Lessons Learned
With a key bankruptcy auction set for next week, retail experts take stock of the cautionary tale Sears devolved into.
Tried-and-true takeaways from the downfall of Sears.
With almost everything done but the yelling at Sears Holdings Corp., the retail industry has had time to process the lessons of the company’s epic failure.
The quick takeaways are a set of back-to-basics business truths — sell consumers what they want, provide a good experience, keep up with the times, be quick to transform and lay off the debt.
While those lessons might be easy to articulate, they still need to be learned by many and even when their importance is realized, can be hard to execute in a large legacy business heading down some version of the Sears path.
Retailers racing to catch up in the digital age can still learn a lot from Edward S. Lampert, the hedge fund guru turned retailer who was hailed as the second coming of Warren Buffett but got caught in his own corporate quagmire and is still trying to reap additional profits as he tries to dig himself out.
Lampert’s last-ditch effort to buy a dramatically trimmed-down version of the company will be decided at a bankruptcy court auction set for Monday. The investor previously offered $4.4 billion in cash and the forgiveness of prior loans for just 425 stores, but was reported to have sweetened the offer to about $5 billion Wednesday.
If he comes up short, Lampert will be grabbing what he can in a liquidation sale. That is a remarkable fall given that he merged Sears and Kmart in 2005, building a retail group with $55 billion in revenues, only to see business decline to just $10 billion.
Either way, the company that defined retail for generations of Americans has, for all intents and purposes, long since exited the scene.
And although Lampert has portrayed his bid as an opportunity to save up to 50,000 jobs, many think it is time for him to exit as well.
“He has no credibility to even run a smaller Sears,” said Arthur Martinez, chief executive officer and president of Sears from 1995 to 2000. “If he prevails in his bid, it’s just a matter of time. You can foresee the end.”
Martinez said Sears’ downfall underscores the importance of having “a consistent investment policy with respect to the assets to improve the stores and e-commerce. Lampert disdained the idea of investment. He starved the company for investment. You can’t milk a retailer. If you do, you are on the road to failure. Investment is the name of the game and he would not invest. He thought it was unnecessary. Retail is a much more capital-intensive business than people like to think.”
The former ceo said Sears also needed to hire and keep strong executives and avoid financial leverage.
“Retail is a high fixed- cost business and retail margins are pretty modest, particularly for mature retailers,” Martinez said. “You’ve got to avoid too much debt and interest burden. That makes you vulnerable to relatively small changes in sales growth and profitability.”
Allen Questrom, a former ceo of J.C. Penney, Federated Department Stores, Neiman Marcus Group and Barneys New York, said Sears just didn’t move with the times or its customers.
“In the Sixties and Seventies, Sears was the largest retailer in America,” Questrom said. “It had brands. It had the franchises, but it lost sight that you’ve got to keep changing, that you’ve got to move with customers as they move, because there is always someone coming up with the better idea. The lesson learned here — you’ve got to stay on top of your game and stay tuned into the needs and wants of your customers. In capitalism, if you don’t stay on top of your game, some guy or gal will come along with a better idea,” and they generally come from ‘little’ players who must come up with better ideas to get in the game.
“When I was joining Penney’s, Sears also tried to hire me,” Questrom said. “But I recognized that the board wasn’t into how to change or coming up with new answers. Once you think you know all the answers, you are always going to get into trouble.”
In the end, the retailer might have been lulled into a false sense of security by its extremely well-known brand name and its long track record of growth as a retailing institution.
“Sears, for many people, was part of growing up in America,” said Barbara
Kahn, professor of marketing at the Baker Retailing Center at The Wharton School.
“It’s a brand that meant something to a sizable part of the population. There’s an emotional legacy. To have that kind of relationship and a leader who didn’t leverage that and take the brand into the
21st century is a real shame. Developing a brand that has that kind of equity is not easy to do, but clearly that wasn’t enough. Sears should have built more of an advantage based on their appliances, or product innovation, or some other dimension. It just wasn’t enough to have a strong brand name. You really have to have an advantage in another area besides just brand. You’ve got to be the best at something and leverage that best of something to be the best of something else.”
Sears’ downfall, as messy and drawn out as it was, also illustrates just how important it is for companies in the midst of a major transformation to get to where they’re going.
“You don’t want to get caught midtransition,” said Greg Portell, lead partner in A.T. Kearney’s global retail practice. “Sears, when they really started hitting trouble, they were in the process of walking away from being a retailer and more of the investment thesis as based on their real estate holdings.
“When they merged with Kmart, all the hype was on the real estate holdings and the value they had and people kind of forgot that it was a retailer that needs excellent merchandise, nice stores…,” Portell said.
Getting caught in the middle, Sears stopped being a successful retailer as it carried lackluster goods and choked off investment in its stores. Much of the real estate was never really monetized (and is now being sold off by the bankruptcy court).
“We need to break the mindset of incrementalism in business,” Portell said. “Some people say it’s death by a thousand cuts. What we’ve seen in these big periods of disruptions, the companies that try to ride the curve down and try to incrementally adjust their businesses tend to have painful histories as opposed to [those that take a] big bold move that adds risk and takes courage, but at least you’re going to win or lose fairly quickly.”
Shyam Gidumal, leader of EY’s Northeast region consumer products and retail segment, agreed that companies must get their operations fixed first before they tackle the balance sheet.
“You need to accomplish the operational turnaround before you can do the financial restructuring,” Gidumal said, speaking of retailers generally.
“The financial markets will not support people trying to do an operational transformation in bankruptcy.”
The transformation might well start at the very beginning of the retail transaction and the products stores actually sell.
“The value on the floor matters a lot,” Gidumal said. “Don’t lose sight of that. If you have comps that are running negative for an extended period of time, the consumer is telling you that the value proposition that you’re putting on the floor is just not good enough.”
The value of Sears — as a business
— is now very much in focus with the bankruptcy court sorting out how much the company is worth, how that amount can best be realized and how it should be distributed to creditors, including Lampert.
“I believe Eddie Lampert wants to hold on to a small number of stores because he thinks the property is valuable, but I haven’t seen any clear business plan on what’s going to be different operating a smaller Sears, and enable the company to find a place in a very crowded market,” said Steve Horwitz, professor of economics at Ball State University. “The creditors and the board see that, and the creditors would like him to liquidate now so he doesn’t run down the value anymore. The board and the creditors think enough is enough.
“The problem facing Sears was that it got squeezed from at least three different sides,” said Horwitz. “First, it could not provide the range of products and service in any one narrower category as did large firms like Best Buy. Second, it could not provide the low prices of firms like Walmart, nor did it offer goods like groceries to expand the range of customers who walked in the door. Third, they did not capitalize on the need for online retailing with the convenience and breadth of an Amazon, which now is also in the grocery business.
“Any large retailer that wants to survive in the 21st century has to find a way to respond effectively to at least one of those concerns,” he said. “A reorganized Sears, and stores like Macy’s or J.C. Penney, are going to have to either try to compete downscale with Target and Walmart, or compete upscale with something like Nordstrom. Or they are going to have to find a way to muscle into the online world far more effectively.
“Much in the same way that the general store has largely disappeared…so will the midscale large retailers likely find themselves extinct in the near future,” Horwitz predicted. “This is a good thing for American consumers, who have found far more value in the various options they now have. This sort of dynamic change is a sign of a healthy, competitive economy that is delivering value for consumers. Firms need to either adjust to that new reality or face the fate of Sears.”
“Sears should have built more of an advantage based on their appliances, or product innovation, or some other dimension. It just wasn’t enough to have a strong brand name.”
— BARBARA KAHN, THE WHARTON SCHOOL