CIRCUIT CITY TO CUT 2,000 JOBS, DROPS COMMISSIONS

Chain’s all-out switch to noncommission strategy caps gradual move in that direction. Before implementation of new program, about 60% of Circuit City’s salespeople -- generally those in TV, PC, audio and car stereo departments -- were paid commissions. Rest, including cashiers and salespeople in AV software departments, were paid straight hourly wage. “This created the potential for a conflict of interest and was cumbersome to administer,” McCollough said. Under new structure, sales counselors will be converted to product specialists responsible for specific categories. Third sales manager post will be added to each of 400 stores to oversee “high-touch” A/V categories. Each store will have 17-18 product specialists and 3 managers, company said.

Implementation of noncommissioned sales strategy represents huge philosophical and operational shift for Circuit City, which for years stood by its compensation system as model for providing customers with better service and product knowledge. Sources told Consumer Electronics Daily that Circuit City salespeople had averaged salaries of $25,000-$60,000, with median at $35,000. Best Buy switched to noncommission sales in 1989. Meanwhile, Circuit City has overhauled video departments in 301 stores in last year to clear space for flat-panel plasma and LCD TVs, and has scaled back selection of commodity TVs in smaller screen sizes. It plans to install new fixtures in 200 stores this year (most of which have newly remodeled video departments) to broaden assortment of products on sales floor and “make them more accessible to customers,” McCollough said.

Observers we polled for reaction agreed changes could put Circuit City at risk of losing better trained commission-based salespeople to competitors. “They're going to have trouble out- Best Buying Best Buy,” quipped one CE vendor executive. “Best Buy has things rolling now and this is going to be a total change for Circuit City and it will be questionable whether they can do it as well as Best Buy does.” Best Buy shares were up marginally Wed.

Circuit City spokesman responded that in shifting 40% of store staff to hourly wage during past year, chain found that “it’s not how people are compensated” but rather “what their expectations are in terms of delivering customer service and product knowledge.” Chain remains committed to “keeping up our product knowledge and information-rich stores that people have come to expect from Circuit City,” he said. Circuit City will continue to require that sales staff be certified on products in their categories, he said: “I can understand the concerns, but we're going to make sure that we're maintaining a high level of product knowledge.” Spokesman conceded that Circuit City commission structure had been major differentiation point vs. Best Buy. But he said chain will continue to rely on its other established differentiation tools, such as customer service and liberal return policies. He wouldn’t comment on Circuit City salary structure.

Most Circuit City salespeople will be converted to hourly rate at existing wage, McCollough said. New hires will receive in-store training. While transition to hourly wage is likely to “disrupt” sales in Feb., it will have minimal impact beyond that, McCollough said. For fiscal year ending Feb. 28, Circuit City projected that compensation change would reduce pretax earnings $40 million, including severance and other one-time costs in addition to displaced sales. However, Circuit City said new structure would yield $130 million in pretax savings in fiscal 2004 on expected decline in selling and general administration expenses.

Compensation changes are among first significant moves being made at Circuit City store level since Kim Maguire joined as exec. vp last year from Target. Chain revamped structure of hq merchandising and buying work force last July. Sources said Circuit City opted to impose straight hourly wage after studying but ultimately rejecting alternative commission formulas.

In closing 10 repair centers and eliminating additional 200 jobs, Circuit City now will operate 7 such centers, down from peak of 37 in 1998. As for store operations, Circuit projected costs of $150 million in net cash and noncash expenses in fiscal 2004 to relocate 18-22 stores and fully remodel another 5. Expenses include cost of installing new fixtures in 200 stores. Chain also plans to open 8 new stores in fiscal 2004. Another 50 stores will be relocated in fiscal 2005, company said. Fully remodeled stores will based on format implemented at 24 outlets in Chicago and Baltimore-Washington markets in 2001 costing less than half of redesign model used year earlier in Jacksonville. Remodeling campaign began in 2000 soon after Circuit City dropped major appliances and to fill space with assortment of videogames and PC software, PC peripherals and accessories, digital imaging products, cellular phones. Dumping of major appliances caused reduction of 1,000 Circuit City jobs chainwide.

Meanwhile, Circuit City said Jan. same-store sales fell 2%. As result, chain forecast 4th-quarter earnings of 21?-26? per share, 12? per share in one-time costs for severance and compensation change. With one-time costs factored out, Circuit City is projecting earnings for quarter in 35?-40? range.