Circuit City & Best Buy: Adaptation in Consumer Electronics Retail

One company clung to high margins while its market changed beneath it. The other adapted repeatedly. A study in the margin trap.

A Changing Market

In the 1980s and 1990s, the consumer electronics retail industry underwent rapid change. New product introductions came with lower margins, and rapid price deflation was reshaping customer expectations. A mid-level IBM computer fell from $3,500 to $1,500; VCR prices dropped from $400 to $150.By the 1980s, customers were buying their third TV, not their first. The new customer wanted to buy but didn’t want to be sold. Richard Schulze estimates 576 consumer electronics retailers went bankrupt from 1983–2000.

Circuit City, under CEO Richard Sharp, centered its strategy on high gross margins through commissioned step-up selling and extended service plans. Best Buy read the customer differently and adapted its model multiple times.