I’m sure you’ve heard by now that Circuit City has finally come to the realization that their current model is unsustainable, and are now reorganizing under Chapter 11.

Yes, Circuit City is bankrupt.

I’ve heard some suggest that Circuit City could be the next Tweeter and fade into oblivion, however after thinking about this for awhile, I think that there is a chance that they may be able to position themselves to be a profitable publicly traded company (note: Circuit City is now trading under the ticker: CCTYQ).

Is this a slim chance? Probably. However, it’s always interesting to explore the options a company under Chapter 11 can explore.

First, here are two key excerpts from their statement on the Chapter 11 filing, with the important parts emboldened:

The company recognizes that, to achieve these objectives, there is a critical need to create a more efficient chain with a streamlined cost structure. As previously announced, the company is in the process of closing 155 domestic segment stores. This week, the company took action to realign its regional and district support structure commensurate with the smaller store base, which will include approximately 566 stores when the domestic segment store closings are completed. As a further cost-saving measure, the company reduced its corporate headquarters workforce on November 7, 2008. These corporate, regional and district support reductions totaled approximately 700 positions and are in addition to the reductions resulting from the store closings. The store closings and support workforce reductions will result in a combined domestic workforce and store base reduction of approximately 20 percent.

And finally, words from the top:

James A. Marcum, vice chairman and acting president and chief executive officer of Circuit City Stores, Inc., said, “We recently have taken intensive measures to overcome our deteriorating liquidity position. The decision to restructure the business through a Chapter 11 filing should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively. In the meantime, our stores remain fully operational, and our associates are focused on consistent and successful execution this holiday season and beyond.

“We appreciate the support we have received from our lenders in the midst of such a tight credit market. With this support, we believe we have the opportunity to leverage our market position and the strength of our brand to restore Circuit City to solid financial footing,” continued Marcum.

James Marcum is absolutely right in noting that they have the opportunity to strengthen their brand, position and liquidity. But how?

Now that that worst CEO in the world, Phillip Schoonover is no longer with Circuit City, they can finally focus on the fundamentals and reality, not his grandiose, “pie in the sky” schemes that only wound up hurting the company’s balance sheet.

But how to they save themselves?

The answer is simple: expand their online operations and reduce consumer annoyances.

Even though Circuit City is facing significant challenges with their physical stores, one property that seems to be successful for them is their website, which is continually ranked as one of the top online retailers (#16 in 2007).

In terms of revenue, in 2007 Circuit City generated $1.4 billion in online sales, though that represented less than 10% of their total revenue.

While it doesn’t seem likely that a company like Circuit City could use their website as a mechanism to rebuild their balance sheet, take a look at how their website traffic compares to some competitors:

The first competitor that comes to mind is obviously Best Buy:

Circuit City vs. Best Buy

Circuit City vs. Best Buy

As you can see, the trend line is consistent throughout the last 365 days, which leaves many to believe that visitors were just using Circuit City’s website to do some comparison shopping.

While that’s not the best news, it’s important to keep that in the back of your mind when evaluating possible turn-around solutions.

Now lets expand this and add another online retailer, this time one that does all of its business online, overstock.com:

http://origin.grapher.compete.com/site_media/snapshot/circuitcity.com+overstock.com+bestbuy.com_uv.png

Circuit City vs. Overstock vs. Best Buy

Now this is what I find extremely interesting.

Even though Circuit City has put so much focus on their physical stores, their online traffic has remained strong enough to keep them in the running as one of the top online retailers.

Imagine the success Circuit City could see if they closed down even more stores, limiting themselves to owning no more than two locations in a 25 mile radius, and then using the saved revenue to improve their online efforts?

In my opinion, the fewer physical stores Circuit City maintains, the better off they’ll be not only financially, but also as a brand. As it stands now, the one thing you can expect when going into any Circuit City is unfriendly, often condescending sales people and an often lackluster store setup.

However, making their online sales a more integral part of their business model isn’t going to be enough to bring them back to stability.

As I mentioned earlier, people often use Circuit City’s website as a place to comparison shop for purchases that inevitably end up being made at BestBuy.com.

If they want to be successful, Circuit City has to address and act on this. They should harness this consumer desire to comparison shop, and display Best Buy’s and other competitors prices next to theirs and do whatever they can to ensure they have the lowest prices.

Removing the overhead costs caused by the physical stores, and by possibly outsourcing some other elements, there should be no reason that they cannot provide a lower price than Best Buy.

Furthermore, they can seize another opportunity by offering free year round shipping, and free 90 day in-store FireDog service. While most people will never use it, it gives them piece of mind knowing that if they cant figure something out, or something isn’t working, they have 90 days to come into your store, and someone will help figure it out.

Beyond that, they should develop a rewards program like Best Buy, but make the rewards greater. Have specials where on certain dates, you can get double or even triple rewards points (maybe at the end of each quarter, just before reports are compiled?). Even consider working with other online merchants to develop a partnership where points can be used and earned at a number of retailers, much like airlines do with frequent flier miles.

Finally, they need to make the process of getting the best price less annoying for the consumer.

One of the most obnoxious things about purchasing something online from Circuit City is that everything is based on mail-in rebates, with straight discounts rarely given without.

People are busy, they don’t want to waste their time dealing with mail-in rebates that they are likely to forget about anyway. Offering them is one thing, but having that be your major catalyst for savings is another.

While I’m confident that each of these ideas could help Circuit City somewhat, I cant help but wonder how what they deem as more important, their web position or in-person sales?

Time is ticking for Circuit City, and if they don’t get this right, it’s game over.

Regardless of the result, this is definitely going to be interesting to follow.

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