A Question...I'm Confused... (credit, lender, mortgage, bankrupt)

[Mom2Feebs]

Why do companies continue to build new retail stores if they're about to go bankrupt?

Circuit City is blaming the economy, among other things, for their current state.

I find it remarkable, considering we just had a new Circuit City open this weekend here in Houston. Maybe, uh, overzealous spending is the reason they've gone bankrupt?

If these companies know they are in trouble, why do they continue to expand? What happened to tightening the reins?

[Padgett2]

Sometimes you have to wonder if the Department that's in charge of New Development and Expansion even knows that the object of business is to stay solvent.

You can understand how a business can have a bad quarter, or even a bad year. But to ignore losses for months and months and continue to build and act as if everything is going great, has to be stupidity.

[Noc]

You have to realize that the economy pretty much went under overnight. Not the mortgage mess that started it but when main street got hit with the credit freeze that did in a lot of businesses.

When the new CC store opened in your area that was in their fiscal budget for this year. Those decisions were made late last year or early this year when things were still good. They had to acquire the land and contract the job to build/renovate the place and order up a ton of inventory to be scheduled for delivery once that store opened. It wasn't an overnight thing and this is happening to many business.

Some construction jobs in many places in the world are on hold b/c they don't know the outcome of this economic crisis. They have the money to finish the job but the tenants are backing out of leases left and right. Some can't the credit b/c of the freeze to continue going.

Store like CC rely heavily on credit and people to buy their products. If people are losing jobs no one is buying consumer electronics. When that happens the inventory they bought on credit just sits there and devalues. When it's time to payback their lender they can't that's why the filed for bankruptcy and are closing stores.

[Padgett2]

Noc has put it together well. CC has had it's ups and downs but generally speaking, planning ahead was done when things were looking better than they are now. Leases were signed, contracts given and stock ordered. Well, things didn't get better and CC didn't have the background or resources like General Motors and AIG. (Those are the ones that really get to me.) CC gambled on the future. And the future didn't come up to expectations.

We have noticed for quite a while that in our local CC store that certain departments didn't seem to be well stocked, while in others, there was an oversupply. I just can't believe that there are enough houses or bars with huge rooms that could use those gigantic big screen flat TV sets. We have tried to buy a computer at CC. They simply didn't have much stock to choose from. Either very basic, cheap, Slow and Pokey sets or sets with every bell and whistle you could think of, with a price tag to match. Nothing in between.

[Philip T]

More like because their CEO/MBAs do not the wits to look ahead further than own next paycheck to see this coming.

The crash has been writ large upon the wall for over two years, now.

As far as Circuit City in particular, I suspect there really is some sort of business Karma going on for screwing over the help.

[Mom2Feebs]

I appreciate your answers! They all give me more insight into the mess. Thank you!

[trishguard]

It might have something to do with an accounting term "going concern".

[harry chickpea]

Noc did a good job of explaining the basics.

Unless you are privy to the board room conversations and the work done on assessing the competition, it is hard to understand just how far most big business must go to keep ahead. Planning for expansion is a vital way of keeping competitors at bay. I know of situations where a company I worked for placed "New location coming!" signs on empty lots, and made initial overtures to landlords just to make competitors stay out of an area. Sometimes a location was built even though it looked like a bad move, just to undermine competition, drop their profits, and send a message. The game is hardball, and the public doesn't get to see just how hard and fast some of the pitches are.