Circuit City Gone; GM Set to Follow ; But McDonalds Booming

Hard times put a lot of stress on companies. Companies that were already in trouble will not make it.

Circuit City, after many years of trying to turn itself around and regain growth and profitability, filed for bankruptcy today.  The company is hoping that bankruptcy protection will give it the time and breathing space to regroup for the holiday season.  Over the last couple of weeks it was unable to pay vendors and when these vendors cut off credit the company had no choice but to go Chapter 11.  That does not mean that Circuit City is finished.  Chapter 11 provides some breathing space for Circuit City to fix its operations.  There might even be some good deals this Holiday Season.

That time may be in vain though.  It faces stiff competition from Best Buy, Walmart, Costco, and others.  Consumer electronics are now commodities and the lowest price wins.  I wouldn't want to be competing against Wal Mart in a consumer commodity market.

GM  is in terrible shape.  The company recently cut development on most of its future projects, the lifeblood of a car company.  Today, several analysts came out and predicted that GM will run out of cash imminently.  GM is suffering from an almost 50% decline in car sales from last year.  HIgh gas prices, a horrible economy, and a lack of credit have hurt all of the car companies, but GM is the weakest and the leas prepared to handle the downturn.

Marketwatch reports that:

"In a note to investors, Deutsche Bank said Detroit-based GM's cash position will likely fall below $5 billion by late December, leaving its operations underfunded for payables due in early January. To keep operations going and assist in restructuring, the U.S. would have to provide as much as $25 billion and at least $10 billion in loans to keep the company afloat.

"Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like," analyst Rod Lache said in a research note, essentially calling the company's shares worthless with a price target of $0, reduced from $4."

Time has run out for the car company and its employees.  A government bailout of the existing company would only delay the inevitable.  To save GM, the following must done:

  • Fire all GM management and bring in some new blood.
  • Reduce pay and benefits of its UAW workforce.
  • Begin to make cars and people want to drive.

Not all the news is bad though.  After all, I like to report the good as well as the bad. McDonald's sales grew by 8.2% in October.  Big Macs are all the rate.  They may be okay for our wallet but not great for cholesterol.  But seriously, it's clear that credit fueled industries like cars and consumer electronics are feeling a lot of pain.  Less expensive and comfort based experiences are moving right along.  I expect this will be a theme over the next couple of years.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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