Cutbacks at Circuit City

The continuing recession is hitting Circuit City hard.

In early February, North America's second largest electronics retailer announced sweeping cutbacks of its workforce, including the dismissal of approximately 3900 commissioned salespeople and the shuttering of 10 repair centers. Circuit City's sales force will move to an hourly wage, a measure that CEO Alan McCollough said will save the company about $130 million in payroll costs this year. The savings will help offset an expected $40 million drop in earnings caused by severance pay and "other one-time charges."

Approximately 60% of Circuit City workers were commissioned salesfolk. Approximately 2100 of those dismissed will be replaced by new hires on the hourly system. Additionally, 200 repair center workers will join the unemployment rolls, a reflection of the consumer electronics market's tendency to replace rather than repair older models. Over the past four years, Circuit City reduced its service centers from 37 to 17. The new closings will bring the total to seven. The company's workforce was informed of the changes on February 5, with its 625 stores opening late due to the announcement. The dismissals average three employees per store.

The cutbacks come in the wake of a soft winter holiday season for most electronics dealers, a trend that continued through January. Circuit City's December net income dropped 5% to $1.74 billion, with same store sales down 6%. Uncertainty about the economy and fears of war are making consumers cautious, according to industry analysts.

Breaking away from the commission structure could cut both ways for Circuit City. Commission-based compensation systems are commonplace among electronics dealers, and are widely believed to motivate salespeople to do a good job. They are also derided by some consumer advocates who believe that it's impossible to get objective information from salespeople who are invested in the outcome of the sale, and who are therefore likely to steer customers toward products with higher profit margins. Circuit City customers may henceforth get more objective information, but perhaps not from the most informed salespeople. "The ability of people to sell is not based on how they’re paid," McCollough told reporters. "If you have good people and set the expectations, they can do the right job. It’s more about expectation than compensation."

His comments were dismissed by Warren Mann, director of the MARTA Cooperative of America buying group. Circuit City's abandonment of commissions is "a major blunder," he said. "They’ve gone to the dark side of retail, with a clerk floor like Kmart. You can’t make money selling better goods in a self-sale environment." A former manufacturer who was once a Circuit City supplier, Mann said that the Richmond, VA–based chain is "throwing the good sales people away, just like they did with appliances." He said the layoffs are a good opportunity for competitors to pick up sales talent.