BlockBuster-Circuit City Combination Is A Bust

Some retail executives think that a potential Blockbuster -- Circuit City combination is a bust, a marriage of two troubled players with little hope of a brighter future.

Retail executives at RetailVision 2008, which is owned by ChannelWeb parent Everything Channel, a division of United Business Media, say they see few synergies between the two companies.

"It's like seeing the Titanic buy Enron," said one executive for a competitor who did not want to be identified.

Blockbuster, the nation's largest video rental company, formally announced this week that it was making what amounts to a hostile bid to buy Circuit City for more than a $1 billion. Blockbuster has offered at least $6 a share for the number two consumer electronics retailer, a 54 percent premium over Circuit City's closing price last Friday. Blockbuster shares fell 10 percent to $2.81 on Monday after the unwelcome bid was disclosed. Circuit City shares closed up 27 percent to $4.97.

Kevin Jones, the vice president of merchandising for Micro Center, a 21 store national chain which has enjoyed considerable growth with PC-passionate consumers that make $100,000 or more, said he is not worried about a potential Blockbuster Circuit City combination.

"You have to find a model that works," said Jones after a session at RetailVision. "Blockbuster doesn't have a model that works. Circuit City doesn't have a model that works. How do you put the two together and make it work? How do you make it profitable? It's business 101."

"You have to have a business model that is replicatable before you start buying somebody," he said.

Jones compared the Blockbuster-Circuit City deal to a deal many years ago in which CompUSA bought Good Guys, a home theatre and audio retailer. "Neither model at the time was proven and replicatable," he said. "I just don't know how you could take two unreplicatable models, bring them together and make a winning solution."

Jones attributes Micro Center's success to sharp focus on the high income passionate PC consumer. "It has to do with discipline in your business model and not getting distracted," he said.

Jones said Circuit City got distracted by chasing Best Buy. "You can't run your business by letting everybody tell you what you should be doing," he said.

NEXT: Micro Center's Astonishing Growth

Micro Center's growth is astonishing in what amounts to a treacherous retail environment that is feeling the effects of an economic downturn. Year to date MP3 unit sales at Micro Center are up 500 percent system, while storage units are up 200 percent, he said.

Micro Center's Apple business, meanwhile, is up more than 50 percent, he said. PC-based system sales are also up more than 50 percent, he said. Desktop unit sales alone are growing in the mid-teens, he said. "That is unheard of in this business," Jones said. And Micro Center's popular Build Your Own segment sales, which supplies PC motherboards and components to customers building their own systems, is up more than 70 percent.

Ray Robidoux, a partner for The Sightline Group, which does consulting in the retail computer market, said Blockbuster has to do something to "accelerate the change to a different business model. To me it's a creative way for them to approach the business model change. The question is and it's a big question is are there enough synergies so that they'll recognize the benefits."

Robidoux, the former president of Netgear, knows firsthand how difficult it is to navigate the retail waters. He says the entire retail sector is under "a lot of pressure" because of the lagging economy. "A good number of these purchases are discretionary," he said. "They are purchases that can be put off."

How long will the current economic slump affect retailers? "I think it's going to be a slow recovery just like the economy," Robidoux said. "How do you bake that into your forecast? It's a bear. You have to make tough, tough choices anytime there is a disruption and this is disruption."