Circuit City’s closing having a ripple effect

Circuit City’s closings will leave a huge amount of vacant retail space.

Associated Press

Circuit City will finally flicker out when its last 567 stores close this year, but the bankruptcy of the nation’s second-largest electronics retailer will ripple across the U.S. economy for years.

In its wake will be 18.71 million square feet of vacant space in a faltering real estate market. More than 40,000 workers will be jobless, including 7,000 laid off last year.

Shopping centers will lose rental income. Suppliers will lose display space. Newspapers already struggling with falling ad revenues will have one less glossy insert in their Sunday editions.

Circuit City is bigger by far than any other retailer that has gone under in the current recession. The job outlook for its workers is far worse. The prospects for suppliers finding other customers is grim, and a larger pool of creditors are likely to go unpaid.

“The situation today is so different than” during other downturns, said Jerry Mozian, a restructuring expert at Tatum LLC. “It wasn’t the whole economy. Here, we’ve got a worldwide recession.”

Other big retail bankruptcies, such as Macy’s in 1992 and Kmart’s in 2002, ended in reorganizations or buyouts rather than liquidation.

Circuit City initially hoped to reorganize when it filed for Chapter 11 protection in November. It was sagging under the weight of $2.32 billion in debt and dismal sales as consumers cut back. But the 60-year-old company couldn’t work out a sale or secure new financing, and on Jan. 16 announced it would close for good.

The chain owes nearly $625 million to its 30 largest unsecured creditors — mostly vendors who supply the DVDs, flat-screen TVs and headphones on Circuit City shelves. They must wait to be paid until secured creditors such as bank lenders are satisfied.

That’s hitting electronics makers when they can least afford it. Hewlett-Packard, which is shedding 8 percent of its work force after a big acquisition, is owed nearly $120 million. Samsung, which posted its first quarterly loss Friday, is owed roughly $115 million. And Sony, which saw its net profit fall 95 percent in the October to December quarter, is owed $60 million.

Smaller businesses also got burned. Freelance photographer Scott Brown had worked for Circuit City’s corporate office in Richmond, Va., for two years, shooting photos of people and products for the company’s advertisements. The account grew to represent a quarter of his business.

The 41-year-old delivered his last project just four days before the company filed for Chapter 11. At the time, Circuit City owed him nearly $30,000. Brown listed himself as a creditor with the courts and hired an attorney. But the lawyer advised him he would probably never get paid.

“It was huge,” Brown said of the loss. “It added to the stress of the daily business like you wouldn’t believe.”

The vacant stores leave a huge hole for shopping center owners to plug. The 18.71 million square feet of space is like the Raymond James Stadium in Tampa, Fla., where the Super Bowl was played — multiplied by 11.

Finding new tenants is increasingly difficult, as chains such as Linens ’N Things, Mervyns and Steve & Barry’s also go out of business. Other companies such as Starbucks and Ann Taylor are retrenching from an era of swift expansion.

To be sure, some companies stand to gain from Circuit City’s dissolution, including the competitor that has dogged it for years: Best Buy Co. Inc.

The retailer, which has about twice as many stores as Circuit City, has been winning over customers to its brighter, more vibrant stores, outselling Circuit City $40 billion to $12.4 billion in 2007.

Analysts have said they think Best Buy can easily capture up to 30 percent of Circuit City’s revenue, especially since two-thirds of its stores are within 10 miles of soon-to-be vacant Circuit City sites.