WEBVTT 00:00:00.000 --> 00:00:02.259 Welcome back to the Deep Dive. Today, we are 00:00:02.259 --> 00:00:05.339 looking at a giant. And I mean, I really don't 00:00:05.339 --> 00:00:07.980 use that word lightly. We are talking about a 00:00:07.980 --> 00:00:11.179 true titan of the American retail landscape that 00:00:11.179 --> 00:00:15.000 for a very, very long time just seemed absolutely 00:00:15.000 --> 00:00:18.300 invincible, untouchable. Totally. And if you 00:00:18.300 --> 00:00:20.620 grew up in the United States, any time between, 00:00:20.739 --> 00:00:24.760 say, the 80s and the early 2000s, you know exactly 00:00:24.760 --> 00:00:26.160 what I'm talking about. You can probably picture 00:00:26.160 --> 00:00:28.559 it right now. Oh, the imagery is iconic. It's 00:00:28.559 --> 00:00:30.489 burned into my... brain. It really is. I want 00:00:30.489 --> 00:00:32.909 you to just close your eyes for a second. Imagine 00:00:32.909 --> 00:00:34.929 you're in the passenger seat of your parents' 00:00:35.049 --> 00:00:37.490 station wagon, right? You're driving down some 00:00:37.490 --> 00:00:40.549 suburban highway, you pass a strip mall, and 00:00:40.549 --> 00:00:43.829 there it is. The Red Tower. That massive burgundy 00:00:43.829 --> 00:00:46.590 red tiled tower standing like a fortress at the 00:00:46.590 --> 00:00:50.350 entrance. The plug design, the sheer scale of 00:00:50.350 --> 00:00:52.469 the place. We're talking, of course, about Circuit 00:00:52.469 --> 00:00:55.359 City. It's such a fascinating case study. Because 00:00:55.359 --> 00:00:57.420 for a long time, Circuit City wasn't just another 00:00:57.420 --> 00:01:00.719 store. It was the destination. It was the place 00:01:00.719 --> 00:01:02.479 you went to see what the future of technology 00:01:02.479 --> 00:01:06.079 looked like. If you wanted to see the first flat 00:01:06.079 --> 00:01:09.859 screen TV or the first DVD player or the newest 00:01:09.859 --> 00:01:12.640 camcorder, you went to the Red Tower. And yet, 00:01:12.799 --> 00:01:15.859 if you drive past those same locations today. 00:01:16.430 --> 00:01:18.730 The contrast is just haunting. It really is. 00:01:18.829 --> 00:01:20.569 They're either these empty shells or they've 00:01:20.569 --> 00:01:23.109 been turned into a gym or a Halloween pop -up 00:01:23.109 --> 00:01:25.390 store or some other retailer. The speed at which 00:01:25.390 --> 00:01:27.689 this company went from a Fortune 500 powerhouse 00:01:27.689 --> 00:01:31.859 to total liquidation is just... And that is exactly 00:01:31.859 --> 00:01:34.239 the mission of this deep dive. We are not just 00:01:34.239 --> 00:01:36.599 here to get nostalgic about buying CDs in 1998. 00:01:37.140 --> 00:01:39.680 We really want to understand how a company that 00:01:39.680 --> 00:01:42.099 pioneered the very concept of the electronic 00:01:42.099 --> 00:01:44.859 superstore and, spoiler alert for anyone who 00:01:44.859 --> 00:01:46.959 doesn't know this, a company that actually created 00:01:46.959 --> 00:01:49.980 the massive success that is CarMax. Which is 00:01:49.980 --> 00:01:51.959 an amazing story in itself. How could a company 00:01:51.959 --> 00:01:53.659 like that just completely collapse? We're talking 00:01:53.659 --> 00:01:55.340 about a company that liquidated everything in 00:01:55.340 --> 00:01:59.640 2009. Gone. Poof. And it's not just... You know, 00:01:59.640 --> 00:02:01.739 it's not just a story about the economy being 00:02:01.739 --> 00:02:03.599 bad in 2008. I mean, that's the easy answer, 00:02:03.700 --> 00:02:05.700 but it's not the whole story. Not even close. 00:02:05.920 --> 00:02:09.060 No. When you really dig into the source material, 00:02:09.340 --> 00:02:11.360 especially the detailed corporate history and 00:02:11.360 --> 00:02:13.979 all the financial filings, you see this series 00:02:13.979 --> 00:02:17.960 of strategic missteps that are They're almost 00:02:17.960 --> 00:02:19.560 Shakespearean in their nature. We're going to 00:02:19.560 --> 00:02:21.939 look at how they timed the housing market completely 00:02:21.939 --> 00:02:24.900 wrong, how they bet on the wrong tech formats. 00:02:25.099 --> 00:02:27.439 And this is maybe the most critical part, how 00:02:27.439 --> 00:02:29.819 they fundamentally misunderstood the value of 00:02:29.819 --> 00:02:32.039 their own people. Oh, that human capital piece. 00:02:32.360 --> 00:02:34.800 When we get to it, it is going to blow your mind. 00:02:34.900 --> 00:02:37.539 It's genuinely one of the most frustrating, just 00:02:37.539 --> 00:02:40.180 baffling corporate decisions I've ever read about. 00:02:40.340 --> 00:02:42.780 It's a textbook example of what not to do. Exactly. 00:02:43.060 --> 00:02:45.020 But before we can get to the collapse, we have 00:02:45.020 --> 00:02:47.340 to start with the rise. Because Circuit City 00:02:47.340 --> 00:02:49.740 didn't just appear as a big box store. It actually 00:02:49.740 --> 00:02:52.000 started with a barbershop. It did. It's a classic 00:02:52.000 --> 00:02:54.080 American origin story. But I think you have to 00:02:54.080 --> 00:02:56.319 understand the context of the era to really get 00:02:56.319 --> 00:02:58.479 why it was so revolutionary. We have to go back 00:02:58.479 --> 00:03:02.259 to 1949. 1949. OK, so post -World War II. The 00:03:02.259 --> 00:03:04.539 baby boom is just getting started. Suburbs are 00:03:04.539 --> 00:03:06.919 being built. Precisely. The American consumer 00:03:06.919 --> 00:03:10.020 engine is just waking up from the war. So into 00:03:10.020 --> 00:03:14.020 this world comes Samuel S. Wurzel. He's a businessman. 00:03:14.620 --> 00:03:16.800 And he's on vacation in Richmond, Virginia. Okay. 00:03:17.240 --> 00:03:19.939 And you have to imagine this scene. He's sitting 00:03:19.939 --> 00:03:22.340 in a local barbershop, just getting a trim, a 00:03:22.340 --> 00:03:24.340 totally normal day. And while he's sitting in 00:03:24.340 --> 00:03:27.860 that chair, he witnesses something that completely 00:03:27.860 --> 00:03:31.259 changes his life. He sees the start of a television 00:03:31.259 --> 00:03:33.699 broadcast in the South. Let's just pause on that 00:03:33.699 --> 00:03:37.099 for a second. 1949, he sees the TV. I mean, today 00:03:37.099 --> 00:03:39.400 we're so saturated with screens. They're in our 00:03:39.400 --> 00:03:42.300 pockets, on our walls, in our cars. But back 00:03:42.300 --> 00:03:45.199 then, what did that actually mean? Oh, cool, 00:03:45.300 --> 00:03:48.240 a TV. No, no, it was basically alien technology. 00:03:48.340 --> 00:03:50.159 It was magic. You have to remember, for most 00:03:50.159 --> 00:03:52.439 people, entertainment was the radio. It was audio 00:03:52.439 --> 00:03:54.759 only. Right, voices out of a box. To see moving 00:03:54.759 --> 00:03:57.979 pictures. In a box, in a barbershop. It was a 00:03:57.979 --> 00:04:00.199 marvel. But the way people bought things back 00:04:00.199 --> 00:04:04.199 then, retail was very stiff. Stiff how? Like 00:04:04.199 --> 00:04:05.840 you had to wear a suit and tie just to go look 00:04:05.840 --> 00:04:08.139 at a toaster? Pretty much. You went to an apartment 00:04:08.139 --> 00:04:09.979 store, everything was behind a glass counter. 00:04:10.319 --> 00:04:13.039 You had to ask a clerk, usually an older gentleman, 00:04:13.120 --> 00:04:15.219 in a suit. to please show you the merchandise 00:04:15.219 --> 00:04:17.819 it sounds so formal it was a very high friction 00:04:17.819 --> 00:04:20.639 experience it was intimidating wurzel and later 00:04:20.639 --> 00:04:24.120 his son alan they realized that the future wasn't 00:04:24.120 --> 00:04:26.420 may i help you sir it was look at this massive 00:04:26.420 --> 00:04:28.680 pile of cool stuff so he's in the barber shop 00:04:28.680 --> 00:04:31.060 the tv turns on most people would just say wow 00:04:31.060 --> 00:04:34.600 that's neat but wurzel sees dollar signs he sees 00:04:34.600 --> 00:04:37.500 the future of consumer demand and what's amazing 00:04:37.500 --> 00:04:40.939 to me is the speed of his reaction He didn't 00:04:40.939 --> 00:04:42.720 just go home and write a business plan for a 00:04:42.720 --> 00:04:46.879 year. In late 1949, same year, he moved his entire 00:04:46.879 --> 00:04:50.180 family to Richmond and opened the first Ward's 00:04:50.180 --> 00:04:52.759 Company retail store. And just to clarify for 00:04:52.759 --> 00:04:54.899 everyone listening, Ward's Company was the original 00:04:54.899 --> 00:04:57.740 name. It wasn't Circuit City yet. Correct. And 00:04:57.740 --> 00:05:00.139 for the next couple of decades, really through 00:05:00.139 --> 00:05:03.019 the 50s and 60s, Ward's Company was successful, 00:05:03.120 --> 00:05:05.199 but it was still kind of exploring. They were 00:05:05.199 --> 00:05:07.060 figuring out what they wanted to be when they 00:05:07.060 --> 00:05:09.129 grew up. They were expanding into places like 00:05:09.129 --> 00:05:12.709 Albany, Mobile, D .C., and Costa Mesa, California. 00:05:13.430 --> 00:05:16.029 They even had a mail order business called Dixie 00:05:16.029 --> 00:05:18.910 Hi -Fi. Wait, mail order Hi -Fi? That sounds 00:05:18.910 --> 00:05:21.649 like the Amazon of the 1960s or something. In 00:05:21.649 --> 00:05:23.449 a way, it was. They were trying to reach the 00:05:23.449 --> 00:05:25.430 audiophiles, the real enthusiasts. They were 00:05:25.430 --> 00:05:27.050 testing all these different formats. They had 00:05:27.050 --> 00:05:31.269 smaller mall outlets called Sight & Sound. And 00:05:31.269 --> 00:05:33.889 some were even branded Circuit City. But it wasn't 00:05:33.889 --> 00:05:35.990 the Superstore concept yet. It was still small 00:05:35.990 --> 00:05:39.269 scale. OK, so when does the Circuit City that 00:05:39.269 --> 00:05:41.370 we all remember actually come into play? When 00:05:41.370 --> 00:05:44.370 do we get that big warehouse vibe? Because that 00:05:44.370 --> 00:05:46.389 feels like such a distinct shift from a little 00:05:46.389 --> 00:05:49.370 sight and sound store in a mall. The real game 00:05:49.370 --> 00:05:52.589 changer happens in the mid 70s. Samuel's son, 00:05:52.750 --> 00:05:55.970 Alan Wurzel, he becomes CEO in 1972. And Alan 00:05:55.970 --> 00:05:59.029 has a long range plan. OK. In 1975, they're building 00:05:59.029 --> 00:06:01.069 a new corporate office and distribution center 00:06:01.069 --> 00:06:03.910 on Thalbro Street in Richmond. And they have 00:06:03.910 --> 00:06:06.279 all this extra space in the facility. I mean, 00:06:06.279 --> 00:06:08.060 basically a big empty chunk of the warehouse. 00:06:08.399 --> 00:06:10.779 So they decided to open a new retail format right 00:06:10.779 --> 00:06:13.600 there. They called it Ward's Loading Dock. Ward's 00:06:13.600 --> 00:06:16.399 Loading Dock. It sounds so gritty, industrial, 00:06:16.680 --> 00:06:18.560 like you need to wear a hard hat to go shopping. 00:06:18.759 --> 00:06:20.560 And that was exactly the point. It opened in 00:06:20.560 --> 00:06:24.920 May 1975. It was a massive warehouse showroom 00:06:24.920 --> 00:06:30.209 and consumers. They absolutely loved it. I mean, 00:06:30.230 --> 00:06:32.089 why would people want to shop in a loading dock 00:06:32.089 --> 00:06:34.350 compared to a nice department store with, you 00:06:34.350 --> 00:06:36.750 know, carpets and stuff? It implies a lack of 00:06:36.750 --> 00:06:38.910 pretense. It was literally the loading dock of 00:06:38.910 --> 00:06:40.410 their corporate headquarters. They rolled up 00:06:40.410 --> 00:06:42.970 the bay doors. It was gritty. But that triggers 00:06:42.970 --> 00:06:45.829 something in the consumer's brain. It makes you 00:06:45.829 --> 00:06:47.170 feel like you're getting a deal, like you're 00:06:47.170 --> 00:06:49.269 bypassing the middleman and buying it straight 00:06:49.269 --> 00:06:51.689 off the truck. It's the Costco effect or like 00:06:51.689 --> 00:06:54.170 the Ikea warehouse section. If I have to go pick 00:06:54.170 --> 00:06:56.610 it off a giant metal pallet myself, I assume 00:06:56.610 --> 00:06:58.629 I'm paying less for it. Precisely. It's that 00:06:58.629 --> 00:07:01.370 treasure hunt aspect. And because it was so wildly 00:07:01.370 --> 00:07:04.410 popular, they decided to pivot the entire company 00:07:04.410 --> 00:07:08.069 toward this model. So by 1978, they renamed this 00:07:08.069 --> 00:07:10.920 format the Circuit City Superstore. which led 00:07:10.920 --> 00:07:12.379 to the company listing on the New York Stock 00:07:12.379 --> 00:07:15.279 Exchange in 1984 and then officially changing 00:07:15.279 --> 00:07:18.139 its corporate name to Circuit City Stores, Inc. 00:07:18.560 --> 00:07:22.019 So they ride this superstore wave right into 00:07:22.019 --> 00:07:25.040 the 80s. And this is where the branding we all 00:07:25.040 --> 00:07:27.759 know really starts to solidify. We mentioned 00:07:27.759 --> 00:07:30.060 the Red Tower earlier. That wasn't just some 00:07:30.060 --> 00:07:32.180 arbitrary design choice, was it? They didn't 00:07:32.180 --> 00:07:34.399 just have a surplus of red tiles laying around. 00:07:34.579 --> 00:07:37.819 No, no. It was incredibly strategic. In 1985, 00:07:38.240 --> 00:07:41.439 they were entering the Los Angeles market. Now, 00:07:41.500 --> 00:07:44.620 you have to think about L .A. It's a car culture. 00:07:44.860 --> 00:07:47.839 Totally. You're driving past endless strip malls 00:07:47.839 --> 00:07:50.759 and shopping centers at 45, 50 miles per hour. 00:07:50.779 --> 00:07:52.779 If you want to stand out, you need something 00:07:52.779 --> 00:07:54.660 vertical. You need a beacon. You need something 00:07:54.660 --> 00:07:57.019 that just pops against all that beige stucco. 00:07:57.100 --> 00:08:00.220 Exactly. So they introduced the red tower entrance 00:08:00.220 --> 00:08:03.360 specifically to be identifiable to drivers in 00:08:03.360 --> 00:08:06.550 that crowded L .A. market. It was brilliant architectural 00:08:06.550 --> 00:08:08.430 branding. You didn't even need to read the sign. 00:08:08.550 --> 00:08:10.029 You saw the shape. You saw the color. And you 00:08:10.029 --> 00:08:12.610 knew that's what the TEs are. It's marketing 00:08:12.610 --> 00:08:14.730 through architecture, which is so smart. And 00:08:14.730 --> 00:08:17.209 then in 1988, they evolved that look into what 00:08:17.209 --> 00:08:20.069 they called the plug design. Right. If you look 00:08:20.069 --> 00:08:22.860 at photos from that era. The entrance literally 00:08:22.860 --> 00:08:26.000 looks like a giant electrical plug going into 00:08:26.000 --> 00:08:28.220 the building. Yeah. They were just doubling down 00:08:28.220 --> 00:08:30.540 on their visual brand as the place for electronics. 00:08:30.819 --> 00:08:33.259 And along with that look, they had the slogan, 00:08:33.440 --> 00:08:36.179 Welcome to Circuit City, where service is state 00:08:36.179 --> 00:08:38.820 of the art. And, you know, in the 80s and 90s, 00:08:38.820 --> 00:08:41.659 that wasn't just a tagline. It was a real differentiator. 00:08:41.779 --> 00:08:44.460 You have to remember, technology back then was 00:08:44.460 --> 00:08:47.019 complicated. Oh, yeah. It was not plug and play 00:08:47.019 --> 00:08:49.399 like it is today. Not at all. Setting up a home 00:08:49.399 --> 00:08:51.440 theater meant dealing with all these different 00:08:51.440 --> 00:08:54.500 receiver wires, impedance, tracking on your VCR. 00:08:55.379 --> 00:08:58.120 Buying a camcorder meant understanding formats 00:08:58.120 --> 00:09:02.259 like VHSC versus 8mm, early home computers. They 00:09:02.259 --> 00:09:03.919 were a nightmare for the average person. You 00:09:03.919 --> 00:09:05.500 couldn't just Google it. Right. You needed a 00:09:05.500 --> 00:09:07.740 guide, a tech Sherpa to get you up the mountain. 00:09:07.799 --> 00:09:10.159 Exactly. And Circuit City had factory trained 00:09:10.159 --> 00:09:12.299 staff. They wore uniforms. They were professionals. 00:09:12.580 --> 00:09:15.159 You know, discount stores like Zody's, which 00:09:15.159 --> 00:09:17.799 funnily enough, Circuit City actually took over 00:09:17.799 --> 00:09:19.919 a bunch of their old locations. They didn't offer 00:09:19.919 --> 00:09:22.240 that level of expertise. You're on your own at 00:09:22.240 --> 00:09:24.860 Zody's. At Circuit City, someone would actually 00:09:24.860 --> 00:09:27.360 explain the difference between a two head and 00:09:27.360 --> 00:09:30.059 a four head VCR. So they are absolutely crushing 00:09:30.059 --> 00:09:32.159 it. They're expanding aggressively. They're taking 00:09:32.159 --> 00:09:35.139 over former the Akron stores, former Zody's stores. 00:09:35.279 --> 00:09:39.590 They are the big dog in the yard. But this, this 00:09:39.590 --> 00:09:42.370 is where it gets really interesting. In 1988, 00:09:42.690 --> 00:09:45.590 they had a chance to squash a future rival before 00:09:45.590 --> 00:09:47.549 it even really got started. This is one of the 00:09:47.549 --> 00:09:50.190 biggest what -ifs in all of retail history. It's 00:09:50.190 --> 00:09:53.110 fascinating. Okay, lay it on me. In 1988, there 00:09:53.110 --> 00:09:55.610 was this smaller, growing competitor called Best 00:09:55.610 --> 00:09:58.610 Buy. They were mostly based in Minneapolis. And 00:09:58.610 --> 00:10:00.570 Circuit City had the opportunity to preach as 00:10:00.570 --> 00:10:05.309 Best Buy for just $30 million. Worthy. Million. 00:10:05.409 --> 00:10:07.409 I need to put that in context. For a company 00:10:07.409 --> 00:10:09.590 the size of Circuit City back then, that's barely 00:10:09.590 --> 00:10:11.710 a rounding error on their balance sheet, right? 00:10:11.809 --> 00:10:13.289 It was a pocket change. It was essentially nothing. 00:10:13.529 --> 00:10:15.490 So play devil's advocate for me. I'm Rick Sharp. 00:10:15.649 --> 00:10:17.730 I'm the Circuit City CEO at the time. I've got 00:10:17.730 --> 00:10:20.129 the money. Why on earth do I say no? Is it just 00:10:20.129 --> 00:10:23.110 pure hubris? Or was there a business case for 00:10:23.110 --> 00:10:26.370 rejecting it? It's so easy to just say ego. In 00:10:26.370 --> 00:10:28.309 hindsight. But you have to look at the metrics 00:10:28.309 --> 00:10:31.970 from 1988. Circuit City stores were generating 00:10:31.970 --> 00:10:34.789 double the sales per square foot that Best Buy's 00:10:34.789 --> 00:10:37.429 were. Wow. OK. Their profit margins were fatter. 00:10:37.570 --> 00:10:41.429 Their stores were cleaner, more organized. Sharp 00:10:41.429 --> 00:10:44.250 looked at Best Buy and he saw a messy, low margin 00:10:44.250 --> 00:10:48.450 operator with a confusing store layout. Best 00:10:48.450 --> 00:10:50.370 Buy didn't have the commission model. They were 00:10:50.370 --> 00:10:52.809 experimenting with this grab and go thing. So 00:10:52.809 --> 00:10:54.929 he thought he was buying a lemon. He thought 00:10:54.929 --> 00:10:57.950 he was buying a distraction. His logic was, why 00:10:57.950 --> 00:11:00.669 should I spend $30 million to buy a worse version 00:11:00.669 --> 00:11:02.909 of us when I can spend that same $30 million 00:11:02.909 --> 00:11:05.409 to build 10 more red towers that I know for a 00:11:05.409 --> 00:11:08.289 fact will print money? He didn't see the value 00:11:08.289 --> 00:11:09.629 in buying them. He thought he could just beat 00:11:09.629 --> 00:11:11.350 them by opening stores in their home turf of 00:11:11.350 --> 00:11:13.409 Minneapolis. Okay, I can see the logic in the 00:11:13.409 --> 00:11:15.629 moment, but it completely ignores the concept 00:11:15.629 --> 00:11:17.549 of a defensive buy. I mean, sometimes you buy 00:11:17.549 --> 00:11:19.509 a competitor just to kill them, right? Just to 00:11:19.509 --> 00:11:21.929 take them off the board. Absolutely. And that 00:11:21.929 --> 00:11:24.519 is the Shakespearean tragedy of it. He fundamentally 00:11:24.519 --> 00:11:27.100 underestimated Best Buy's capacity to evolve. 00:11:27.399 --> 00:11:30.379 He just assumed Best Buy would stay messy forever. 00:11:30.759 --> 00:11:32.799 He didn't foresee that Best Buy would eventually 00:11:32.799 --> 00:11:35.679 adopt the very best parts of Circuit City's inventory 00:11:35.679 --> 00:11:38.320 system, but strip away all the high labor costs. 00:11:38.700 --> 00:11:41.539 Best Buy became the lean predator, while Circuit 00:11:41.539 --> 00:11:43.820 City just stayed fat and happy. And as we all 00:11:43.820 --> 00:11:46.200 know, that is not how history played out. Best 00:11:46.200 --> 00:11:48.799 Buy eventually became the apex predator in this 00:11:48.799 --> 00:11:51.500 whole ecosystem, but at the time, Circuit City 00:11:51.500 --> 00:11:54.080 felt untouchable. And to be fair, they were still 00:11:54.080 --> 00:11:55.970 innovating. We have to talk about one of their 00:11:55.970 --> 00:11:57.909 biggest successes, which ironically most people 00:11:57.909 --> 00:12:00.330 don't even realize, was a Circuit City creation. 00:12:00.690 --> 00:12:04.450 CarMax. Yes, CarMax. The used car superstore. 00:12:04.549 --> 00:12:06.830 I feel like most people know CarMax as the place 00:12:06.830 --> 00:12:08.590 you go to buy a Honda Civic without getting yelled 00:12:08.590 --> 00:12:10.850 at by a salesman. But that was a Circuit City 00:12:10.850 --> 00:12:13.490 project. It was 100 % homegrown. It was a concept 00:12:13.490 --> 00:12:16.570 developed in 1993 by Austin Ligon, who was the 00:12:16.570 --> 00:12:19.129 senior VP of planning, and Rick Sharp, the CEO. 00:12:19.389 --> 00:12:21.190 They looked at the used car market and just saw 00:12:21.190 --> 00:12:24.000 a disaster area. A disaster. I mean, think about 00:12:24.000 --> 00:12:27.639 buying a used car in the early 90s. It was the 00:12:27.639 --> 00:12:30.539 used car salesman stereotype in the plaid suits. 00:12:30.960 --> 00:12:34.259 It was fragmented. You had no idea if the odometer 00:12:34.259 --> 00:12:36.139 had been rolled back. You had to haggle for three 00:12:36.139 --> 00:12:40.059 hours. It was just a painful, untrustworthy experience. 00:12:40.519 --> 00:12:42.480 So they thought, what if we treat cars like we 00:12:42.480 --> 00:12:45.059 treat TVs? Exactly that. They thought, what if 00:12:45.059 --> 00:12:48.120 we apply the big box electronics model to cars? 00:12:48.889 --> 00:12:51.669 No haggle pricing. A massive selection. We're 00:12:51.669 --> 00:12:54.610 talking 400 plus cars at a single location. A 00:12:54.610 --> 00:12:57.009 professional, clean, consumer -friendly experience 00:12:57.009 --> 00:12:59.929 where the price on the sticker is the price you 00:12:59.929 --> 00:13:02.450 actually pay. It seems so obvious now, but back 00:13:02.450 --> 00:13:04.889 then, buying a used car was like entering a battle 00:13:04.889 --> 00:13:07.629 zone. Circuit City brought corporate standardization 00:13:07.629 --> 00:13:10.580 to the Wild West. And it was a grand slam. They 00:13:10.580 --> 00:13:13.220 opened the first one in Richmond in 93. It grew 00:13:13.220 --> 00:13:15.220 slowly at first, but then they took it public 00:13:15.220 --> 00:13:17.720 as something called a tracking stock in 1997. 00:13:18.139 --> 00:13:19.799 Hold on, I want to double click on that, a tracking 00:13:19.799 --> 00:13:22.139 stock. We hear these finance terms thrown around, 00:13:22.259 --> 00:13:24.220 but what did that actually mean for a regular 00:13:24.220 --> 00:13:26.360 Circuit City shareholder? It's a little bit of 00:13:26.360 --> 00:13:29.100 financial gymnastics. So essentially, Circuit 00:13:29.100 --> 00:13:31.379 City said, we have this amazing car business 00:13:31.379 --> 00:13:33.679 inside our company, but the market is confused. 00:13:34.100 --> 00:13:37.080 Are we an electronics store or are we a car lot? 00:13:37.659 --> 00:13:40.559 So they created a specific stock ticker just 00:13:40.559 --> 00:13:42.980 for the performance of CarMax, even though Circus 00:13:42.980 --> 00:13:45.200 City still owned the whole thing. It allowed 00:13:45.200 --> 00:13:48.080 investors to bet on the car business completely 00:13:48.080 --> 00:13:50.799 separately from the stereo business. So they 00:13:50.799 --> 00:13:52.639 were trying to unlock the value. They wanted 00:13:52.639 --> 00:13:55.120 the market to see CarMax as this huge growth 00:13:55.120 --> 00:13:58.340 engine, not just some used car lot attached to 00:13:58.340 --> 00:14:00.740 a speaker store. Exactly right. And it worked 00:14:00.740 --> 00:14:03.159 almost too well. The child started outgrowing 00:14:03.159 --> 00:14:06.379 the parent. So eventually, in 2002, Circuit City 00:14:06.379 --> 00:14:09.000 spun it off completely. Shareholders got stock 00:14:09.000 --> 00:14:12.799 valued at over $1 .2 billion. That is just incredible. 00:14:13.000 --> 00:14:15.240 A consumer electronics store incubates a used 00:14:15.240 --> 00:14:17.340 car dealership that becomes worth billions of 00:14:17.340 --> 00:14:20.360 dollars. It is so rare for a retailer to internally 00:14:20.360 --> 00:14:23.179 incubate a business that becomes as successful, 00:14:23.240 --> 00:14:25.700 if not more so, than the parent company itself. 00:14:26.059 --> 00:14:28.379 It really showed that Circuit City did have vision. 00:14:28.460 --> 00:14:31.139 They did have innovation deep in their DNA. But 00:14:31.139 --> 00:14:35.460 for every CarMax. there is a DIVX. Ah, DIVX, 00:14:35.460 --> 00:14:38.860 the strikeout, the dark side of innovation. This 00:14:38.860 --> 00:14:40.860 is one of those technologies that if you weren't 00:14:40.860 --> 00:14:42.399 there at the time, it just sounds like a fever 00:14:42.399 --> 00:14:45.659 dream. Explain what DIVX was and why on earth 00:14:45.659 --> 00:14:48.740 Circuit City bets so heavily on it. So this was 00:14:48.740 --> 00:14:51.820 1997. The DVD format is just emerging. It's the 00:14:51.820 --> 00:14:54.639 new hot thing. Circuit City, however, decided 00:14:54.639 --> 00:14:57.970 to back an alternative called DIVX. Was it like 00:14:57.970 --> 00:14:59.710 a different shape of disc or something? No, it 00:14:59.710 --> 00:15:02.269 looked just like a DVD. But the business model 00:15:02.269 --> 00:15:05.009 was radically different. The concept was you 00:15:05.009 --> 00:15:07.129 would buy a disc for a really low price, say 00:15:07.129 --> 00:15:11.549 five bucks. But, and this is a huge but, you 00:15:11.549 --> 00:15:13.610 could only watch it for 48 hours after you first 00:15:13.610 --> 00:15:15.490 hit play. Wait, so it's like a rental, but you 00:15:15.490 --> 00:15:17.950 own the physical disc. Correct. But here's the 00:15:17.950 --> 00:15:20.269 real kicker. The player had to be connected to 00:15:20.269 --> 00:15:22.690 a phone line. To watch the movie, the player 00:15:22.690 --> 00:15:24.909 would literally dial out to a central server 00:15:24.909 --> 00:15:28.019 to authorize the viewing. If you wanted to watch 00:15:28.019 --> 00:15:30.179 it again after the 48 hours were up, you had 00:15:30.179 --> 00:15:32.559 to pay a continuation fee. Okay, I can already 00:15:32.559 --> 00:15:34.980 see why consumers hated this. It feels like Big 00:15:34.980 --> 00:15:37.360 Brother is in your living room monitoring your 00:15:37.360 --> 00:15:39.919 movie habits. Plus, you have to keep a phone 00:15:39.919 --> 00:15:42.299 line plugged into your DVD player. That's just 00:15:42.299 --> 00:15:44.620 annoying. It was incredibly annoying. But you 00:15:44.620 --> 00:15:46.960 have to ask yourself, why did the executives 00:15:46.960 --> 00:15:49.240 think this was a good idea? These aren't stupid 00:15:49.240 --> 00:15:51.720 people. What was the pitch in the boardroom? 00:15:51.879 --> 00:15:54.080 I'm going to guess it was about recurring revenue. 00:15:55.000 --> 00:15:58.299 Bingo. The whole pitch was subscription revenue. 00:15:58.820 --> 00:16:01.240 Think about it. When you sell a standard DVD, 00:16:01.559 --> 00:16:04.980 you get paid once, $20, done. But with DIVX, 00:16:04.980 --> 00:16:08.299 you sell the disc for $5 as a loss leader, and 00:16:08.299 --> 00:16:10.620 then you charge them $3 every single time they 00:16:10.620 --> 00:16:13.100 want to watch it again later. It was the Netflix 00:16:13.100 --> 00:16:16.019 model before streaming existed, but tethered 00:16:16.019 --> 00:16:18.399 to physical hardware. It was a subscription model 00:16:18.399 --> 00:16:21.399 implemented via hardware. Yes. But they completely 00:16:21.399 --> 00:16:23.759 ignored the psychology of ownership, the first 00:16:23.759 --> 00:16:26.740 sale doctrine. People want to own things. The 00:16:26.740 --> 00:16:29.200 idea that you had to ask your DVD player for 00:16:29.200 --> 00:16:30.960 permission to watch a movie you were physically 00:16:30.960 --> 00:16:33.379 holding in your hand, it just felt dystopian. 00:16:33.519 --> 00:16:36.100 Please, HAL. Open the pod bay doors so I can 00:16:36.100 --> 00:16:39.179 watch The Matrix again. Exactly. And remember, 00:16:39.299 --> 00:16:40.960 this wasn't just a product failure. It was a 00:16:40.960 --> 00:16:43.740 PR disaster. Internet forums were just becoming 00:16:43.740 --> 00:16:46.860 a thing in the late 90s. And the tech nerds, 00:16:46.860 --> 00:16:49.360 you know, Circuit City's core demographic, they 00:16:49.360 --> 00:16:52.120 organized boycotts. They viewed DIVX as anti 00:16:52.120 --> 00:16:55.440 -consumer evil. Wow. Circuit City pushed it hard, 00:16:55.480 --> 00:16:57.850 but it was a total disaster. They discontinued 00:16:57.850 --> 00:17:01.370 it in 1999 and took a $114 million loss. That 00:17:01.370 --> 00:17:03.830 is a lot of money to just set on fire. So you 00:17:03.830 --> 00:17:06.769 have Carrax, which is brilliant, and DIVX, which 00:17:06.769 --> 00:17:09.410 is a catastrophe. It shows a company that's swinging 00:17:09.410 --> 00:17:12.509 for the fences, but maybe... Maybe losing its 00:17:12.509 --> 00:17:14.410 focus on the core business. And that loss of 00:17:14.410 --> 00:17:17.069 focus becomes painfully apparent as we move into 00:17:17.069 --> 00:17:19.950 the 2000s. This is where the tide really begins 00:17:19.950 --> 00:17:21.789 to turn. We start seeing these strategic decisions 00:17:21.789 --> 00:17:24.089 that, in hindsight, are just baffling. Let's 00:17:24.089 --> 00:17:25.630 talk about the year 2000. This is what's known 00:17:25.630 --> 00:17:28.130 as the appliance blunder. This is such a critical 00:17:28.130 --> 00:17:31.750 pivot point. In July of 2000, Circuit City made 00:17:31.750 --> 00:17:34.150 the decision to abandon the large appliance business 00:17:34.150 --> 00:17:36.390 in all of their stores. So we're talking refrigerators, 00:17:36.410 --> 00:17:39.250 washers, dryers, gone. Was this just a small 00:17:39.250 --> 00:17:41.009 part of their business? I mean, if I'm selling 00:17:41.009 --> 00:17:43.849 90 % stereos and 10 % fridges, maybe it makes 00:17:43.849 --> 00:17:46.769 sense to drop the fridges to focus? Not at all. 00:17:46.829 --> 00:17:50.130 That is what makes it so shocking. In 1999, Circuit 00:17:50.130 --> 00:17:53.130 City was the number two appliance retailer in 00:17:53.130 --> 00:17:55.849 the entire United States. They were second only 00:17:55.849 --> 00:18:00.210 to Sears. They had nearly $1 .6 billion in revenue 00:18:00.210 --> 00:18:03.720 coming just from that sector. They walked away 00:18:03.720 --> 00:18:06.380 from $1 .6 billion in revenue. Why? Who walks 00:18:06.380 --> 00:18:08.640 away from a billion dollars? The rationale was 00:18:08.640 --> 00:18:11.359 a mix of fear and cost -cutting. The executives 00:18:11.359 --> 00:18:13.460 were worried about competition from Home Depot 00:18:13.460 --> 00:18:15.740 and Lowe's. Those home improvement stores were 00:18:15.740 --> 00:18:18.420 getting really aggressive in appliances. So Circuit 00:18:18.420 --> 00:18:20.660 City leadership thought, we can't compete with 00:18:20.660 --> 00:18:23.529 Home Depot on fridges. They also thought they 00:18:23.529 --> 00:18:25.450 could save a fortune on warehousing and delivery 00:18:25.450 --> 00:18:27.750 costs if they just stopped selling these big, 00:18:27.769 --> 00:18:30.130 heavy metal boxes. They wanted to use that floor 00:18:30.130 --> 00:18:32.589 space for consumer electronics, PlayStations, 00:18:32.630 --> 00:18:35.609 PCs, software. Okay, I can almost see the logic 00:18:35.609 --> 00:18:37.630 in a boardroom. Let's focus on the high -tech, 00:18:37.690 --> 00:18:40.049 high -margin stuff. Let the hardware stores handle 00:18:40.049 --> 00:18:43.650 the fridges. But the timing. The timing was catastrophic. 00:18:43.990 --> 00:18:45.690 I mean, think about what happened in the U .S. 00:18:45.690 --> 00:18:48.289 economy right after the year 2000. The housing 00:18:48.289 --> 00:18:50.549 boom. The massive residential housing boom. Everybody 00:18:50.549 --> 00:18:52.769 was buying houses, flipping houses, renovating 00:18:52.769 --> 00:18:55.430 kitchens. And what does every single renovated 00:18:55.430 --> 00:18:59.089 kitchen need? A new stainless steel fridge. Exactly. 00:18:59.329 --> 00:19:02.470 The mid -2000s saw this dramatic rise in new 00:19:02.470 --> 00:19:05.109 appliance sales. And by exiting that market in 00:19:05.109 --> 00:19:07.910 2000, Circuit City completely missed the boat. 00:19:08.319 --> 00:19:10.259 They walked away right before the party started. 00:19:10.420 --> 00:19:12.299 They essentially just handed all that market 00:19:12.299 --> 00:19:14.660 share to Best Buy, Lowe's, and Home Depot on 00:19:14.660 --> 00:19:17.180 a silver platter. And to make it even worse, 00:19:17.319 --> 00:19:19.359 the cost of the transition itself was enormous. 00:19:19.799 --> 00:19:22.160 It wasn't free to just stop selling fridges. 00:19:22.279 --> 00:19:25.859 No. They had to retrofit every single superstore. 00:19:26.019 --> 00:19:28.240 They had to rip out the plumbing and the heavy 00:19:28.240 --> 00:19:30.819 -duty shelving for appliances and install new 00:19:30.819 --> 00:19:33.799 shelving for games and computers. That retrofit 00:19:33.799 --> 00:19:37.769 alone... cost the company $1 .5 billion. Wait 00:19:37.769 --> 00:19:39.609 a minute. Let me get this straight. They walked 00:19:39.609 --> 00:19:43.470 away from a $1 .6 billion revenue stream and 00:19:43.470 --> 00:19:47.000 they paid $1 .5 billion to do it. Essentially, 00:19:47.119 --> 00:19:49.519 yes. They spent a billion and a half dollars 00:19:49.519 --> 00:19:51.779 to stop selling the very products that were about 00:19:51.779 --> 00:19:55.500 to see a massive surge in demand. And the new 00:19:55.500 --> 00:19:58.500 products they focused on, games, CDs, movies, 00:19:58.859 --> 00:20:01.559 those were all low margin. Right. There's not 00:20:01.559 --> 00:20:04.079 a lot of profit in a CD compared to a brand new 00:20:04.079 --> 00:20:06.940 washing machine. Exactly. And those smaller items 00:20:06.940 --> 00:20:09.480 were also increasingly moving to digital or to 00:20:09.480 --> 00:20:12.839 other big box competitors like Walmart. You don't 00:20:12.839 --> 00:20:15.059 need expert advice to buy a Britney Spears CD. 00:20:15.180 --> 00:20:17.599 You just buy it wherever it's cheapest. But you 00:20:17.599 --> 00:20:19.839 do need advice to buy a washer and dryer set. 00:20:20.019 --> 00:20:22.500 They gave up their advantage. That is just painful 00:20:22.500 --> 00:20:24.420 to hear. And it wasn't just the product mix, 00:20:24.460 --> 00:20:26.119 right? Their real estate was starting to become 00:20:26.119 --> 00:20:29.220 a problem, too. It was. By the early 2000s, those 00:20:29.220 --> 00:20:32.119 iconic Red Tower stores were getting old. They 00:20:32.119 --> 00:20:33.920 were often these older shopping centers built 00:20:33.920 --> 00:20:36.259 in the 70s and 80s. Those centers were losing 00:20:36.259 --> 00:20:39.799 foot traffic. Meanwhile, Best Buy was building 00:20:39.799 --> 00:20:41.920 shiny new stores in the newer power centers, 00:20:42.079 --> 00:20:45.140 closer to where the population was moving. Circuit 00:20:45.140 --> 00:20:47.680 City tried to adapt. They introduced new store 00:20:47.680 --> 00:20:51.319 formats called Horizon and Tide. Tide, like the 00:20:51.319 --> 00:20:54.170 laundry detergent. Or the ocean. Like the ocean 00:20:54.170 --> 00:20:56.849 tide. Yeah, the Horizon format in 2000 and Tide 00:20:56.849 --> 00:21:00.349 in 2001 were these attempts to modernize. They 00:21:00.349 --> 00:21:02.630 removed the old racetrack layout. They lowered 00:21:02.630 --> 00:21:05.750 the sight lines. And sadly, they eliminated the 00:21:05.750 --> 00:21:08.309 red tower entrances in favor of a central one. 00:21:08.390 --> 00:21:10.690 They were trying to look more like a self -service 00:21:10.690 --> 00:21:12.990 big box store. So they were basically trying 00:21:12.990 --> 00:21:14.910 to copy Best Buy. They were trying to look like 00:21:14.910 --> 00:21:17.579 them, yes. They even did this internal research 00:21:17.579 --> 00:21:20.500 that found that women and teenagers felt disrespected 00:21:20.500 --> 00:21:23.319 by the Circuit City sales staff. So the Tide 00:21:23.319 --> 00:21:25.440 format was designed to be friendlier and more 00:21:25.440 --> 00:21:28.000 open. You know, that research point is really 00:21:28.000 --> 00:21:31.000 interesting, disrespected by sales staff, because 00:21:31.000 --> 00:21:33.500 that leads us directly into what I think is the 00:21:33.500 --> 00:21:35.720 darkest chapter of this whole story. Section 00:21:35.720 --> 00:21:38.450 5. The human capital crisis. This is the heart 00:21:38.450 --> 00:21:40.890 of the collapse. This is where the tragedy really 00:21:40.890 --> 00:21:42.769 sets in. We talked about state -of -the -art 00:21:42.769 --> 00:21:45.490 service. Well, that relied on experienced, knowledgeable 00:21:45.490 --> 00:21:48.769 people. But starting in 2003, Circus City began 00:21:48.769 --> 00:21:51.390 to view those people not as assets to be cultivated, 00:21:51.589 --> 00:21:54.230 but as liabilities to be cut. So what exactly 00:21:54.230 --> 00:21:57.230 did they do? In 2003, they eliminated commission 00:21:57.230 --> 00:22:01.230 sales in all stores overnight. They laid off 00:22:01.230 --> 00:22:04.490 3 ,900 experienced salespeople who were making 00:22:04.490 --> 00:22:07.349 good money on commission. And they replaced them 00:22:07.349 --> 00:22:10.450 with hourly product specialists. So you take 00:22:10.450 --> 00:22:12.349 the people who know the most, who are the most 00:22:12.349 --> 00:22:14.430 motivated to sell because their paycheck literally 00:22:14.430 --> 00:22:16.210 depends on it, and you just show them the door. 00:22:16.549 --> 00:22:19.349 All to save money. Yeah. They estimated it would 00:22:19.349 --> 00:22:22.650 save about $130 million a year. But company insiders 00:22:22.650 --> 00:22:25.269 later identified this as the single most influential 00:22:25.269 --> 00:22:28.750 decision that led to the company's demise. You 00:22:28.750 --> 00:22:31.710 traded expert service for cheaper labor. But... 00:22:31.849 --> 00:22:35.289 It gets worse. 2007. 2007. This is the wage management 00:22:35.289 --> 00:22:37.869 layoffs. Yeah. And the details of this are truly, 00:22:38.029 --> 00:22:40.930 they're difficult to comprehend from a morale 00:22:40.930 --> 00:22:42.630 standpoint. Walk us through it, because this 00:22:42.630 --> 00:22:44.789 sounds like something out of a dystopian novel. 00:22:45.049 --> 00:22:47.730 So in March 2007, Circuit City announced they 00:22:47.730 --> 00:22:50.849 were firing 3 ,400 better paid associates. These 00:22:50.849 --> 00:22:52.990 were people working on the floor. But here's 00:22:52.990 --> 00:22:55.369 the kicker. They weren't fired to do a bad job. 00:22:55.549 --> 00:22:57.210 They weren't fired for being late. They were 00:22:57.210 --> 00:22:58.930 fired because they were too good at their jobs. 00:22:59.009 --> 00:23:01.930 Wait, explain that. How can you possibly be fired 00:23:01.930 --> 00:23:04.509 for being too good? Because they had been there 00:23:04.509 --> 00:23:06.849 a long time. They had earned their annual raises. 00:23:07.049 --> 00:23:09.589 They had hit the pay cap for their position. 00:23:10.130 --> 00:23:12.309 The corporate algorithm just looked at the payroll 00:23:12.309 --> 00:23:15.809 and said, this person costs $15 an hour. I can 00:23:15.809 --> 00:23:18.450 replace them with a kid who costs $8 an hour. 00:23:18.529 --> 00:23:20.630 That is the most spreadsheet -brained decision 00:23:20.630 --> 00:23:22.930 I have ever heard in my life. It's the McNamara 00:23:22.930 --> 00:23:25.150 fallacy. You know, making decisions based solely 00:23:25.150 --> 00:23:28.309 on quantitative metrics like wage cost and completely 00:23:28.309 --> 00:23:31.410 ignoring the qualitative ones like trust, expertise, 00:23:31.589 --> 00:23:34.650 and loyalty. They calculated the savings perfectly. 00:23:35.160 --> 00:23:36.880 What they couldn't calculate because it doesn't 00:23:36.880 --> 00:23:38.700 fit in the spreadsheet was the cost of losing 00:23:38.700 --> 00:23:40.980 all that knowledge. And the insult to injury 00:23:40.980 --> 00:23:42.880 was the offer they made to these people, right? 00:23:43.019 --> 00:23:45.559 Oh, yes. These laid off workers were told they 00:23:45.559 --> 00:23:48.539 could be rehired after 10 weeks at the new lower 00:23:48.539 --> 00:23:51.200 market rate. The starting wage had dropped from 00:23:51.200 --> 00:23:55.019 roughly $8 .75 to $7 .40 an hour. You're fired, 00:23:55.099 --> 00:23:57.400 but hey, come back in two and a half months and 00:23:57.400 --> 00:24:00.059 we'll pay you less to do the exact same job. 00:24:01.000 --> 00:24:03.740 That is, I mean, who thought that was a good 00:24:03.740 --> 00:24:07.089 idea? That's just humiliating. It was a disastrous 00:24:07.089 --> 00:24:09.630 miscalculation of human psychology. The Washington 00:24:09.630 --> 00:24:12.109 Post reported on this at the time and it backfired 00:24:12.109 --> 00:24:14.309 immediately. Obviously, the fired people didn't 00:24:14.309 --> 00:24:16.309 come back. They went to Best Buy or somewhere 00:24:16.309 --> 00:24:18.769 else that valued them. But think about the people 00:24:18.769 --> 00:24:21.930 who weren't fired. The survivors. Exactly. If 00:24:21.930 --> 00:24:24.119 you're a survivor. What's your incentive to work 00:24:24.119 --> 00:24:26.299 hard? Yeah. If you work hard and get a raise, 00:24:26.519 --> 00:24:28.579 you might be the next one on the chopping block 00:24:28.579 --> 00:24:30.500 for earning too much. So everyone just stops 00:24:30.500 --> 00:24:32.900 trying. Morale completely collapsed. Yeah. And 00:24:32.900 --> 00:24:35.380 customers noticed it immediately. Imagine being 00:24:35.380 --> 00:24:37.779 a customer the next day. You walk in to buy a 00:24:37.779 --> 00:24:40.640 $3 ,000 home theater system. You want to talk 00:24:40.640 --> 00:24:42.259 to Dave, the guy who helped you last time, who 00:24:42.259 --> 00:24:44.539 knows everything. Where's Dave? Dave is gone. 00:24:44.740 --> 00:24:47.640 And in his place is a 19 -year -old making minimum 00:24:47.640 --> 00:24:50.119 wage who is just reading the tag off the shelf 00:24:50.119 --> 00:24:53.369 to you. I can read the tag myself. Exactly. Circuit 00:24:53.369 --> 00:24:56.369 City destroyed their entire value proposition. 00:24:56.849 --> 00:24:59.650 Why would you pay Circuit City prices for Walmart 00:24:59.650 --> 00:25:02.910 level service? The moment they fired their experts, 00:25:03.089 --> 00:25:05.470 they became just a more expensive version of 00:25:05.470 --> 00:25:07.829 a discount store. They cut out their own heart 00:25:07.829 --> 00:25:11.089 to lose a few pounds. And that leads us to the 00:25:11.089 --> 00:25:14.460 inevitable end, the death spiral. So now we have 00:25:14.460 --> 00:25:16.680 a company with no appliances, bad real estate, 00:25:16.779 --> 00:25:20.039 and a demoralized, inexperienced workforce. We 00:25:20.039 --> 00:25:23.880 are entering 2008 and 2009. The collapse. And 00:25:23.880 --> 00:25:26.380 the warning signs are just everywhere. CEO turnover. 00:25:27.039 --> 00:25:29.599 Highfield Schoonover resigned in September 2008. 00:25:29.779 --> 00:25:31.880 The stock was tanking. And then there was this 00:25:31.880 --> 00:25:34.660 bizarre incident in August 2008 involving... 00:25:35.190 --> 00:25:37.730 Mad Magazine. Mad Magazine. What did Alfred E. 00:25:37.750 --> 00:25:39.970 Neumann have to do with Circuit City? Mad Magazine 00:25:39.970 --> 00:25:42.769 ran a parody piece calling the store Sucker City. 00:25:43.049 --> 00:25:45.089 It poked fun at how they had so many locations 00:25:45.089 --> 00:25:46.970 right next to Best Buys and how the service had 00:25:46.970 --> 00:25:48.509 declined. You know, it was a cartoon. Great. 00:25:48.549 --> 00:25:50.230 It's Mad Magazine. They make fun of everyone. 00:25:50.410 --> 00:25:53.349 That's their whole thing. Exactly. But corporate 00:25:53.349 --> 00:25:55.769 leadership at Circuit City was so thin skinned, 00:25:55.769 --> 00:25:58.390 so panic stricken, that they ordered all the 00:25:58.390 --> 00:26:00.950 stores to destroy the issue. They literally ordered 00:26:00.950 --> 00:26:04.009 employees to rip the magazines off the racks 00:26:04.009 --> 00:26:06.269 and throw them in the trash. They ordered the 00:26:06.269 --> 00:26:09.210 destruction of a comic magazine. That just screams 00:26:09.210 --> 00:26:11.890 panic. That is a company that has completely 00:26:11.890 --> 00:26:14.970 lost its grip on reality. It screams a company 00:26:14.970 --> 00:26:18.069 that knows the criticism is true. And financially, 00:26:18.309 --> 00:26:21.920 the walls were closing in. In early 2008, Blockbuster, 00:26:22.000 --> 00:26:24.799 of all companies, made a bid to buy Circuit City 00:26:24.799 --> 00:26:27.420 for a billion dollars. Blockbuster trying to 00:26:27.420 --> 00:26:29.460 buy Circuit City. It's like watching two people 00:26:29.460 --> 00:26:31.180 who are drowning try to hold on to each other 00:26:31.180 --> 00:26:33.660 to stay afloat. It really is. It was a desperate 00:26:33.660 --> 00:26:36.299 move by Blockbuster to get into retail and a 00:26:36.299 --> 00:26:38.440 desperate move by Circuit City to find any savior. 00:26:38.640 --> 00:26:41.259 But even Blockbuster withdrew the offer in July 00:26:41.259 --> 00:26:44.079 2008 because of market conditions. They basically 00:26:44.079 --> 00:26:46.420 looked at the books and ran away screaming. And 00:26:46.420 --> 00:26:49.700 then November 2008. November 10th, 2008. Circuit 00:26:49.700 --> 00:26:52.019 City filed for Chapter 11 bankruptcy protection. 00:26:52.380 --> 00:26:55.420 OK, let's explain that term for a second. Chapter 00:26:55.420 --> 00:26:58.259 11 usually isn't the end, right? I mean, airlines 00:26:58.259 --> 00:27:00.220 file for Chapter 11 all the time and they keep 00:27:00.220 --> 00:27:03.519 flying. Right. Chapter 11 is a reorganization. 00:27:03.799 --> 00:27:06.180 It's a timeout. You go to a judge and you say, 00:27:06.299 --> 00:27:08.640 look, we have too much debt. Protect us from 00:27:08.640 --> 00:27:11.099 our creditors while we close some stores, fix 00:27:11.099 --> 00:27:13.500 our operations and come up with a plan to be 00:27:13.500 --> 00:27:16.700 profitable again. The goal is to emerge as a 00:27:16.700 --> 00:27:19.460 leaner, healthier company. So why didn't that 00:27:19.460 --> 00:27:21.920 happen here? Why couldn't they fix it? They just 00:27:21.920 --> 00:27:24.839 ran out of time and trust. This was late 2008. 00:27:25.119 --> 00:27:27.619 The global financial crisis was in full swing. 00:27:27.720 --> 00:27:30.140 Credit was completely frozen. And Circuit City 00:27:30.140 --> 00:27:32.619 owed massive amounts of money, $119 million to 00:27:32.619 --> 00:27:36.400 HP, $116 million to Samsung. And if you're Samsung 00:27:36.400 --> 00:27:38.839 and Circuit City already owes you over $100 million, 00:27:39.119 --> 00:27:41.559 are you going to send them more TVs on credit? 00:27:41.859 --> 00:27:44.819 Absolutely not. Cut them off. The vendors were 00:27:44.819 --> 00:27:47.039 scared to ship any new merchandise because they 00:27:47.039 --> 00:27:49.220 didn't think they'd get paid. So the shelves 00:27:49.220 --> 00:27:51.019 went empty. Yeah. And if you have no product, 00:27:51.119 --> 00:27:53.839 you have no sales. It's a death spiral. They 00:27:53.839 --> 00:27:55.920 tried to find a buyer, though, right? They did. 00:27:56.640 --> 00:27:58.660 There was some interest from a Mexican retail 00:27:58.660 --> 00:28:02.059 tycoon, Ricardo Salinas Pliego, and a few others. 00:28:02.640 --> 00:28:05.960 But the numbers just didn't work. The hole was 00:28:05.960 --> 00:28:08.740 just too deep to climb out of. So on January 00:28:08.740 --> 00:28:12.130 16th, 2009. They announced the end. They converted 00:28:12.130 --> 00:28:15.170 from Chapter 11 reorganization to Chapter 7 bankruptcy. 00:28:15.490 --> 00:28:18.470 And Chapter 7 means? Liquidation. It means game 00:28:18.470 --> 00:28:21.490 over. We aren't fixing the company. We are selling 00:28:21.490 --> 00:28:24.049 off the parts. The fixtures, the inventory, the 00:28:24.049 --> 00:28:26.930 real estate, everything must go. 30 ,000 employees 00:28:26.930 --> 00:28:29.619 lost their jobs immediately. And it wasn't just 00:28:29.619 --> 00:28:32.039 the Circuit City employees, was it? No. You have 00:28:32.039 --> 00:28:33.380 to remember, they had partnered with Verizon 00:28:33.380 --> 00:28:35.700 Wireless to run the mobile shop inside the stores. 00:28:36.000 --> 00:28:39.339 45 % of Verizon's entire sales force worked inside 00:28:39.339 --> 00:28:41.400 Circuit City locations. They were all laid off, 00:28:41.420 --> 00:28:43.599 too. It just rippled through the economy. That 00:28:43.599 --> 00:28:46.480 is massive. The final day was March 8, 2009. 00:28:46.960 --> 00:28:49.640 Yeah. I remember driving past the store that 00:28:49.640 --> 00:28:51.799 week. The signs were already being torn down. 00:28:51.940 --> 00:28:53.920 And if you went to their website, it was just 00:28:53.920 --> 00:28:57.319 replaced with this simple, stark message. Circuit 00:28:57.319 --> 00:28:58.920 City would like to thank all of the customers 00:28:58.920 --> 00:29:00.799 who have shopped with us over the past 60 years. 00:29:00.920 --> 00:29:03.160 Unfortunately, we announced on January 16th, 00:29:03.160 --> 00:29:06.579 2009, that we are going out of business. 60 years. 00:29:07.140 --> 00:29:10.200 From a vision in a barbershop to a liquidation 00:29:10.200 --> 00:29:14.519 sale. Just gone. But the name didn't completely 00:29:14.519 --> 00:29:16.680 disappear, did it? This is the weird afterlife 00:29:16.680 --> 00:29:18.819 of the brand. In the modern corporate world, 00:29:18.940 --> 00:29:21.000 brands rarely die. They just become zombies. 00:29:21.529 --> 00:29:23.490 The intellectual property, the name, the logo, 00:29:23.670 --> 00:29:26.250 the customer list, that still has value. In May 00:29:26.250 --> 00:29:29.210 2009, a company called Systemax bought the brand, 00:29:29.369 --> 00:29:31.869 the trademarks, and the website for just $14 00:29:31.869 --> 00:29:34.369 million. $14 million. That is less than half 00:29:34.369 --> 00:29:36.230 of what they could have bought Best Buy for back 00:29:36.230 --> 00:29:39.150 in the 80s. The irony is just inescapable. And 00:29:39.150 --> 00:29:41.730 Systemax already owned CompUSA and TigerDirect. 00:29:41.910 --> 00:29:45.490 So for a few years, from 2009 to 2012, CircuitCity 00:29:45.490 --> 00:29:47.450 .com was basically just a clone of those other 00:29:47.450 --> 00:29:49.630 sites. It was the skin you were buying from TigerDirect, 00:29:49.750 --> 00:29:52.380 but the banner said, circuit city but then it 00:29:52.380 --> 00:29:54.400 tried to come back again it keeps trying to come 00:29:54.400 --> 00:29:58.079 back in 2016 a retail veteran named ronnie schmoll 00:29:58.079 --> 00:30:01.519 acquired the brand and there have been various 00:30:01.519 --> 00:30:04.119 announcements since then kiosks store within 00:30:04.119 --> 00:30:07.299 a store concepts a powered by circuit city initiative 00:30:07.299 --> 00:30:10.420 that was announced in 2023 but for the average 00:30:10.420 --> 00:30:12.839 consumer the circus city we all knew the red 00:30:12.839 --> 00:30:16.420 tower the warehouse showroom that's history it's 00:30:16.420 --> 00:30:19.279 a ghost okay let's unpack all this we've gone 00:30:19.279 --> 00:30:22.569 from The barbershop in 1949 all the way to the 00:30:22.569 --> 00:30:24.950 liquidation in 2009, it has been a roller coaster. 00:30:26.089 --> 00:30:28.490 What are the big takeaways here? What do we learn 00:30:28.490 --> 00:30:30.650 from the fall of the Red Tower? I think there 00:30:30.650 --> 00:30:32.450 are three really critical lessons that apply 00:30:32.450 --> 00:30:34.930 to almost any business. First, the danger of 00:30:34.930 --> 00:30:37.970 looking backward. Circuit City was so obsessed 00:30:37.970 --> 00:30:40.289 with cost cutting on their legacy business, the 00:30:40.289 --> 00:30:42.710 appliances, that they completely missed the housing 00:30:42.710 --> 00:30:44.930 boom. They were fighting the last war. They were 00:30:44.930 --> 00:30:46.769 worried about Home Depot when they should have 00:30:46.769 --> 00:30:48.670 been worried about relevance. Second has to be 00:30:48.670 --> 00:30:50.950 the human capital. I just can't shake that story 00:30:50.950 --> 00:30:53.569 about the layoffs. You cannot fire your experts 00:30:53.569 --> 00:30:56.509 and expect to maintain an expert brand. Absolutely. 00:30:56.789 --> 00:31:00.150 You cannot strip mine your own culture to save 00:31:00.150 --> 00:31:02.529 a few dollars on the balance sheet. They treated 00:31:02.529 --> 00:31:05.690 their best employees as expenses to be cut rather 00:31:05.690 --> 00:31:08.230 than assets to be invested in. And the customers 00:31:08.230 --> 00:31:10.890 felt that immediately. The moment that trust 00:31:10.890 --> 00:31:13.269 is gone, the brand is just a logo on a building. 00:31:13.450 --> 00:31:16.250 And the third. The failure to adapt to media 00:31:16.250 --> 00:31:20.029 and openness. They bet on a proprietary, restrictive 00:31:20.029 --> 00:31:23.170 format like the IVX instead of embracing the 00:31:23.170 --> 00:31:25.809 open standard of DVD. They tried to control the 00:31:25.809 --> 00:31:27.690 consumer rather than serving the consumer. They 00:31:27.690 --> 00:31:30.210 tried to lock people in. And people hate being 00:31:30.210 --> 00:31:32.799 locked in. It's a tragedy of errors. But here's 00:31:32.799 --> 00:31:34.599 where it gets really interesting to think about 00:31:34.599 --> 00:31:36.839 the alternative timeline. And this is the thought 00:31:36.839 --> 00:31:38.619 I want to leave our listeners with. It's a CarMax 00:31:38.619 --> 00:31:41.880 question. Exactly. Circuit City had the internal 00:31:41.880 --> 00:31:44.819 invitation to create CarMax. CarMax is a company 00:31:44.819 --> 00:31:47.039 that is still around. It's still thriving. It's 00:31:47.039 --> 00:31:49.720 worth billions of dollars. They had the future 00:31:49.720 --> 00:31:52.539 inside their own building. They did. They incubated 00:31:52.539 --> 00:31:55.400 their own replacement. The question is, if Circuit 00:31:55.400 --> 00:31:57.839 City leadership had simply recognized that their 00:31:57.839 --> 00:32:00.819 future was in their innovation, in the CarMax 00:32:00.819 --> 00:32:03.099 model, rather than in their legacy electronics 00:32:03.099 --> 00:32:06.200 stores, would the name Circuit City still be 00:32:06.200 --> 00:32:09.420 a ticker symbol on the NYSE today? Did they just 00:32:09.420 --> 00:32:12.079 cling to the store concept for too long when 00:32:12.079 --> 00:32:13.759 they had already invented the next big thing? 00:32:13.920 --> 00:32:17.220 It's possible. Or maybe, just maybe, every retail 00:32:17.220 --> 00:32:20.470 giant eventually runs out of space to grow. Maybe 00:32:20.470 --> 00:32:22.910 the Red Tower was destined to fall so that something 00:32:22.910 --> 00:32:25.369 else could rise in its place. Like a spirit Halloween 00:32:25.369 --> 00:32:27.809 store. Laughs like a spirit Halloween store. 00:32:27.950 --> 00:32:29.829 On that spooky note, that's it for this deep 00:32:29.829 --> 00:32:32.089 dive into the rise and fall of Circuit City. 00:32:32.190 --> 00:32:34.049 Thanks for listening, and we'll catch you on 00:32:34.049 --> 00:32:34.490 the next one.