Circuit City learns the hard way that discounting sucks

TWICE: Circuit City Sees Red Over Flat-Panel Pricing

Circuit City’s profits plummeted in its fiscal third quarter as the No. 2 electronics chain succumbed to the flat-panel margin pressures that are roiling the CE industry.
The company reported a net loss of $16 million for the three months, ended Nov. 30, nearly matching that of Tweeter Home Entertainment Group. Best Buy’s net earnings were up 8.7 percent for the period but still came in below projections.

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In a conference call, Schoonover said the magnitude and the velocity of the price declines were “unprecedented” in all his years in the industry, and described the situation as a “sea change” in flat panel. He traced the volatility to a plasma TV vendor with excess inventory, and to defensive responses by two LCD vendors that viewed the price moves as grab for market share.

I will say it again: discounting is a death spiral waiting to happen. When you discount your product, you are sending a message to customers that your product is not worth paying full price for. That you are not worth paying more for. Once you've let that genie out of the bottle, it's a tough trick to get him bottled up again once you've declared for all to hear that your brand is worth less than it used to be. I don't care how much top-line revenue you grow by buying business from price shoppers, with flat net income, you are no further ahead.

The late, great Milton Friedman said that the greatest economic fallacy is that the economy is a closed system, and that for your piece of pie to be bigger, someone else's has to be smaller. This fallacy leads market strategists to view the business of selling stuff as a battleground: Total War, Scorched Earth, someone must win, and someone must lose. And inevitably, this outlook leads to trying to win "by any means neccessary," which means bribing customers to take your product from you. Ask an executive for General Motors what the endgame is, once you head down the road of offering incentives to buy.

The truth is, there is enough business out there for everyone. In my marketplace, the custom residential design field in Alberta, I have no idea what my so-called competitors are doing, because I am too goddamn busy to keep tabs on them. I wish them well, and hope that they are benefitting from the Alberta Advantage because, quite frankly, anybody who is not doing well in this economy has only themselves to blame.

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