Eddie “fast buck” Lampert is squeezing the proverbial turnip for more cash — as the musicians aboard the sinking “Titanic” are now truly playing “Nearer My God to Thee.” The cash he’s squeezing out is his own, in the form of a $400 million loan from his hedge fund, ESL Holdings. And regardless of his sinking ship, he’s got a life saver in the form of a healthy interest rate and a loan secured by valuable real estate. So “abracadabra Eddie” keeps the ship afloat. For now.
Unfortunately the music is about to end, and as he continues to sell off the “deck chairs” (read: assets), Sears and its bleeding sister, Kmart, will finally sink into the briny. Some experts predict this will happen by 2016. Regardless of the financial predictions, these two retail brands are “dead men walking” as I write.
What a damn shame! The loss of Kmart, however, was, in my opinion, due to a shabby, poorly run business from its inception. But we should be particularly aghast at how Lampert has systematically dismantled the once greatest retailer in the entire world: Sears. In its heyday, it was bigger and better than Walmart. Lampert had the rather pompous audacity upon acquiring it to publicly announce that he intended to return it to its rightful iconic position.
He has achieved the exact opposite result. And one could honestly say he did it single-handedly because he micro-managed everything with a blistering senior level executive turnover rate. The only good news that could come out of Sears demise would be to shed some of the useless, excess retail square footage across the industry.
Premature as I might be in declaring Sears dead, before it is officially and financially defined as such, I prefer to remember its past. Its rich history has incredible learning points and strategic insights for retailers and brands today. Some of the following excerpts are from the recently released updated edition of my book, The New Rules of Retail. My co-author, Michael Dart, and I speculate on whether or not Sears could have a sustainable future.
Sears Precedes the Internet and Employs Preemptive Distribution
In the late 1800s, before the Internet was even imagined, the famous Sears catalog gave customers the same advantage that innovative e-commerce sites have over brick-and-mortar retailers today. Essentially, Sears was distributing its entire store into the living rooms of America’s middle class, whose shopping options at the time were slim, as 60% of the US population lived in rural areas. The catalog contained everything those families would ever need, from cradle to grave, at affordable prices. One could say Sears was Amazon before Amazon.
Then as the population began migrating from rural areas to the newly forming towns to cities and then suburbs, enabled by the construction of the interstate highway system, Sears employed another strategy we define as imperative for retailers in the 21st Century: preemptive distribution. To preempt the competition, Sears followed its consumers into their new neighborhoods as both developer and anchor for the very first shopping centers in the country. Sears further expanded its reach with the explosion of mall development across the United States. At this point in time, Sears was beginning to become untouchable.
Private Brands and Vertically Controlled Value Chain
Also, more and more of their products were exclusive and many were produced by Sears. Interestingly, Sears was on the leading edge of vertical integration and total control over its value chain, a strategy we suggest is crucial just for survival today.
In the 1960s, Sears expanded its R&D lab, introduced a market-research department and process, and advanced the company’s understanding of advertising. They firmly believed that relentless consumer research, as well as product development and testing (as opposed to gut instinct), were the only sure paths to successful innovation. And successful they were.
A constant stream of brands and products were rolled out through the largest distribution machine in the world. The number of “firsts” and private and exclusive Sears brands were mind-boggling: the first steel-belted radial tire; Craftsman tools; DieHard batteries; Kenmore appliances; Toughskins jeans; Cling-alon hosiery; the Comfort Shirt; the NFL and Winnie-the-Pooh exclusive licenses. These exclusive brands were made possible by Sears’s unique merchandising structure and process. As the owner of many of its suppliers, and the primary buyer from others, Sears possessed a vertical integration that facilitated a continuous process of joint research, innovation, testing, and therefore a continuous stream of new, exclusive products and brands. This private branding strategy provided the foundation of Sears’s value proposition and gave it an enormous advantage over competitors.
Sears also pursued product innovations for all consumer segments, making them a democratic retailer for all Americans, not just the middle class. Thus, it had a unique niche. Sears did not have to compete head-on with the department stores (because it had its own exclusive brands) or with the discounters (they couldn’t operate on the higher cost structure necessary to match Sears’s offerings).
The Sears Geeks Before the Geek Squads
Perhaps the most important message Sears-past can project into the 21st Century is the importance they placed on their in-house consultants. Sears’s sales associates were the early equivalent of Best Buy’s blue-shirted Geek Squad or Apple’s Geniuses. They were thoroughly trained and proficient in the famed thousand-page Sears rule book. They were so well trained, they could instruct customers on everything from Sears’s history to the use of each brand and product in their particular department.
And not unlike Apple’s powerful neurologically-connecting experiences with its customers, Sears connected with, and compelled its customers to keep coming back for the memorable educational experiences the Sears associates provided.
Furthermore, all Sears stores were decentralized when it came to merchandise decisions. Store managers ordered and bought products and quantities according to their local consumers’ preferences. Through this localization, there was a clear competitive advantage.
The Biggest and Best Ever
By the late 1960s, Sears was the equivalent of today’s Walmart. It was an unparalleled master of retailing; bigger than the next five-largest retailers combined, with 900 large-format stores and more than 2,600 smaller retail and catalog outlets, accounting for one percent of US gross national product. More than half the households in the country had a Sears credit card. A survey at the time confirmed that the brand was the most trusted economic institution in the country.
The Beginning of the End
Then in the mid- to late 1970s, the unraveling began. Tragically, after 84 years of building one of the greatest brands the world had ever seen, it would take Sears just a few years to lose its unique competitive position and veer into a quarter century of decline that continues to this day. And under Mr. Lampert’s watch, the descent to insignificance is accelerating.
So, what happened?
A more detailed history of the rise and fall of Sears appears in Chapter 12 in our book, The New Rules of Retail, under the heading: Lessons From Sears: From Success to Struggle. Following is a summary:
As the consumer and competitive marketplace began to go through major shifts during the late 70s and early 80s, enabled by technology and globalization, Sears made three fundamental errors.
- It concluded that market saturation meant growth had to come from businesses outside its core. This did not have to be fatal; however, it actually starved those resources (capital and management ) from the retail business, leaving it unable to respond and adapt to the needs of the evolving consumer and marketplace.
- It allowed the emergence of a bureaucratic culture, which slowed decision-making. When the unraveling began in the late 1970s, Sears’s culture became characterized by infighting and significant strategic redirects. This cultural sclerosis is a disease that cripples many large, older companies in need of change for survival.
- It stopped investing in new distribution formats.
Could There Be a Future for Sears?
For a miraculous intervention to halt Sear’s death spiral, Eddie Lampert must first remove himself from the helm. He needs to find a retail genius, granted there is a very short supply in this industry. And furthermore, he must find a genius that would be interested in taking on the wreckage.
Even with a miracle-maker new CEO, the seminal question is whether Sears has time to address the following three dynamics to regain any position of strength.
- Consumers: Today they have unlimited, equal, or better shopping choices than Sears offers. Their attitudes, behavior, and demographics have changed in favor of Sears’s competitors, many of which are located closer to where their consumers live. This raises the attendant issue of Sears’s captivity in malls and how it will deal with this issue. The challenge for Sears is to create experiences for the consumer and build a strong emotional connection that propels them into the stores—even if that’s a little farther than they would normally go. And as of this writing, CEO Lampert’s early decision to cut store-maintenance costs eschews any investment in creating a compelling shopping experience, and the stores will decline into a more miserable shape.
- Competitors: Sears must focus on competitors that have more efficient and effective business models positioned with dominant value promises and elevated shopping experiences. These competitive brands are attacking the conglomeration of Sears’s arguably waning businesses (appliances and tools included). Competitors such as Walmart, Kohl’s, Target, JC Penney, Home Depot, Lowe’s and the multiplicity of specialty chains have a major advantage because of their lower operating costs and real estate flexibility. Thus they gain more pricing leverage and greater profitability, as well as better proximity to the consumer. Between 1998 and 2010, the number of competitors within a 15-minute drive from any Sears grew from 1,400 to 4,300 stores. Furthermore, during this period Sears had barely developed an e-commerce strategy (much less a preemptive one) and it lagged behind in the application of other leading-edge distribution platforms (e.g., mobile technology).
- Economy and Industry Dynamics: A slowly recovering, post-recession economy; an oversaturated retail industry; and the overall down trending of the channel that Sears competes in, all provide very little wiggle room — and no more time for drifting. We believe that for Sears to survive, it will have to revisit its roots and the strategic drivers that made it the paragon of retailing throughout the world. It must reposition its model based on our three New Rules: a neurologically compelling shopping experience; preemptive, precise and perpetual distribution; and optimum control of the value chain, without which the first two are impossible.
The question is: Does Sears have enough time and capital to execute this change? Or will the clock run out first?
Tick-tock, tick-tock. “Abracadabra” Eddie has very few tricks left, he’s running out of cash, and the sea water is now chest high as the Titanic heads for the final plunge.