive director of the MARTA buying cooperative disagrees. "Because the Circuit customer went there for service, they won't go to a self-serve store like Lowe's, Depot or Sam's Club," he argued. "Some of the business goes to Sears, but it's also very good news for our guys."
Though thankful, Mann remains perplexed by Circuit's move, given their long history with the category. "They were one of the biggest NATM members selling appliances," he said. "These guys have made a huge management blunder. They're getting rid of profitable merchandise that they've built a loyal customer base around to sell printers. The best thing they could have done was to fix their appliance business, which sustained them for years.
"Are they also getting out of projection TVs?" Mann asked. "Because there's absolutely no difference between selling them and appliances. I think they just don't have the energy to fight what's going on in the marketplace, with self-cleaning ranges at $288 and 25-cubic-foot side-by-side refrigerators under $800."
Saul Gold, NATM's founding executive director, was also scratching his head. "I can't see how they're going to replace over a billion dollars worth of products profitably with computers and electronics. The only place is in digital, but that's three years down the road. Where are they going to make it up?"