- The Washington Times - Sunday, November 7, 2004

RICHMOND - Alan McCollough, chief executive of Circuit City Stores Inc., recalls hovering over an employee who tapped on a computer keyboard and showed him how the retailer could showcase its products online.

“Instantly, the wheels would start to turn in your head,” he said. “It was so much better than someone saying, ‘Guess what, the Web’s going to change your life.’”

Back then, in the mid-1990s, Mr. McCollough was senior vice president of merchandising. The employee, George Barr, worked in business development and explored the Internet in his spare time. He retired in 2001 and was last known to be sailing the Atlantic with his wife.

Mr. Barr’s vision helped give Circuit City a head start over competitors in the online marketplace and perhaps one of its few advantages over Best Buy Co. Inc., which began to surpass the Richmond-based retailer in sales in the late 1990s to become the nation’s No. 1 chain of consumer electronics stores.

Today, Mr. McCollough is relying heavily on Circuit City’s Internet prowess to revive sales and woo shoppers. The company has overhauled its Web site (www.CircuitCity.com), tripling the number of products available for sale to more than 1 million. It also is offering shoppers a “seamless” buying experience by closely linking marketing efforts and providing similar signage and product information in stores.

Although online sales are still a small part of the company’s total revenue, they are growing fast and becoming more critical to Circuit City and its rivals. This year, total Internet sales of electronics are expected to rise 32 percent to $7.5 billion, slightly faster than the rate of all retail sales online, according to a Shop.org and Forrester Research report.

The study also found that sales of consumer electronics are more likely to migrate to the Web than those of other large retail categories, such as music and videos. In 2004, about 12 percent of all consumer electronics sales are expected to go online, compared with less than 5 percent of the entire Internet marketplace.

“There’s a lot more potential,” Mr. McCollough said. “But in the end, it’s not so much about Internet growth, it’s about customer growth and sales growth. It would be impossible to get that without a state-of-the-art Web store.”

Best Buy executives are thinking the same way.

Over the summer, Best Buy brought in one of the industry’s top guns, Sam Taylor, who immediately went to work on a Web store (www.BestBuy.com) that some critics say has been the retailer’s weak point.

Mr. Taylor, known for his work on Lands’ End’s pioneering Web site (www.LandsEnd.com), streamlined the site’s checkout process and made other improvements to BestBuy.com’s search engine and navigation. Asked what he thought of CircuitCity.com, Mr. Taylor said:

“There are three competitors we talk about: Wal-Mart, Dell and Amazon. I’ll just leave it at that.”

Indeed, Circuit City has an uphill battle as it tries to gain more market share. Although the No. 2 electronics chain posted a smaller-than-expected loss in the second quarter, Minneapolis-based Best Buy is outpacing the company in growth and profitability.

In the quarter, Best Buy earned $150 million on $6.1 billion in sales, while Circuit City lost $11.9 million on $2.35 billion in revenue. Best Buy’s same-store sales rose 4.3 percent, compared with Circuit City’s 2.9 percent.

Donald Trott, an analyst with Jefferies & Co. Inc., has downgraded Circuit City to hold from buy, saying its stock appreciation reflects investor recognition of Mr. McCollough’s efforts to relocate poor-performing stores.

He added that “meaningful incremental progress” will be needed to push the share price higher.

“Despite Circuit’s improvements … main competitor Best Buy appears to be continuing to strengthen its competitive position via its larger assortment, superior store locations and through the success of its new Rewards loyalty program,” Mr. Trott wrote in a report.

Kurt Barnard, president of Barnard’s Retail Consulting Group, says Best Buy executives would be remiss to discount Circuit City’s improvements — both online and on the ground.

“By being arrogant or supercilious, they don’t advance their own cause and they don’t do themselves a favor,” he said.

Neither company discloses its online sales. Although Best Buy drives more customer traffic to its Web site with the power of its brand, the number of visitors doesn’t necessarily indicate higher sales.

According to an August survey by Keynote Systems, which measures Web site performance, customers indicated they were much more likely to purchase from CircuitCity.com than BestBuy.com. They gave Circuit City high marks for simplifying the search, navigation and checkout processes while complaining that Best Buy’s site made browsing and buying difficult.

“Overall, Circuit City is making it much easier to find the products they want and to compare them and figure out whether they are appropriate for them,” said Bonny Brown, research director of the San Mateo, Calif., company. “Best Buy is probably not taking as much of an advantage of its size as Circuit City is.”

Circuit City also has received raves for giving customers the ability to buy online and then pick up in stores — a feature it has offered since the site’s debut in 1999. BestBuy.com says it offers the same, though there are fundamental differences in how the companies handle those transactions.

BestBuy.com does not have so-called “real-time” inventory, meaning that online shoppers know almost instantaneously whether that product is available in its stores. It tells customers to hold off on rushing to stores until they receive an e-mail — in less than 30 minutes. During that time, an employee will pull that item off a store shelf so no store shopper can purchase it.

By holding off on its promise to consumers online, Best Buy’s Mr. Taylor said, the company avoids a situation where a store shopper grabs the last product and then learns at the checkout counter that the item already has been purchased by an Internet customer.

“You’re going to disappoint one of those customers,” Mr. Taylor said.

Circuit City tracks inventory in real time so that the item is reserved online at the store and is ready for pickup, often less than 15 minutes after the customer’s last click for the sale.

“Unlike most of our primary competitors, CircuitCity.com customers don’t have to guess, hope and wait to see if the products they want are available for pickup,” said Fiona Dias, who leads the company’s Internet team.

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