ALL BUSINESS Circuit City’s job cuts backfire; other companies should understand why ADVERTISING By RACHEL BECK The Associated Press NEW YORK — Corporate leaders who think they can slash expenses without customers noticing might want to give Circuit City Stores
ALL BUSINESS
Circuit City’s job cuts backfire; other companies should understand why
By RACHEL BECK
The Associated Press
NEW YORK — Corporate leaders who think they can slash expenses without customers noticing might want to give Circuit City Stores Inc.’s top brass a call. The electronics retailer is living the nightmare of cost-cutting gone bad.
The Richmond, Va.-based company has been in a downward spiral since it announced last spring that it would lay off thousands of experienced workers it candidly said it could replace with cheaper new hires.
Too bad that service matters in that corner of the retail market. Shoppers quickly noticed and fled — leaving Circuit City’s sales and profits plunging. Its same-store holiday sales, reported last week, fell 11.4 percent. And its stock is now about 80 percent below where it was the day before it made the staffing announcement.
It’s a business school case study being written before our eyes. Companies everywhere should remember this management mishap as they wrestle with cost cuts of their own amid slowing economic growth, rising inflationary pressures and a fatigued consumer.
Corporate profits are expected to drop more than 8 percent in the fourth quarter from a year ago, resulting in a 0.31 percent contraction in overall 2007 earnings. That would be the first 12-month decline in operating earnings since the second quarter of 2002, according to Standard & Poor’s data of 500 companies in its broad-market stock index.
The December jobs report from the Labor Department showed employers have grown wary about current conditions. Private-company employment declined last month while total payroll growth at both private and public employers was the smallest since August 2003.
Staffing changes are just one way for companies to curb expenses and preserve or juice up profits. They also could start closing stores or slashing product lines.
Regardless of the actions they take, they better know how their customers will react and consider the message they are sending to the public, says management consultant Peter S. Cohan, who runs his own firm in Marlborough, Mass.
That’s what Circuit City got wrong when it hatched its plan last March to slash 3,400 of its higher-paid and most experienced sales staff and replace them with lower-paid workers. While the company declined to give specifics about its pay scale, estimates put the wages of laid-off workers at around $14 to $15 an hour versus about $9 for their replacements.
Circuit City was upfront about its plan; had it worked, management would have been lauded. But the retailer “violated a basic principle of good business,” said Cohan, who also teaches management at Babson College. “They (executives) were so focused on cutting costs that they failed to take into account the real value of good salespeople.”
The result: While there was a great appetite across the retail landscape for electronic gadgets during the holiday season, many shoppers chose Best Buy and other merchants instead of Circuit City for such products as televisions, camcorders, DVD hardware and digital photo products.
Its December sales slump was the latest bit of bad news for Circuit City, which had warned right before Christmas that its fourth-quarter results would disappoint. Even before this hiring mess, Circuit City had been struggling to keep pace in the competitive electronics marketplace, reporting a loss of $8.3 million for its fiscal 2007 that ended last February.
By breeding an environment that doesn’t reward the knowledge or loyalty of its staff, then “why would workers have the incentive to put in any extra effort?” asks Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
The changes have turned consumers off. As Baker notes, “they saw this happen and thought of themselves. Since when is making $14 an hour too much?”
Customers have posted their frustrations with the retailer online, in blogs and chat rooms. Many tell of a noticeable apathy among Circuit City’s workers.
This mess isn’t lost on Circuit City’s management. In announcing its disappointing December sales, CEO Philip Schoonover — who some online call “Soonover” in reference to calls for him to be ousted — said the company wanted to empower its “sales associates with the necessary knowledge and tools needed to improve both sales and margin.”
Company spokesman Jim Babb said that Schoonover’s comments were meant to “redouble the company’s commitment to provide training” to its sales staff of 40,000, as part of its ongoing program to keep its workers up to date on new technology and store operating procedures.
Still, chances are its lower-paid new hires will take a good bit of time and bundles of money to get their experience up to par. So much for those cost savings.
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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck@ap.org
