http://www.thestar.com/Business/article/197187

Circuit City's cost squeeze

BILL SANDFORD FOR THE TORONTO STAR


Mar 29, 2007 04:30 AM
Dana Flavelle
business reporter

Vince Schneider wasn't surprised to hear the owners of The Source by Circuit City are putting the 800-store consumer electronics chain under review for possible sale.

Schneider says he lost his shirt – and his home – on a joint venture partnership with InterTan Inc. while operating a store for them in Collingwood under The Source brand name.

"I'm not surprised," Schneider said in an interview yesterday. "I got the feeling in the year and a half that I tried to get a fairer deal from them that one of the reasons they couldn't do that is they were losing money."

InterTan's owner, Circuit City Stores Inc., announced yesterday the Canadian operations are under review, and possibly for sale, amid wider cost-cutting measures. Circuit City bought InterTan in 2004 for $284 million (U.S.)

Many of the small mall-based stores formerly operated using the Radio Shack name under a licensing agreement between InterTan and RadioShack Corp., of Texas.

A spokesperson for RadioShack said he couldn't comment on whether the company would be interested in buying InterTan. RadioShack closed its remaining Canadian operations in January, which consisted of "less than 10" corporate stores to focus on its core U.S. operations, spokesperson Charles Hodges said yesterday.

Circuit City also said it would cut 3,400 higher paid employees of its U.S. stores and replace them with lower paid ones . The U.S. locations, which are large superstores, operate under the name Circuit City.

The decision to replace more than 8 per cent of its U.S. store staff is part of "a wage-management initiative," the company said yesterday. The associates were paid "well above" market rates, the company said.

The Richmond, Va.-based company also said it would outsource its information-technology systems to IBM Corp. at a cost of 130 head office jobs. About 50 employees would be transferred to IBM, the company said, with the other 80 laid off. The deal is expected to cut Circuit City's information systems cost by 16 per cent over the seven-year life of the contract, the company said.

The moves come amid a price war in flat-screen TVs that has hurt North America's second-largest consumer electronics retailer, analysts said.

"We're taking a number of aggressive actions to improve our cost and expense structure," Circuit City chairman, president and chief executive officer Philip Schoonover said in a statement.

"Unfortunately, a number of associates are directly impacted by the actions."

Schneider says he has already felt the impact.

The small businessman says he tried for 18 months to get InterTan to renegotiate what had become a highly unfavourable deal for joint-venture partners like him.

Unlike franchises, these joint-venture partnership deals didn't require big initial cash outlays by the store operator. Instead, the store operator got a percentage of the profits while InterTan got a share of the sales, Schneider explained.

The deal worked fine until profit margins in the consumer electronics industry began plunging, Schneider said.

Competition has intensified as everyone from Home Depot to Wal-Mart jumped into the consumer electronics market, while TV makers Sony, Sharp and Panasonic drove down prices to capture market share, analysts noted.

Schneider said his share of the profits got so thin, despite strong sales, that he was barely able to cover the store's costs and was unable to pay himself a salary.

After eight months without paying his mortgage, he said he had to sell his home and now rents a place.

About 100 of the company's 800 stores in Canada are operated on this basis, Schneider said. Others are corporate stores or franchises. His store in Collingwood is now a corporate store, he said.

Circuit City said in a statement that it has asked investment banker Goldman Sachs to help it explore strategic alternatives for InterTan, which could include the sale of the Barrie-based company.

The cost-cutting comes just a week before Circuit City is due to report is fourth-quarter results, which will contain the holiday period. It has already said sales for the quarter missed targets, rising 8 per cent instead of the 10 per cent forecast.

In the third quarter, the company reported it first loss in six quarters. The stores in Canada lost $300,000 while sales at $171 million were 3.9 per cent lower than the year earlier period once currency fluctuations were taken out.

The company's shares, which are down 20 per cent from a year ago, rose 35 cents, or 1.85 per cent, to close at $19.23 (U.S.) in New York Stock yesterday.

This is the second time in two months that Circuit City has taken the knife to its operations. In February, the company said it would close 62 corporate stores in Canada and cut 70 store support and field management jobs, for a combined loss of 290 jobs. It also closed some U.S. stores.

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Speech by Thomas Friedman of The New York Times....

"When we were young kids growing up in America, we were told to eat our
vegetables at dinner and not leave them. Mothers said, 'think of the
starving children in India and finish the dinner.' And now I tell my
children: 'Finish your maths homework. Think of the children in India
who would make you starve, if you don't.'"

What does this article have to do with anything on Canadiandesi? Do people who have access to the Canadiandesi via the net not have access to the star?

There's at least 10 posts of yours on the main Charcha screen that have articles posted in them. So what's the big idea? You work for the star? You trying to show off how much you read?

We allow posting of articles where there's relevance. Cut and paste isn't the purpose of CD, the idea is original content. Flooding the forum with articles from all over the place does not help the forum in anyway. In case you didn't notice, its called CHARCHA, NOT CHIPKA.

Secondly, post links and maybe an excerpt if you must. DON'T cut and paste the whole article.

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Are you there?

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