Retail upheaval: Sears, Amazon and survival of the fittest
The demolition of the Sears Auto Store on an outparcel at Fashion Square, as well as the replacement of the Sears Department Store inside the mall, reflect in iconic terms not just the fundamental capitulation of Sears as a viable retailer, but, to a large extent, a portrait of an economy that has completely transformed itself — and at an accelerating rate — from brick and mortar to what has now effectively become “all things digital.”
Even more striking, particularly for Sears, is the almost karmic irony in what has befallen a company that at one point in its history was a disrupter itself. Sears overturned the convention of general stores selling limited inventories with a new business model called “catalog sales” which ultimately grew, within a few short years, to average over 500 pages.
From its early origins as Sears Roebuck & Co. in 1895, Sears, with its highly recognizable mall stores, catalog showrooms, and, of course, mammoth catalogs, had grown to become by 1989 the largest retailer in the country. Along the way, it developed a host of national brands such as Kenmore, Craftsman, Diehard and Discover Credit Card, among others. Its sibling — Kmart — originally founded as S.S. Kresge Company in 1899, was operating some 2,171 stores when it merged with Sears and had profits that peaked at $1.5 billion in 2006.
Unfortunately, it got ugly very quickly thereafter. The consolidated Sears Holdings went on to amass billions of dollars in losses. That forced Sears to shed every brand name that was part of America’s adolescence, as well as acquisitions it made along the way, such as Lands’ End, reducing Sears’ brick and mortar presence from 3,500 stores in 2010 to what is now a paltry 555 stores with the closure of another 72 announced last week. Its consolidated market capitalization as of the date of writing is a paltry $313 million. In its most recent annual report, Sears Holding Company reported that “substantial doubt exists related to the company’s ability to continue as a growing concern.” Whether mandated by regulatory standards or not, it is selfevident that the future for Sears is the orderly liquidation of its remaining real estate.
On the other hand, founded just 24 years ago by Jeff Bezos in his garage, Amazon focused on an exotic and different experience on the internet, mirroring the biggest river in the world — the Amazon River — with what was intended to be the biggest bookstore in the world. From that modest niche embedded in a gargantuan vision, Amazon has become the largest retailer in the world, reporting $178 billion of revenue in 2017; 566,000 employees worldwide; well-known subsidiaries such as Amazon Studios, Zappos and Whole Foods; an iconic personal assistant by the name of Alexa; and a market value at press of a whopping $792 billion. Moreover, to accentuate how dominant Amazon has become, the most recent report indicates that Amazon is now capturing 40 cents of every dollar spent online and 15 cents of every dollar spent in retail.
Fleshing out the implications of this extraordinary transformation exceeds the space limitations available to us here. However, of particular note, are the following:
First, while Sears first disrupted the retail landscape through catalog distribution and later through mall stores populating American suburbia, it was itself disrupted by a company tapping the scalability of the internet, which had simply become too efficient for general retailers to compete against. In short, no business or business model is safe from disruption.
Second, while it may be a truism to evaluate the SearsAmazon matrix in Darwinian terms, to do so is nonetheless compelling. To the same extent that Amazon savaged Sears, Netflix had earlier destroyed Blockbuster. Both case studies reflect that a free market is an ongoing fight for survival of the species.
Third, the fundamental principle of competitive economics is the extent to which one enterprise can continue to produce value for consumers more efficiently, effectively and profitably than its nearest competitors. When all eyes are focused on that standard — where value accretion is seen as the ultimate differentiator — the economy, business and consumers all end up as winners.
On the one side, I say goodbye to Sears with a lump in my throat. On the other hand, I welcome Amazon as both a worthy successor and a tribute to our free-enterprise system.