Movers and SHAKERS
What Is in the Future for Sears and for Retailing?
(Note: all the sources listed in the "Balanced" section)
Last fall was a study in contrasts in the retailing world. Amazon (AMZN) garnered a trillion-dollar market cap in September and Sears filed for bankruptcy protection the following month. Many observers tied the fortunes of each company to each other.
Amazon clearly has thrived. But, Sears problems stemmed even before Amazon, in fact, over the past five decades. The steady decline in brand loyalty in retailing and the advent of increased competition in big box retailing, played more significant role despite the common perception that Amazon was the Sears’ kryptonite. Amazon was only the latest, and possibly last, competitive threat and problem for Sears.
As the top retailer from 1950 to 1990, Sears’ past success and size made it a significant target for smaller, startup retailers. Sears did not adjust to the competitive factors that it faced with Walmart and Home Depot. Other missteps include: the failed diversification efforts into financial services (Coldwell Bankers and Dean Witter), the sale of the Discover credit card franchise, the cancellation of its mail order catalog business and lack of transition to the internet, and the use of debt leverage. These mistakes limited the ability to right the ship and effectively respond to changing consumer shopping habits. Furthermore, a hedge fund manager, Eddie Lampert, with limited retailing experience, has been in control since 2005.
Walmart’s CEO Doug McMillon said on CNBC when Sears was on the verge of bankruptcy last October, “You see the rise and fall of Sears and others …it’s just a reminder that this can happen to us, too.” McMillon stated that he keeps a chart of the top 10 retailers in the US by decade to remind him. Sears was the leader through 1990, but steadily fell to 10 by 2010 and off the list several years ago.
Over the past decade, a merger with Kmart and high financial leverage have forced cost cutting moves and left many stores in a state of disrepair. Lampert also focused almost exclusively on e-commerce and allowed the stores to atrophy. Even though an e-commerce strategy helped stabilize same store sales, it has proven difficult to thrive with a shrink to grow mentality. The e-commerce strategy was forward thinking and adopted many tools, like dynamic pricing, but Sears underappreciated the negative impact on e-commerce of a smaller store footprint and poorly maintained stores. Ironically, Amazon moved away from a pure e-commerce strategy with the acquisition of Whole Foods Markets in mid-2017 and is rumored to be contemplating buying some of the former Sears and Kmart stores to expand its “bricks” presence.Where does Sears go from here? Mr. Lampert, the largest shareholder, was, as expected, the lone bidder at an auction earlier this week. Subsequently, his bid was sweetened to more than $5.2 billion from $4.4 billion. Mr. Lampert’s bid for Sears possibly keeps it as a “going concern.” If approved by the Bankruptcy Court, the plan would keep up to 425 store locations open and possibly save close to 25,000 jobs. The bid avoids a Chapter 7 liquidation that would have resulted in the sales of real estate, inventory, intellectual property and other assets to satisfy creditors, including suppliers. Will the plan work? Time will tell, but it might be too late for Sears to regain the brand loyalty required to survive in the Amazon Era.
Shedding burdens of past. With stability in place for the mean time, Bloomberg columnist Sarah Halzack made some suggestions. Sears should make a “nostalgia play,” shutter Kmart operations to focus on the Sears brand, and allocate the strongest personnel to areas where it has been able to compete, such as appliances.
Survival only gets tougher. Even with the approval of the bankruptcy court, Sears is still damaged goods and will have a difficult time rebounding. A smaller physical footprint does not bode well for e-commerce sales. In addition, the resources to enhance marketing and rehab stores will remain limited. As shown by weak holiday sales at other department store chains, such as Macy’s (M) and Nordstrom’s (JWN), the competitive environment is tough and department store model may be on the verge of extinction. In addition, litigation is possible given the many transactions that Sears has completed, such as real estate sales, with Lampert to remain afloat.
Restructuring plan creates breathing room. Sears has survived before. Can it do it again? Sears has much work ahead to regain some of the luster lost over the past fifty years. With the restructuring plan and less aggressive capital structure, Sears seems poised to retain a place in the retailing world where Amazon is a leader. A lean cost structure and lower financial burdens could allow Sears to maintain a more attractive store presence.
If new ideas and possibly new management are introduced, Sears might be able to stabilize the brand and expand e-commerce. So far, the doubters have been right.
Perhaps Sears will be able to continue to shrink to survive and regain some of the lost luster of the once venerable brand. No doubt there is plenty of room for recovery.
“Sears to Stay Open Another Week; Auction Set for Monday” Michael Corkery, New York Times, Jan. 8, 2019
“Sears' Implosion Proves You Can't Neglect Stores Even in the Amazon Era” Phil Wahba, Fortune, Jan. 8, 2019
“Amazon Eyes Closed Sears Stores for Whole Foods Expansion” Crystal Hu, Yahoo Finance, Jan. 10, 2019
“Sears of the 1970s May Have Foreshadowed The Challenges It Faces Today” Don Katz, USA TODAY, Jan. 11, 2019
“Here’s What Eddie Lampert Should Do With Sears Now” Sarah Halzack, Bloomberg, Jan. 16, 2019
“Sears may live on but experts think a turnaround is unlikely” Tonya Garcia, MarketWatch, Jan. 17, 2019“Sears bid challenged by creditors who say chairman stripped company to enrich himself” Charisse Jones, USA TODAY, Jan. 18, 2019