Rise and Fall of Sears
July, 2019BACKGROUND
As a kid, Sears was one of my favorite stores. Both my father and grandfather were fairly handy and had quite a collection of tools in their garage. As I was growing up and old enough to start building things on my own, I started my own collection of tools. Naturally I wanted good quality tools that were made in the U.S., so Craftsman was the natural choice. I remember my grandfather talking about this circular saw he bought from Sears in the 1980s. He used it for everything, cutting drywall, wood, and even metal. Needless to say, he wasn’t easy on it and burned the motor up after just a few years. He took it back to Sears hoping to buy an equivalent model. Instead they honored their lifetime guarantee and replaced the saw for free, even though he clearly explained that he misused the tool. That kind of commitment to their products is what drew me to the retailer. I have many memories at Sears and my garage is filled with Craftsman tools and products.
Sears started in the late 1880s launching the first Sears catalog in 1888. This was a huge disruption in retailing since people had previously made their own clothes and furniture and now it was being offered to the masses via mail order. Access to new devices to make their lives easier like the washing machines and electric stoves were now available. For the next 100 years, Sears would grow into the number one retailer in the nation.
Fast forward to the early 2000s and Sears is struggling to keep up with competitors. Large home improvement chains are sprouting up – giants like Home Depot and Lowes are eroding their market share. Amazon in launched and online retailing explodes. Sears still bets on its brick and mortar stores, leaving it in financial trouble. It’s safe to say that the retail landscape was radically changing, especially in the past 10-15 years. There are still those who want to shop at brick and mortar stores, but not in the same volume as before the internet. After their financial troubles in the 2000s, Sears merged with K-Mart, another struggling retailer. The thought was that the combination of the two struggling companies could create one large retailer that could succeed.
New CEO and major shareholder Eddie Lampert, who founded and manages a large hedge fund, thought that he could turn the struggling retailer around. His strategy was to cut costs and sell the real estate of underperforming stores, closing over 2,500 locations. The capital generated was used to pay off the company’s mounding debt instead of being reinvested in the business. This was a strategy Lampert has used successfully on other companies, which made him somewhat of a Wall Street oracle. The long running mail order catalog was finally discontinued after over 100 years in print. Sears didn’t take advantage of the opportunity to become a major player online either, during a time when loyal customers were looking for more convenient shopping options. Capital was also not reinvested in the existing stores and they started to fall into disrepair, while competitors were pouring money into improving the customer experience at their stores.
To generate more cash to meet its mounding debt commitments, Sears started selling off additional real estate and its core brands like Craftsman to Lowes, and Kennmore and Diehard which can now be found on Amazon. With those brands, left the loyal customers that Sears had so painstakingly acquired.
OUR TAKE
It seems that 3 big things led to the downward spiral that eventually resulted in Sears declaring bankruptcy after 125 years in business.
- Failing to cater to existing customers. Each move they made seemed to further alienate their core customer group. Those who wanted the Sears experience in person would be disappointed as stores were falling apart, shelves weren’t kept stocked, lights weren’t replaced making them dark places to shop. Customers also wanted a more convenient way to shop as online retailing was on the rise.
- Failing to keep up with the changing retail landscape. The rise of large competitors and lack of a robust online shopping platform drove customers to other options. Instead of changing the business to follow their customers’ changing needs, they compensated for declining sales by selling assets to reduce the cash deficit.
- Selling it biggest assets – property and exclusive brands. The 3 biggest brands that were exclusive to Sears were Craftsman, Kennmore and Diehard. Selling those to competitors (leading to an exodus of loyal customers) generated short term cash but killed them in the long term. Instead of improving its struggling stores and solving the underlying problem, Sears closed the stores and sold the property.
I don’t want to discredit Mr. Lampert because he had a difficult job, but the issues Sears was facing became compounded by the management practices of its CEO. Mr. Lampert micromanaged every detail of the chain, effectively stifling decision making at lower levels. This practice stomped out any innovation and prevented the company from quickly pivoting in a rapidly changing environment. After being a leading retailer for over 100 years, Sears stopped innovating and didn’t properly change to keep up with new, changing customer demands.
They didn’t let their most cash generating assets work for them. Putting money back into the stores to boost the customer experience and give them purchasing options both in stores and online could have slowed or reversed declining revenue. This also piggybacks onto the mismanagement of capital. Selling property and brand assets to service debt will only make sales generation more difficult.
It’s easy to look back and say we would have done things differently, but that’s how we learn. The underlying lessons here should be with capital management and innovation. Creating a culture where free decision making within the organization is discouraged, will cause all change to come from the top. In a large organization that needs to change quickly to stay at the forefront of the industry, this practice prevents effective change. Capital management is important and selling revenue generating assets to service debt is unwise. This can work in limited circumstances but grew out of control here to the point of selling a majority of the company’s assets to pay off the debt. It wasn’t enough and eventually led to bankruptcy.
DISCUSSION
Here are a couple of questions to help guide your comments and facilitate the discussion. We will interject additional comments as the discussion progresses, but we are interested to hear what our members think. Please offer your opinions on the situation or what you would have done.
1. Do you think Sears could have (or should have) been saved?
2. What have other large brick and mortar retailers done to keep up with the changing industry landscape?
3. What would you have done in Mr. Lampert’s shoes soon after taking control of Sears? Would you have implemented a different strategy or executed the same strategy differently?
4. What are some other examples of companies that have failed because they didn’t properly innovate and change with customer needs?
Victory Business Group is a management consulting firm focused on providing tools and resources to entrepreneurs and small business managers to become more effective and grow their business efficiently. We have been certified by the Department of Veterans Affairs, Center for Verification and Evaluation as a Veteran-Owned Small Business (VOSB).
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