Features, The New Rules of Retail

The Rise & Still-Falling Iconic American Brand

This article is not an attempt to match Edward Gibbon’s epic book, The Rise and Fall of the Roman Empire, in quantity or quality, although its quantity might seem as intense. And it’s not another bashing of Eddie “the magician” Lampert, or “fast buck” Eddie, or whatever I have called him. It is a long, really long, but serious story of one of the greatest brands in the history of the world. At its pinnacle, it was bigger than Walmart. So I believe the story is worthy of its length. I also believe there are many strategic lessons to be learned from the incredible “rise” of Sears and from its nearly four decades of “falling.” I know the attention span of some of my readers will be challenged, but grab a Starbucks and plow through it. I think you will be glad you did.

The Beginning

In 1886, the combined vision of Richard Sears and Alvah Roebuck was every bit as genius as those of Jeffrey Bezos and Steve Jobs. The tools Sears and Roebuck had to work with were just not as advanced.

With 60 percent of the U.S. population living in rural areas, they launched the Sears catalog, which was equivalent to the internet and smartphone of today. Essentially, Sears was distributing its entire store into the living rooms of America’s middle class, whose shopping options were slim to none. And with its 1,000-plus pages containing everything a human being would want or need, from their cradle, to an entire home they could live in, to the coffin they could be buried in, it was perceived by those families to be as big and amazing as Amazon’s marketplace. The entire family would eagerly gather around this Sears “store” in their living room to enjoy the dazzling experience of browsing, selecting and ordering whatever their hearts desired, at affordable prices. And if they couldn’t pay it all at once, Sears would help them out with payment terms.

Furthermore, a growing number of those products were exclusive to, and some even produced by, Sears. In this early stage, Sears was truly on the leading edge of value-chain control through vertical integration, one of the three imperative strategies for success (neurological connecting experiences and preemptive distribution being the other two), as defined in my co-authored book, The New Rules of Retail.

Just as the consumer was at the center and the beginning, middle and end of every thought, idea and innovation that Jobs and Bezos created (and Bezos still does), so too were Sears and Roebuck equally consumer driven.

Just like the smartphone as the marketplace for everything on earth has turned consumers into the point of sale (as it sits in their pockets wherever they are), so too did Sears “follow” its consumers into their homes, thus making it the point of sale. (Thinking Amazon, anyone?) Then from a store (catalog), in their living rooms, as the population began migrating from rural areas to the newly forming towns, cities and then suburbs, and particularly after the construction of the interstate highway system in the 50s, Sears adjusted its distribution strategy to follow those consumers to ensure that its stores were the first ones to reach them in their new neighborhoods.

In fact, Sears was the developer and ultimate anchor for the very first shopping centers in the country, and its business expanded along with the mall movement across the United States. Sears thus executed its strategy through multi-distribution platforms (thinking omnichannel anyone?), and physically demonstrated the extent of its investment in the consumer. This was also a preemptive distribution strategy, the second of the three mentioned above: go where the consumer is, and get there first, faster and more often than the competition.

Sears was beginning to become untouchable.

Sears Supremacy: The 60s and 70s

During the 60s and 70s, Sears transformed its model from being a catalog and brick-and-mortar retailer to becoming a powerful go-to brand that also created and produced its own private-branded products. Sears was continuing to move toward a totally vertical integrated value chain. They had a view of marketing that embodied all the activities of value creation, including research and development, branding/imaging, communications/advertising, publicity and distribution. These functions were arguably nonexistent in most retail businesses at the time.

They firmly believed that relentless consumer research and 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, exclusive Sears brands was mindboggling: the first steel-belted radial tire; Craftsman tools; DieHard batteries; Kenmore appliances; Toughskin jeans; Cling-alon hosiery; the Comfort Shirt; the NFL and Winnie-the-Pooh exclusive licenses; and many others. These exclusive brands were made possible by Sears’ unique merchandising structure and process. As the owner of many of its suppliers, or as the primary buyer from others, its vertical integration facilitated a continuous process of joint research, innovation, testing and therefore a continuous stream of new and exclusive products and brands. It provided the foundation of Sears’ value proposition, and was an enormous advantage over competitors.

Sears also pursued product innovations for all consumers. Their open acknowledgment of their desires for better quality and better performance and for honest, low prices, made Sears a “democratic” retailer. It was a resource for all Americans, not just the middle class. High- and low-income consumers of all ages and genders shopped at Sears. Thus, it had a unique niche—in the sense that it wasn’t niche at all. Sears’ then-CEO Robert Wood said, “The customer is your employer, and the moment we lose their confidence is the beginning of the disintegration of the company.”

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’ offerings). Most important, Sears’ sales associates were the early equivalent of Apple’s T-shirted Geniuses. They were thoroughly trained and proficient in the Sears rule book and could instruct customers how to use every brand and product in the store.

Furthermore, all Sears stores were decentralized when it came to merchandise decisions. Therefore, store managers ordered and bought the products and quantities according to their local consumers’ preferences. Through this localization, there was a clear competitive advantage. And they didn’t need “big data” analytics. Although, imagine the possibilities if they did have that capability at the time.

For all the reasons just mentioned, Sears was uniquely nailing the neurological connection and engaging experiences for consumers (the third “new rule”) that no other retailer could touch at the time.

During this period, Sears was the equivalent of Walmart today. And it powered into the 70s as an unparalleled master of retailing, bigger than the next five largest retailers combined, with 900 large stores and over 2,600 smaller retail and catalog outlets, accounting for an incredible one percent of the gross national product. More than half the households in the country had a Sears credit card, and a survey at the time confirmed that it was the most trusted economic institution in the country.

Then in the mid-to-late 70s 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 (awesome experiences, preemptive distribution and vertically integrated and controlled value chain) and veer into a quarter century of decline that sadly continues to this day. What happened?

Misreading the Tea Leaves

Sears conducted a major study in the early 70s that alerted them to the following major shifts which were exacerbated by growing market saturation and the slowing economy.

  • Sears’ customer base was getting older and turning into two-income families, plus women were becoming the most important shoppers.
  • The youth of America were not getting married as early as their parents had, and they were seeking their own shopping sources such as the rapidly growing specialty chains.
  • Sears’ profitability was shifting from merchandise, which had been contributing 80 to 90 percent of profits, to services, which were contributing 75 percent by the end of the 70s (including installation, credit extension and its Allstate insurance business).
  • Competitors were closing the gap—JCPenney in the malls and Kmarts appearing on every corner. The specialty store upstarts were also staking a claim in the malls, and Walmart was a preview of coming attractions.

The result of this study, along with many other internal issues that were coming to a head, which included political infighting between stores and merchandising management; mounting costs; and a calcifying culture, ultimately forced Sears management to seek a new direction. They began to believe that the key to growth was not to be found in the core competencies that had driven the success of the company. They started to look into new businesses that would be complementary and synergistic. So, Sears moved in a completely different direction.

This was the critical juncture in Sears’ history.

The Tumbling 80s

Even as the Sears Tower was going up in the late 70s and early 80s, to become the company’s new Chicago headquarters, much of its world, inside and outside, was starting to crack. And to make matters worse, the larger economy was tanking.

While Sears’ profits were plummeting in 1979 and 1980 because of the combination of inflation-raging interest rates, rising operating costs, loss of direction, mounting competition and organizational disarray, Sears new CEO at the time, Ed Telling, determined that the retail business had matured, and retreated to the Tower with his new team to work on building what he called the “Great American Company.” Sears as a diversified conglomerate of financial, real estate and insurance services. At the same time, he assigned another executive, Edward Brennan, to head up the retail business. Ironically, Brennan was charged with saving what truly was the Great American Company—the Sears retail business. At this crucial crossroads in Sears’ history, CEO Telling was essentially turning his back on, and leaving the scene of, the disaster to chase his dreams. He would initiate and oversee the dismantling of arguably one of the greatest American companies in history.

Telling’s dream was of a great synergy between financial services and the core retail business. Sears already owned Allstate Insurance, and it went on to acquire Dean Witter Reynolds financial services, Coldwell Banker real estate and, later, Discover Card. It also created the Sears U.S. Government Money Market Trust Fund and formed the Sears World Trade Company. The synergy was to come from Sears using its stores, catalogs and Allstate Insurance offices as additional locations where they could insert the financial service businesses. It expected to lure the millions of Sears’ customers across the aisle to purchase financial services, and vice versa. Telling boasted to the press about their “socks and stocks” strategy.

Chief among the several factors necessary for this grand strategy to work, however, was a successful and growing core retail business to generate the crossover and new traffic expected. But this was not the case. Not only was the core business beginning to decline during this period, but the customers also questioned Sears’ authority on financial skills and management, citing confusion about where Sears now belonged in their lives. What was it—retailer, banker, financier, real estate mogul or a “money store”? What did it stand for? Does this ring a bell in describing their position today? Don’t worry, I’m getting to that.

In the end, rather than an inspired synergy, Telling’s so-called Great American Company was one of the first major strategy missteps that sent Sears into its long decline. In fact, instead of a synergy for growth, the strategy likely caused a reverse downward synergy. Along with the already daunting task of turning the retail business around, Telling’s idea to “bolt on” a completely different business just compounded the complexity and confusion of accomplishing either.

So, Telling’s dream did not come true. In fact, the financial services businesses might as well have been independent entities of a holding company. They ended up contributing only incrementally (with the exception of Allstate, which Sears held even before Telling, and eventually the Discover Card). By the early 90s all the financial services, real estate and insurance businesses were sold off as Sears entered another decade-long search for direction.

As the new head of retail, Brennan did make some bold moves in the early 80s, enough to achieve a short-lived spike in business and confirm his promotion to CEO in 1984 upon Telling’s retirement. Some of his initiatives for a “new Sears” included: improving stores and merchandise presentations; adding national brands; trying to strengthen apparel lines; launching a “Store of the Future” concept as a template for refurbishing stores over a five-year period; rolling out Business System Centers and paint and hardware specialty stores (a beginning probe for competing in the specialty tier); and the launch of a national ad campaign.

However, all these initiatives turned out to be merely opportunistic tactics. The ad campaign’s underlying message said it all: Sears has everything. So, while Sears gained a momentary boost through Brennan’s initiatives, it had definitely lost its once-supreme position and still lacked a clear strategic direction.

RELATED:   Nordstrom Local: A Triple-Header: Personalization, Experience, BOPUS

The once-proud culture turned arrogant, then bureaucratic. The constructive balance between stores and merchandising and marketing deteriorated into constant infighting. This conflict, along with the loss of their private and exclusive branding strategy (giving way to national brands) and cost cutting, led to the unraveling of Sears’ fully integrated (and/or exclusively controlled) product development and production sourcing. This was further exacerbated when it shuttered its R&D and consumer research departments.

Sears’ small-store preemptive and multichannel distribution strategy, also initiated under Brennan, would prove to be too little too late, as well as underfunded, since more capital was being infused into the financial services business. Finally, it was confronting the arrival of Walmart as the new, hot discounter in small towns. Cutbacks in store expansion also left many of its original stores anchored in declining locations.

For 10 years Sears focused on the so-called synergy for growing financial services while ignoring the store. The “store of the future” was a flop. And everyday-low-price branding strategy failed.

During the 70s and 80s total retail space doubled in the United States, while Sears concentrated on closing and remodeling. It halfheartedly dabbled in specialty store concepts that turned out to be too late and insufficiently funded.

Sears’ return on equity in 1984 was at 14 percent. In 1992 it stood at 9.6 percent. Virtually all Sears’ earnings between 1985 and 1992 came from the financial services businesses. And for all of Sears’ numerous cost-reduction efforts during the 1980s, its cost-to-sales ratio continued to be almost double that of Walmart and well above the rest of its competitors.

Finally, with the $3 billion sale of the financial services business, which at the time was claimed to have reduced debt, many experts said there would not be enough left for capital spending on the stores.

Sears was not only on a severely declining revenue and income trajectory, it was waffling on a strategic positioning in the no-man’s-land of being “everything for everybody.” Therefore, it was competing against the discounters from below, the department stores from above, the specialty stores in front, and the newly emerging big-box specialists from the front, and the rear. In the process, Sears had become a traditional retailer instead of the greatest brand and marketer with the strongest consumer connection the country had ever known.

It was time for a new leader.

The 90s: The Softer Side of Sears

In 1992, Arthur Martinez became only the second leader from outside Sears in its history (“General” Robert Wood being the first). By then, Sears had shed all its financial services businesses.

Martinez came in with a strategic vision for Sears and developed a plan for fundamental transformation, primarily focusing on women’s apparel, with an advertising slogan emphasizing “The Softer Side of Sears.” Having come from the Saks department stores, he would also move Sears into more of a department store positioning. This and other strategic initiatives showed initial success.

By 1998, revenues had increased about 30 percent to roughly $36 billion, and profits rose from losses of close to $3 billion to a gain of over $1 billion.

However, when sales and income started to drop in 1998, there was speculation that the seemingly spectacular turnaround may in fact have been due to Sears’ aggressive focus on growing its credit card business, beginning in 1993. By 1997, 60 percent of all sales transactions were done with credit cards, and experts suggested that over 60 percent of Sears’ bottom line was coming from the credit business.

Despite the potential of the credit business as the growth engine for the retail business, Martinez simply could not change the culture of Sears. In fact, in Martinez’s book, The Hard Road to the Softer Side: Lessons from the Transformation of Sears, he stated that toward the end of his tenure he felt Sears was falling back into the same trap he inherited when he took over in 1992: “Just do more of the same, only work harder.” He was also asking himself the same question as when he arrived: “What is this company going to be? What does it stand for?”

At the end of the 90s, Sears had no more of a strategic compass than it had 10 years before. It was time for yet another leader.

Does this sound like musical chairs on the Titanic? Oh yes, it’s sinking.

The 2000s: Sinking Slowly

With a primarily financial background, Lacy was made CEO in 2001, he immediately moved to grab the low-hanging fruit by doing what he had done best as CFO under Martinez. He slashed costs and further pumped up the credit business. With a primarily financial background, Lacy would be the fourth non-merchant in a row to run the company, and the second, after Martinez.

In less than a year, The Wall Street Journal reported that Lacy was considering abandoning the apparel business altogether after a 25 percent drop in net income in the first quarter of 2001. He admitted at an analyst meeting that Sears could not find its place in fashion, stating, “We almost don’t have any personality.”

As apparel growth slipped, critics increasingly took shots at Martinez’s efforts, which now appeared short-lived. However, Lacy realized that the cost of radically changing stores and replacing lost clothing sales (stagnant, at about $8 billion) would be too steep.

By 2003, Sears had experienced 18 consecutive months of sales declines, and the credit business was responsible for over two-thirds of total net income. In reaction, Sears bought Lands’ End, thereby going deeper into the apparel category, where it had had no success since the late 70s.

If Martinez lost his control of the culture, Lacy was losing it on all fronts. Sears still didn’t know what it stood for. Indeed, Sears seemed to be poised for its final descent. Adjusted for inflation, Sears volume declined about 20 percent from its pinnacle in the late 70s, and continues to drop today.

Sears Struggling to Stay Afloat

In 2004, a strategic financial visionary named Edward “Eddie” Lampert came to the rescue. Head of his own hedge fund, ESL Investments, and a former Goldman Sachs risk arbitrageur, Lampert has a genius for spotting great deals among distressed companies that he considers to be undervalued. He then buys a major stake at a bargain price.

Having made such a deal for the equally distressed Kmart a couple years before his move on Sears, he combined the two companies under the name Sears Holdings (to be owned by ESL Investments, with Lampert owning 41 percent of the stock). He and his newly appointed team declared to Wall Street and the world that they were going to return Kmart and Sears to their rightful positions as successful, iconic retail brands.

In keeping with his track record, Lampert and his team slashed costs across the boards to boost per-share earnings and improve returns on capital, even though both retailers were hemorrhaging before he bought them. Comparative store sales were, and still are, declining month-over-month. However, by cutting people, advertising and research costs and slashing store maintenance and capital improvements, he improved profitability and share prices. Lampert could then leverage the earnings and cash to invest in more promising growth opportunities with higher returns—not necessarily back into the dying businesses.

After several years of cost cutting, even amid a flurry of tactical initiatives, Sears Holdings still does not clearly stand for anything so compelling that consumers make Sears (or Kmart) their destination of choice.

Still Falling

The combined sales of Kmart and Sears in 2005 when Eddie took the helm was about $50 billion. As reported last December, after its 20th consecutive quarterly decline in sales and revenues, the combined top-line number had dropped to about $25 billion. More warning lights are on the bottom line. They lost $2.2 billion in 2016 and over $5 billion over the last three years. And during the past decade, the number of Kmart and Sears stores has dropped from more than 3,800 to 1,430.

In the face of this dark reality, Mr. Lampert made this preposterous comment in the annual meeting in early May 2017: “We don’t need more customers. We have all the customers we could possibly want.” The factual reality is that not only does he need more customers, he needs to keep the ones he has, who, according to the top and bottom line numbers, seem to be leaving in droves.

According to a statement from Sears Holdings’ annual report for the fiscal year ending in January, there appear to be no rabbits left, or hats to pull them out of, in Lampert’s bag of tricks. The report stated, “Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern.” It cited that continuing operating losses were choking off liquidity that might limit its access to new merchandise and new funding.

From day one, when Lampert acquired Sears and merged it with Kmart, he operated the business as though he had absolutely no retail experience, which of course he did not. He declared in a 15-page manifesto in 2005 that traditional measures of retail success, such as same-store sales, were no longer relevant. This statement reminded me of CEO Ed Telling’s proclamation that “the retail business is mature,” as he retreated into Sears Tower to oversee its first unravelling during the 80s.

Cost-cutting, slashing capital spending and store maintenance, closing stores, putting other stores in REITs, selling assets like the Craftsman tool brand and putting Kenmore and DieHard into the for-sale line-up, all of these were, and still are, tactical moves to just survive another day. They are not the strategic decisions required to find another path for growth.

Is There a Sears in Our Future?

Today there are many focused “masters” competing in each of Sears’ many businesses. Indeed, Sears’ 30-year quest to regain its former glory has certainly eroded its relevance to consumers, or at least severely tested their patience.

Simply put, Sears is still in the middle of a perfect storm. The seminal question is whether the following three storm fronts will allow Sears the time to find a meaningful position:

  1. Perhaps the most powerful negative driver for the Sears demise are the millennial and Gen Z consumers, who find everything about Sears, including the iconic brand itself, “old world.” Certainly, the poorly maintained stores offer no compelling, experiential destination for these consumers. They have unlimited, better or equal shopping choices, many of which are located closer to where the consumers live. And there’s Amazon, growing at the rate of 20-30 percent and eating everybody’s lunch. Additionally, Sears’ omnichannel efforts have arguably been too little and too late. Sears’ captivity in malls is another major issue, as declining traffic is driving the majority of them to repurpose or close.
  2. Competitors have more efficient and effective business models, focused and positioned with dominant value propositions and elevated shopping experiences, attacking each or several of the conglomeration of Sears’ waning businesses (appliances and tools included). This includes a repositioned JCPenney, as well as competitors such as Walmart, Kohl’s, Target, Home Depot, Lowe’s and the multiplicity of specialty chains, all of which 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 Sears grew from 1,400 to 4,300 stores.
  3. Economy and industry dynamics are a weakened, post-recession economy and an oversaturated retail industry.

The Final Fall?

I have written about the demise of Sears almost from the first day of Eddie Lampert’s acquisition and merging of the two “Titanics,” as I called Sears and Kmart. I did, and still do, admire and respect Mr. Lampert’s financial brilliance. But financial brilliance alone is not enough to turn around two enormous and already tanking retailers when he took them over. And perhaps nobody could have turned those businesses around. Certainly, under Lampert’s micro-managing control and his cost cutting and resistance to invest in store maintenance, much less anything else, not even the most talented turnaround artist and leader would have been able to stop the bleeding.

I sadly conclude this story of one of the most famous and recognized iconic brands in the world. And while you are reading this, Sears may in fact be filing for bankruptcy, which better minds than mine are predicting will happen in July of 2017. While we are waiting for that to happen, let this be a cautionary tale to some of our major brands in business today who are mirroring where Sears was in the 80s. Be forewarned.

The only possible good news is that the death of Sears will reduce a severely over-stored industry.

Amen

,

1
no comments
You might also like...