A new plan for layoffs at Circuit City is openly targeting better-paid workers, risking a public backlash by implying that its wages are as subject to discounts as its flat-screen TVs.
The electronics retailer, facing larger competitors and falling sales, said Wednesday that it would lay off about 3,400 store workers — immediately — and replace them with lower-paid new hires as soon as possible.
The laid-off workers, about 8 percent of the company’s total work force, would get a severance package and a chance to reapply for their former jobs, at lower pay, after a 10-week delay, the company said.
The news of the layoffs came as a surprise to Rachelle Gouled, who earns about $7.75 an hour working on the sales floor at a Circuit City in Roseville, Minn. She said she was spared but 10 people were laid off Wednesday at her store.
“For some of them, I could see them being OK without this job,” she said. “For others, it was their only job.”
Analysts and economists said the move is an uncertain experiment that could backfire for the chain. The risks: Morale could sink and customers could avoid the stores. Also, knowledgeable customer service is one of the few ways Circuit City can tackle competitors that include Wal-Mart Stores Inc., they say.
“This strategy strikes me as being quite cold,” said Bernard Baumohl, executive director of The Economic Outlook Group. “I don’t think it’s in the best interest of Circuit City as a whole.”
While other companies, such as Caterpillar Inc., have introduced two-tiered wage systems, where newer workers make less, firing workers and offering to rehire them at a lower wage is very rare.
“I don’t think you’re going to find too many examples,” of this, said Ken Goldstein, labor economist for the Conference Board, a business research group. “That certainly has not been a trend we’ve seen.”
Circuit City Stores Inc., the nation’s No. 2 consumer electronics retailer behind Best Buy Co., says the workers being laid off were earning “well above the market-based salary range for their role.” They will be replaced with employees who will be paid at the current market range, the company said in a news release.
“We haven’t done something called (a) wage management initiative before,” said company spokesman Jim Babb. “All companies at one time or another need to go through and make sure their cost structure works with market conditions.”
Circuit City declined to say how much those laid off were paid and how much the new workers would make. Company spokesman Bill Cimino said it varies depending on the market.
The company’s stock rose 35 cents, or 1.9 percent, to close at $19.23 on the New York Stock Exchange.
“The stock is up today on the news restructuring is going to help in short term,” said Morningstar Inc. analyst Brady Lemos. “Longer term, they could face challenges.”
Analyst Vivian Ma of CIBC World Markets said Circuit City sales suffered after it dropped commissions for its sales workers in 2003, and there’s a danger the same thing will happen now.
Circuit City lost money in its most recent quarter and on Wednesday lowered its 2007 revenue guidance for the second time. A store in Falls Church, Va., started cutting hours after the Christmas rush ended, said Imane Eljacifi, a Verizon Wireless employee who has worked for about three months at a kiosk located inside the Circuit City there.
After the cuts, many of the employees, mainly teenagers, left for other jobs where they could get more hours.
“The Circuit City customers were wandering around and would start asking us for help,” Eljacifi said. “That’s what I’ve witnessed and I hate about the whole situation.”
Customers at the store questioned the move.
“I don’t think it’s fair,” said Hamilton Smith, an 88-year-old retired federal worker who had just purchased some batteries at Circuit City. “You need to give people a living, working wage.” He said he would think twice before shopping at the company’s stores again.
Circuit City’s cuts come at a time when other retailers are trying to put more knowledgeable workers on store floors. Home Depot Inc., whose new chief executive is struggling to re-ignite sales growth at its stores, said it has raised pay to attract skilled tradespeople, such as carpenters and electricians.
Home Depot is adding 15,000 new jobs this year, according to spokesman Jerry Shields.
Circuit City’s move, by contrast, “shows they’re positioning for another tough year,” said Timothy W. Allen, a Jefferies & Co. retail analyst. Not only will service levels at the store suffer, he said, but “you’ve lost 3,400 customers-slash-employees.”