Circuit City

You could walk into a Circuit City in the 1980s and 1990s and get educated, in-depth help from someone who had skin in the game. Commission-driven sales associates actually knew something about electronics. They could explain the difference between component cables and composite cables. They could tell you why you needed a surge protector and how much wattage your amplifier needed. They were incentivized to spend time with you because they got paid commissions. The sales force was the differentiator.

Circuit City started as Wards Company, a Richmond, Virginia appliance store founded in 1949. By the 1980s, it had evolved into a big-box consumer electronics chain with a distinctive red "plug" logo and a sales force paid on commission. The commissions were crucial to the brand: Circuit City sales associates actually cared whether you bought the right thing, because they made money only if you did.

For consumers, this was a revolution. You could walk into a Circuit City and get educated, in-depth help from someone who had skin in the game. The store was merchandised aggressively — New Releases got prime positioning, and the layout was designed to make you browse longer. The stores were massive, with entire sections dedicated to TVs, another section for audio equipment, another for computers, another for software. If you were serious about buying electronics, Circuit City was where you went. The company was profitable and expanding.

In the 1990s, Circuit City spun off a used-car superstore called CarMax, which turned out to be even more successful than the parent company. The core electronics business hummed along: VCRs, CD players, DVD players, then flat-screen TVs, then home theater systems. Throughout the 1990s and early 2000s, Circuit City owned consumer electronics retail the way Toys "R" Us owned toys.

Then the company made a catastrophic decision. In 2000, as the dot-com bubble was bursting and Circuit City's sales were slowing, management decided to cut costs by laying off its entire sales force — the most experienced and highest-paid employees. The idea was that they could re-staff with cheaper workers or rely more on customer self-service. The decision was cost-cutting at its most politically motivated and strategically stupid. The sales force was the differentiator. Without commission-driven expertise, Circuit City became just another big box selling the same products as Best Buy, but without the advantage.

Best Buy, for context, had a different model: lower prices, lower commission, lower service, but they were operating at better margins and could outprice Circuit City on most products. Once Circuit City lost its sales advantage, it had nothing left. Customers started going to Circuit City to look at TVs in person, then buying them online or at Best Buy. The company's margins compressed. By the mid-2000s, Circuit City was profitable but not like before.

Worse, the Internet was beginning its assault on consumer electronics. You could price-check on your phone — which didn't exist yet, but soon would — and realize the Best Buy price was undercut by an online retailer. The store became less essential. Circuit City tried to respond by cutting prices further, but they couldn't match Amazon's logistics or pure online players. Their real estate costs were too high. Their overhead was too high. Their customer base had learned to shop elsewhere.

Circuit City filed for bankruptcy in 2009. The company went through a brief revival period where it looked like it might survive, but bankruptcy costs, debt service, and the ongoing shift to online shopping finished it off. All stores closed by 2009. The company liquidated.

What's notable about Circuit City's failure is that Best Buy survived in roughly the same industry, selling the same products, with a similar store format. Best Buy made different cost-cutting decisions and happened to have slightly better execution. Circuit City's demise wasn't inevitable. It was a choice: pay for expertise or cut labor costs. The company chose wrong.