The ripple effect
Circuit City finally will flicker out when its last 567 stores close this year, but the bankruptcy of the nation's second-largest electronics retailer will ripple across the U.S. economy for years.
In its wake will be 18.71 million square feet of vacant space in a faltering real estate market. More than 40,000 workers will be jobless, including 7,000 laid off last year.
Shopping centers will lose rental income. Suppliers will lose display space. Newspapers already struggling with falling ad revenues will have one less glossy insert in their Sunday editions.
Circuit City is bigger by far than any other retailer that has gone under in the current recession. The job outlook for its workers is far worse. The prospects for suppliers finding other customers is grim, and a larger pool of creditors likely are to go unpaid.
"The situation today is so different than" during other downturns, said Jerry Mozian, a restructuring expert at Tatum LLC. "It wasn't the whole economy. Here, we've got a worldwide recession."
Other big retail bankruptcies, like Macy's in 1992 and Kmart's in 2002, ended in reorganizations or buyouts rather than liquidation.
Circuit City initially hoped to reorganize when it filed for Chapter 11 protection in November. It was sagging under the weight of $2.32 billion in debt and dismal sales as consumers cut back. But the 60-year-old company couldn't work out a sale or secure new financing, and on Jan. 16 announced it would close.
The chain owes nearly $625 million to its 30 largest unsecured creditors — mostly vendors. They must wait to be paid until secured creditors such as bank lenders are satisfied.
That's hitting electronics makers when they can least afford it. Hewlett-Packard, which is shedding 8 percent of its work force after a big acquisition, is owed nearly $120 million. Samsung, which posted its first ever quarterly loss Friday, is owed roughly $115 million. And Sony, which saw its net profit fall 95 percent in the October to December quarter, is owed $60 million.
The shuttered stores also put pressure on small businesses.
Cafe 56 in the Cleveland suburb of Mayfield Heights counted on business from customers and workers at a nearby Circuit City store that closed last month. The cafe even had a wrap sandwich on the menu named after a store manager who came in almost every day.
"A lot of their staff would come in here because we'd give them 15 percent off," said manager Ben Taylor. "Our business is definitely down."
Cell-phone provider Verizon and cable company Comcast, both of which operated hundreds of mini-stores inside Circuit City locations, will have to pay to shut them down and decide what will happen to the employees who worked there.
Even local newspapers will feel the effects as revenue from a weekly Sunday insert disappears. Industry analyst Ken Doctor of Outsell Inc. said Sunday circulars have been one of the only remaining reliable sources of ad revenue for newspapers as classified ads have dried up. With Circuit City's gone, he said roughly 5 percent to 10 percent of the market could disappear.
To be sure, some companies stand to gain from Circuit City's dissolution, including the competitor that has dogged it for years: Best Buy Co. Inc.
The retailer, which has about twice as many stores as Circuit City, has been winning over customers to its brighter, more vibrant stores, outselling Circuit City $40 billion to $12.4 billion in 2007.
Analysts have said they think Best Buy easily can capture up to 30 percent of Circuit City's revenue, especially since two-thirds of its stores are within 10 miles of soon-to-be vacant Circuit City sites.
Liquidators also could benefit. Four liquidators will sell off all of Circuit City's remaining merchandise, which they value at as much as $2 billion, minus the operating fees and a roughly 70 percent return they are paying to Circuit City.
Shareholders likely will get nothing, as is typical in many bankruptcies, and the thousands of creditors who may get something likely will receive far less than they are owed.
Employees, thrown into a worsening job market, likely will cut their own spending in ways that reverberate.
Chris Yount, who has worked at Circuit City since 2002, said he plans to stay at his store in Peoria, Ill., until the end. The 48-year-old, a manager in the television department, lamented the enormous loss of jobs from the company's failure.
The community's population of 30,000, he said, is comparable to the new number of Circuit City employees who will be out of work.
"When you think about it, that's a small city."