Sears may sell its best-known brands

▶▶Af­ter years of red ink, the re­tailer may sell its best-known brands ▶▶“Leaner, meaner, but with no rea­son to walk through the door”

Bloomberg Businessweek (Asia) - - NEWS - Lau­ren Cole­man-Lochner

Once upon a time, Sears was the Ama­zon.com and Wal­mart of U.S. mer­chan­dis­ing. Cus­tomers could or­der just about any­thing for de­liv­ery—even a kit to build a 10-room colo­nial-style house— from the Sears cat­a­log, a com­pen­dium of the Amer­i­can dream with a reach into the rural parts of the coun­try that helped make Sears, Roe­buck Amer­ica’s largest mer­chant. Sears helped cre­ate the shop­ping mall in the 1950s, work­ing with de­vel­op­ers to build the re­tail cen­ters that grew with the ex­o­dus to the sub­urbs. And when cus­tomers needed fi­nanc­ing, it cre­ated a mas­sive credit arm that paved the way for the MasterCards and Visas of to­day.

“They stood like a colos­sus on top of the Amer­i­can re­tail mar­ket—big­ger than the next four com­pa­nies com­bined,” says Craig John­son, pres­i­dent of con­sul­tant Cus­tomer Growth Part­ners. That was as re­cently as the 1980s. “Now they’re a 98-pound weak­ling.”

It’s been 11 years since hedge fund mag­nate Ed­ward Lam­pert merged Sears with an­other ail­ing company, Kmart Hold­ing, which he bought out of bank­ruptcy in 2003, to form Sears Hold­ings. Sales have plunged by al­most half, the re­sult of de­fect­ing cus­tomers and the sun­der­ing of as­sets such as the

Lands’ End cloth­ing brand in 2014. Sears has lost more than $8 bil­lion in the past five years. Its stock, once trad­ing above $100, closed at $13.30 in late May. Some mall own­ers are ea­ger to re­place its stores with those of more vi­brant ten­ants. And on May 26, the company said it would con­sider sell­ing some of its crown jew­els: the Ken­more ap­pli­ance, DieHard bat­tery, and Crafts­man tool brands.

“They have been in a des­per­ate state for a num­ber of years,” says Matt McGin­ley, an an­a­lyst at Ever­core ISI, the lone Wall Street firm still cov­er­ing the company. “I wouldn’t say any of the as­set sales have been from a po­si­tion of strength in the past three or four years. They’ve been done to fund sub­stan­tial op­er­at­ing losses.” Sears de­clined a re­quest for com­ment for this story. The re­tailer has suf­fered from an

in­dus­try­wide decline as Amer­i­cans spend dif­fer­ently and on dif­fer­ent things. Peo­ple are buy­ing fewer clothes, spend­ing more on din­ing and other ex­pe­ri­ences, and sav­ing more. In the mid-’80s, 45 per­cent of con­sumer spend­ing went to goods, the re­main­der to ser­vices. To­day those fig­ures are 31 per­cent and 69 per­cent, re­spec­tively, ac­cord­ing to Cus­tomer Growth’s John­son. When Amer­i­cans do buy goods, they’re shift­ing where they shop—not just to on­line, but to off­mall re­tail­ers, such as Wal­mart, Costco

Whole­sale, and T.J. Maxx. That’s left depart­ment stores more and more on the mar­gins, with big­ger chains such as Macy’s swal­low­ing smaller re­gional mer­chants—and oth­ers such as Mervyn’s fil­ing for bank­ruptcy and be­ing liq­ui­dated. In the

’80s, consumers did about 10 per­cent of their spend­ing on goods in depart­ment stores, ex­clud­ing au­tos, gas, and restau­rants, ac­cord­ing to John­son. The es­ti­mate for 2016 is 1.7 per­cent.

That’s quite a turn­about for Sears, which rose from be­ing a watch mer­chant in the late 1800s to Amer­ica’s pow­er­house re­tailer by the mid­dle of the 20th cen­tury. In the 1980s it ex­panded its quest to be all things to all peo­ple, buy­ing Cold­well Banker and Dean Wit­ter Reynolds and in­tro­duc­ing the Dis­cover credit card. But the ’90s were a time of up­heaval, with Sears pulling back from fi­nan­cial ser­vices and push­ing hard to com­pete in cloth­ing. To that end, it pur­chased Lands’ End in 2002 for $1.9 bil­lion.

It was in that pe­riod that Sears be­gan to move away from its blue-col­lar base, says Can­dace Cor­lett, pres­i­dent of con­sult­ing firm WSL Strate­gic Re­tail. “They wanted a bet­ter cus­tomer,” she says. “Fre­quently, when re­tail goes off the rails, it has to do with not lik­ing the shop­per you have.”

Em­blem­atic of that ef­fort, she says, was its 1990s Cir­cle of Beauty brand of higher-end cos­met­ics that “were about three steps above the Sears shop­per.” In the mean­time, “the com­pet­i­tive mix was cap­tur­ing the shop­per that Sears didn’t want any­more.”

Sears Hold­ings ne­glected to spend on its stores, which still ac­count for the over­whelm­ing por­tion of sales for mer­chants even in the in­ter­net age. Chief ex­ec­u­tives and

other se­nior man­agers cy­cled quickly through the company, with Lam­pert him­self be­com­ing chief ex­ec­u­tive of­fi­cer in 2013—in ad­di­tion to his roles as chair­man, lender, and largest share­holder. “The pre­sump­tion when he bought it was that he was buy­ing it for the real estate,” Cor­lett says. “I don’t think any­one but Ed­die Lam­pert thought he was go­ing to be a suc­cess­ful mer­chant.”

Ever­core’s McGin­ley says he re­mem­bers pag­ing through a 2005 pre­sen­ta­tion where the company laid out its plans for cost-cut­ting and sav­ings through the merger, in­clud­ing dra­matic de­clines in store up­keep and ad­ver­tis­ing. “The stores de­graded at a pretty fast pace,” he says. “It ex­ac­er­bated the broader is­sues Sears and Kmart had with rel­e­vance right out of the gate.” At the same time, com­pa­nies such as Tar­get and Home De­pot were ex­pand­ing, open­ing stores away from malls in lo­ca­tions that were of­ten more con­ve­nient to shop­pers.

Sears tried to adapt in other ways. It ex­per­i­mented with var­i­ous store for­mats, in­clud­ing a failed pro­gram to con­vert hun­dreds of Kmart out­lets to a one-stop for­mat called Sears Es­sen­tials. The company has in­vested heav­ily in its dig­i­tal op­er­a­tions, of­fer­ing of­ten in­no­va­tive fea­tures such as on­line or­der­ing for driv­ethrough pickup. It’s sub­let space in some of its stores to other re­tail­ers, in­clud­ing Dick’s Sport­ing Goods and Bri­tish chain Pri­mark, and closed hun­dreds of un­prof­itable lo­ca­tions as part of Lam­pert’s vi­sion of a leaner re­tailer with smaller and fewer stores. Sears Hold­ings had 1,672 stores on Jan. 30, vs. al­most 3,500 at the time of the merger.

“Leaner, meaner, but with no rea­son to walk through the door,” Cor­lett says. “They don’t have any rea­son for be­ing any­more. They’re to­tally re­dun­dant,” and oth­ers do the work bet­ter.

Still, John­son thinks Sears can sur­vive as a smaller chain fo­cused on ap­pli­ances—long a strength—de­spite the height­ened com­pe­ti­tion from on­line sell­ers and brick-and-mor­tar chains such as Best Buy, Home De­pot, and Lowe’s. “There’s a ‘there’ there,” says John­son. “But it’s not go­ing to be easy to get to.”

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