Solid Approach to Liquidation

The demise of Circuit City Stores was a classic case of economics gone bad. The nation’s second-largest consumer electronics retailer had been reeling amid the depressed global economy, unforgiving credit markets, toughened vendor terms and a falling stock price.

With no white knight to rescue it, Circuit City announced plans to liquidate the assets of all remaining stores on January 16, 2009. On that fateful Friday, the attention of CEO James Marcum and senior financial management was focused on satisfying the instructions of a bankruptcy judge.

For Mark Stinde, Circuit City’s vice president of loss prevention, the real work was only ramping up. Liquidation portends great risk to inventory, and Stinde’s primary responsibility shifted to protecting company assets during a two-month fire sale. And because of what Circuit City was, the task of protecting inventory valued in the billions of dollars was fraught with uncertainty.

“In an electronics environment, almost everything you have is high-risk,” Stinde says. “Almost everything is under lock and key. To try to sell in a liquidation process, you have to loosen some of the standards you have. You change the methods of how you sell to the consumer with a lot less control.”

Having worked many years at the highest levels of retail LP, including stints with Sears and Home Depot, Stinde understood the gravity of what Circuit City was facing. He explained that the company could not leave its inventory at risk during the liquidation and still meet the demands of creditors.

By preserving the inventory “you are able to do the right thing for the vendors that have been good to you over the years [by ensuring] that they are going to get the most recovery back for the commitment of goods that they have made” to the company, he says.

Once the decision was made to close all the stores and liquidate, Stinde knew he needed to act quickly. Liquidation sales would begin within days, but, more than that, the announcement and resulting publicity would raise the stakes for loss prevention because tens of thousands of once-loyal employees would no longer have jobs.

That would create what Stinde describes as a “tipping point” whereby workers who wouldn’t ordinarily consider stealing might take the closing as a license to grab items on their way out the door.

That weekend, Stinde and his team sprang into action, placing additional LP personnel at almost every store they believed “would be potentially challenging.”

Within days of the liquidation announcement, LP resolved 115 cases of internal theft – more than 10 times the caseload in a typical environment.

Stinde had the benefit of a dry run two months earlier: Circuit City announced the closing and liquidation of 155 stores in November 2008, a move it hoped would mitigate mounting financial losses as part of its Chapter 11 bankruptcy filing.

That initial round of closings led to the layoff of some 7,200 employees, and Circuit City immediately undertook store-closing sales that lasted through the holiday shopping season.

Unlike the full liquidation announced in January, loss prevention had the benefit of time and planning with the November decision, Stinde says. Fortunately, senior management had included him in advance discussions. “I was able to plan far in advance,” he says.

The first wave of closings called for Circuit City to completely pull out of a dozen markets, including Atlanta and Phoenix, and reduce its footprint in others. Loss prevention’s plan was to drive resources to those stores and markets where the potential for inventory shrinkage was considered to be particularly high.

No-tolerance policy
The full liquidation was exponentially more challenging. The chain was closing for good (though the company name, brand and logo were subsequently purchased and Circuit City now operates as an online-only enterprise), and the order of magnitude of what needed to be accomplished was far greater.

With 34,000 associates about to lose their jobs, employee theft was one of the paramount considerations with inventory. So Circuit City dropped the hammer, making it crystal clear that the chain would not tolerate theft.

Immediately following the liquidation announcement, “we had a meeting with every one of the associates and said we’d experienced in our past closings theft [levels] three or four times where we were before,” Stinde says. “We were very transparent with our associates about the review of the stores, the process, the preventative measures and the follow-up that was going on.”

Stinde’s team re-wrote Circuit City’s exception-based guidelines so as to better identify fraud in a closing environment. The company sealed non-customer entrances and required a log-in to open them, and checked all inbound and outbound merchandise against inventory.

Multiple liquidation firms offered financial incentives to employees to remain through the entire process (the last stores were shuttered May 19), but Stinde knew he needed additional help to get through the liquidation. In such an environment, LP essentially needed to manage the operation of each and every store.

Third-party services
Stinde called on the corporate restructuring and recovery experts at Protiviti, a unit of Robert Half International that provides a range of co-sourced, third-party services to protect the interests of the company, its creditors and other parties through financial advisory and business management solutions.

Within two days, 115 Protiviti personnel were dispatched to Circuit City stores, and the company served as financial adviser to the retailer’s official committee of unsecured creditors.

What was evident, says Stinde, now a vice president of Protiviti, was that the difference between the November closings and the liquidation “was like night and day. Even though I was prepared, there was no way we could react to all of the challenges that happened as well as we did when we had a couple of months to plan for Chapter 11.”

At the start of the liquidation, advisers had suggested that Circuit City should be prepared to lose 6 percent of inventory during the process. According to Stinde, the actual figure was closer to 2 percent.

Advance preparation “is key to a successful closure,” says Protiviti vice president Craig Matsumoto. “That is something that probably was not even part of a discussion point five years ago. But in today’s environment, it is a real issue.”