The Margin Lived Inside a Laminated Pamphlet

A retailer that once operated 616 stores eliminated the people who sold its most profitable product. Every location closed within six years.

The television was enormous, mounted at eye level, tuned to a football game with colors so saturated they looked wet. It sat in a row of identical screens, each one slightly larger and slightly more expensive than the last.

A white tag listed the model number, the price, and a set of specs that meant almost nothing to a person who had come in to replace a thirteen-inch set in the bedroom.

A salesperson in a red polo appeared within thirty seconds. He carried a clipboard and spoke in the practiced tone of someone who had given this tour a thousand times.

He steered the conversation past the screen you were looking at toward the one beside it. He explained the difference and made it sound obvious.

Before you reached the register, he asked one more question. It was about the warranty.

The store was Circuit City.

Samuel Wurtzel opened a small television shop in Richmond, Virginia, in 1949. He called it Wards Company.

By the late 1970s, the business had grown into a chain of large-format electronics stores. The name became Circuit City in 1984.

The visible product was the television, the stereo, the computer. But the real economics lived in a laminated pamphlet the salesperson slid across the counter.

Circuit City sold extended warranties on behalf of third-party insurers. The customer paid for coverage. The insurer carried the risk.

Circuit City kept between 50 and 60 percent of the price as a fee. That fee had almost no cost attached to it.

A television might carry a gross margin of five or six percent. The warranty plan carried almost nothing but profit.

By the early 2000s, warranty revenue ran to about four percent of total sales but contributed a share of gross profit far out of proportion to its size. The person in the red polo was not an expense. He was the delivery mechanism for the most profitable item in the building.

The model worked because the purchases were large, infrequent, and confusing. Buyers wanted someone who could explain the numbers on the tag and make the choice feel safe.

Commissioned salespeople had a reason to learn the products and a reason to ask about the plan. The two incentives reinforced each other.

Circuit City grew to 616 stores and employed roughly 60,000 people. Annual revenue reached approximately $12 billion.

The format worked in an era when electronics were expensive, unfamiliar, and hard to compare without someone standing beside you.

Best Buy had built a different model. Its sales staff worked for hourly wages, and the floor felt lower-pressure.

In 2003, Circuit City eliminated commissions across all stores and laid off 3,900 of its highest-earning salespeople. The move saved about $130 million a year in payroll.

Company insiders later said it was the single decision that mattered most.

In March 2007, a second round cut 3,400 more experienced workers under a program the company called wage management. Employees who had been with the chain for years were let go because their pay had drifted above the local average.

The salesperson who knew the products and asked about the warranty was gone. Extended warranty revenue, which had peaked near $418 million, declined year after year.

The margin that made the model work walked out the door with the name tags.

Same-store sales fell. The 2008 recession accelerated the slide.

On November 10, 2008, Circuit City filed for Chapter 11 bankruptcy. No buyer emerged with financing.

All 567 remaining stores closed by March 2009. About 30,000 employees lost their jobs.

The parking lots emptied. The big screens went dark.

In 1991, Circuit City executives developed the concept for a used-car lot with no-haggle pricing, a large selection, and the same guided sales approach that worked on the electronics floor. The first location opened in Richmond in 1993.

Circuit City spun it off as an independent company in October 2002. It was called CarMax.

CarMax now operates more than 255 locations and generates roughly $26 billion in annual revenue. The parent that created it is gone.

The store that sold the warranty closed.

The side project still sells confidence.