Will Circuit City Repel or Attract Holiday Shoppers?

Bankruptcy Leaves Customer Support in Doubt, but May Lure Bargain-Hunters

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NEW YORK (AdAge.com) -- Circuit City's bankruptcy could cause skittish consumers to steer clear of the ailing retailer this holiday season.
The recent announcement of the closure of 155 stores will likely give holiday shoppers pause..
The recent announcement of the closure of 155 stores will likely give holiday shoppers pause.. Credit: AP

While it was well-known that the electronics chain had been ailing -- it announced the closure of 155 stores on Nov. 3 -- the bankruptcy announcement, coming less than three weeks before Thanksgiving, will likely give holiday shoppers pause. The filing, meant to pacify wary vendors and shore up financing, makes it likely the retailer will survive the holiday. But it's far from clear whether shoppers will actually spend their shrinking holiday budgets there.

"There will no doubt be a group of consumers that refrain from shopping at Circuit City due to confidence issues," said Dan Binder, managing director at Jefferies & Co. He notes that consumers will be concerned about returns and warranties, even though warranties are through third parties.

Gift cards in limbo
A bankruptcy court has authorized the retailer to honor customer programs such as returns, exchanges and gift cards. Still, customers are likely to remember the debacle at Sharper Image earlier this year. Customers who purchased gift cards as holiday presents discovered in February that the bankrupt retailer would not honor gift cards, gift certificates or merchandise certificates.

"I think it's going to be very difficult to convince consumers in no uncertain terms that they'll be able to stand by things and are going to be there," said Hal Fass, senior consultant at Consumer Dynamics. "The problem is that all of these institutions that have been seen as rock-solid are falling by the wayside."

Though consumers are right to be concerned about Circuit City's future, the retailer's troubles could lead to big savings for those unperturbed by the filing.

"While it's possible Circuit City could emerge from this bankruptcy in better financial condition, we have a hard time imagining that it can compete over the long term," Brady Lemos, a Morningstar analyst, wrote in a research note. "Circuit City's bankruptcy will probably contribute to a highly promotional holiday selling season as the troubled retailer liquidates inventory. This could hurt competitors in the short term, although we believe the remaining industry players -- most notably Best Buy -- will benefit over the long run from Circuit City's passing."

Silver lining from troubles
"If Circuit City is perceived as a place that's giving things away, because they are in trouble, they might move a lot of merchandise," Mr. Fass added.

Circuit City should have the funding to move forward with holiday marketing plans, according to analysts, who note it secured a $1.1 billion loan yesterday. Last year, the retailer spent $103 million on measured media during the fourth quarter alone, according to TNS Media Intelligence. In the first half of this year, spending was down 3% to $99 million.

Havas' Euro RSCG, Chicago, handles creative for Circuit City, while media buying is handled in-house. Sharpe Partners, New York, is responsible for digital marketing.

Last month, the retailer began rolling out a marketing campaign touting its "One Price Promise," which pledges merchandise in store and online will be priced the same. That campaign, backed by an expansive media plan, is meant to be the focus of holiday marketing. The retailer also introduced "Wish Upon a Star," a program that allows customers to create a holiday wish list and then send automated reminders from celebrities such as Olympic gymnast Shawn Johnson or country music star Taylor Swift.

Staying on course
Circuit City said it has no plans to change those marketing programs. "Our 'One Price Promise' promotional efforts will proceed full steam ahead," said a spokesman.

But Mr. Fass notes that Circuit City might need to tweak its marketing plans in order to calm wary consumers and urge them to continue shopping with the retailer. "The fact that they have filed for bankruptcy is going to create a barrier to consumers shopping there," he said, noting consumers could be resistant to making big-ticket purchases. "That is an immediate barrier that they are going to have to deal with head-on. They don't have room for subtlety."
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