You Can't Save Your Way To Prosperity

Originally Published 11.4.2008

Circuit City announced the close of 155 stores, around one out of every five. Reporters blame this on a down economy. Phooey.

Best Buy is fighting the same economic conditions. Best Buy’s profitability is down from a year earlier, but still strong. And Best Buy executives are nearly salivating at the prospect of Circuit City stores closing. The company’s executives are planning on grabbing attractive Circuit City locations and buying market share. While Circuit City retreats, Best Buy advances.

If it’s not the economy, what caused Circuit City’s problems? Let’s go back to 2003. Some green eye shade Circuit City executive came up with a great idea for saving money. Stop paying sales commissions.

The company got rid of commissions for sales personnel, put them on hourly pay, cut 1,800 jobs, and saved $130 million.

The most successful salespeople, when converted into hourly employees, became the highest paid. Guess who got cut? The highest paid employees, which meant the best and most knowledgeable salespeople.

Four years later, in 2007, Circuit City did it all over again. According to a March 2007 Washington Post story, “Circuit City fired 3,400 employees in stores across the country yesterday, saying they were making too much money and would be replaced by new hires willing to work for less.”

It sounds like Circuit City was trying to save its way to prosperity. Instead, it saved its way into six straight quarters of losses, leading to the current store closings. This time, 17% of the domestic workforce will be laid off.

Even in good times you can’t save your way to prosperity. It never works. Sometimes you need to make cuts, but only the foolish cut their ability to generate sales.

Never cut your rainmakers. Never cut the best paid salespeople and most productive technicians to save money. When times are tough, you need more rainmakers, not less.

Don’t cut your advertising. Don’t cut your marketing. If you can’t invest more, invest smarter. Just don’t cut your ability to generate sales when you need sales the most. This is like a drowning man trying to conserve energy when he should swim for the shore. While he may not make the shore, he’ll definitely drown if he tries to tread water more conservatively.

Best Buy and Circuit City provide the perfect contrast. In 2003, Circuit City started down the path to bankruptcy by cutting their most productive, most experienced, and best paid personnel. Circuit City manager thought they were cutting costs. Instead, the company cut sales, cut service, and ultimately cut profitability.

By contrast, Best Buy is moving aggressively to take advantage of the opportunity opened by Circuit City’s challenges.

Are any of your competitors creating opportunities you can exploit? Are you willing to act like Best Buy? Or will you follow the path of Circuit City?

© 2008 Matt Michel