Sears dealers ‘doomed to ruin’
Say Sears changes forced them to flee the business
David Halsey didn’t envision spending his retirement years working as a sales associate at Canadian Tire.
But it’s where the former Sears Hometown store dealer has ended up after walking away from his unprofitable Lindsay, Ont., store a year and a half ago.
“At 67 I’m working for $11 an hour,” Mr. Halsey chuckles.
“You do what you have to do. We used all of our retirement savings and we sold our house, sold all of the trucks we had for deliveries. We had to get rid of everything and we took a loss on it, but we had no income.”
Mr. Halsey and his wife, Darlene, are among hundreds of Sears Hometown store dealers represented in a $100-million class action lawsuit against Sears Canada that was certified this month. The dealers allege Sears Canada systematically depleted their livelihoods by changing commission structures and diverting sales away from dealers and toward its online site, Sears.ca.
Sears Hometown outlets have long been a fixture of small towns and villages across Canada, but they have plunged in number to 222 from 276 locations in the past two years. Seven of them have closed down this month alone.
The franchises sell power tools, appliances, furniture and home electronics and also serve as a pickup spot for some catalogue and online orders. Dealers say the stores were presented to them as a solid business prospect when they bought into them.
Dealers do not pay Sears Canada a franchise fee to be in the network, but are responsible for leases, employee and insurance costs, store fixtures and upkeep.
“We were injecting money, everything we had, just to keep the doors open,” says Jim Kay, a former Sears dealer in Woodstock, Ont., and lead plaintiff in the class action certified this month in Ontario Superior Court.
In December, Mr. Kay walked away from his Sears Hometown store, which he took over from another dealer in 2007, after he determined there was no way to operate it profitably.
“You get to know everyone in town when you own one of these stores,” he said. “When things go sour, it makes it hard to keep your head up.”
Sears Canada has been losing revenue for eight straight years and has been slashing costs and raising cash through selling off its best leases to landlords.
The lawsuit is another headache the distressed retailer, whose chief executive announced his imminent exit late last week, can’t afford to have.
The statement of claim filed on behalf of 260 Sears Hometown dealers says Sears Canada’s current agreement with its Hometown stores “dooms dealers to financial ruin.”
Majority-owner Sears Holdings Corp., which has been trying in vain to find a buyer for its 51% ownership stake, is also named in the lawsuit.
The suit alleges Sears flouted franchise disclosure laws regarding the economics of its dealer network, and failed to disclose important material facts about the dealer stores to prospective owners.
“When we came in 2009, the store was doing $1-million in catalogue sales per year and $2-million in dealer sales — items in store like washers, dryers and refrigerators,” Mr. Halsey said, who operated the Lindsay dealer store with his wife Darlene until they gave the keys back to Sears in March 2013.
By 2012, he said, his catalogue sales had dwindled to $700,000 and dealer sales were down to $1.2-million. Sears’ corporate division closed the store down on Sept. 19.
He said dealers were upset when Sears reduced its commissions on goods sold, doubling the commission rate on more trivial items such as television cables to 15%, for example, but cutting commissions on televisions to 7% from 7.5%.
“That’s giving us 15% on [sales of ] $400 a year in cables versus cutting half a per cent off of $80,000 a year [in TV sales].”
Sears similarly reduced percentage commission to dealers on garden tractors, he said, but raised it on fabric tractor covers.
“To help us out, it seemed, Sears said they would pay for [dealers’] advertising, when they used to cover two-thirds of our local advertising costs. We thought, ‘great.’ Then they quit advertising.”
Sears performed an internal audit in 2012 on a sampling of Hometown dealer stores, according to Mr. Kay. The audit, shown to dealers at a series of regional meetings, found that 72% of the stores weren’t making enough money to compensate stores’ owners with minimum wage.
Mr. Halsey and Mr. Kay say dealers were also stymied by Sears’ ongoing efforts to bump up business at Sears. ca, which would offer free shipping to people’s homes during its big promotions.
While dealers are paid a fee for any catalogue or web purchase picked up by a customer at their Hometown stores, Sears Canada gets the full sale for web purchases shipped to customers’ homes.
“Our dealer network is important to us,” Vince Power, spokesman at Sears Canada, said, adding the department store retailer is not trying to compete with its own dealers.
“In smaller markets they are an important component of the Sears footprint,” he said. “Obviously we want to continue to support them as best we can, and to work as co-operatively as possible.”
Asked why so many dealers have fled their stores, Mr. Power speculated they did so for “various reasons … a very competitive marketplace and the differing economics affecting certain local markets, like consumer confidence.”
Some of the Hometown store closures have occurred when the dealers left and some closed after Sears Canada took over and closed them down at a later time, as with Halsey’s store.
“For a dealer issue to escalate to the point of a class-action lawsuit, and one that actually got certified, things have to be pretty bad,” said Alex Arifuzzaman at InterStratics Consultants.
“Look at Canadian Tire. There have been issues over time with [the corporation and its] dealers, there are always some issues going on — but they always deal with them internally. It doesn’t get to this stage.”
Canadian Tire, however, has set up its online sales so that the dealer closest to a customer fulfils the order and the dealer records the sale, not the parent company.