The current economic crisis has affected all the sectors and the consumer sector has been one of the major affecters. The retail sector has suffered majorly due to the consumer shortage as a result of the massive credit crunch. Since most of the retail sales are carried out on the basis of credit; around 75 per cent, the consumers have had to cut back on their spending and hence, the retailers have had to suffer the consequences of this cutback.
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Circuit City; one of America’s second-largest consumer electronics stores has suffered majorly due to the above-described consumer spending pattern. As a result, the company had to file for bankruptcy protection under Chapter Eleven. For the second year in a row, the company suffered losses amounting to $320 million. According to the Chief Financial Officer, these losses were a result of the double-digit-percentage drop in the consumption volume in the stores.
Circuit City, having foreseen the drop in consumer dropping had already announced a shutdown of 155 stores and layoffs of about 17 per cent in the workforce. An additional amount of 1300 workers were laid off during this period of a financial slump.
Not only is consumer spending caused this, but even the suppliers’ have tightened their credit lines causing the situation to worsen by a great deal. Despite, the company’s above attempts to improve the scenario, the supplier’s confidence has remained low. In addition to the low levels of consumer spending, the credit crunch created by the suppliers has worsened the economic crisis. Circuit City was amongst many of the retailing organizations to have suffered serious setbacks.
The supplier’s main concern was the non-payment of and this concern in the case of Circuit City can be said to be viable as the financial statement showed Circuit City’s liabilities were overwhelming its assets by a great margin.
The suppliers’ as a result of the falling sales, negative sales forecast refused to provide credit for any new purchases, In certain cases, payment was done before the merchandise was even provided due to a severe lack of supplier confidence fostered by the negative environment.
Even though certain attempts were made by the company in terms of having personal meetings and closing such stores that were showing negative returns, the vendors continued to tighten the credit lines. Even though Circuit city did have a revolving line of credit with the Bank of America, yet as the level of inventory turnover and value fell, so did the length of credit lines. Hence, the company’s ability to buy any new raw material was clearly limited.
The reason for the consumer spending fall can be attributed to the tighter spending limits being offered by banks to shoppers
As a result of this bankruptcy protection, the company hopes that the vendors would have enough confidence that they would provide more flexible credit lines. After this filing, the NYSE suspended the trading of the stocks of Circuit City which had already devalued by 96 per cent.
At the end of this filing, the company would have to liquidate its assets in order to provide the required cash to its suppliers etc. The company heads hope that after this filing, the company would be to reposition itself and the customer warranty and service plans as such would not be affected.
Mui. Q, Ylan” Circuit City Files for Chapter 11 Protection “Washington Post. 2008