A popular meme this week following the collapse into Chapter 11 bankruptcy (at last!) of Sears, is that the US retail institution was the Amazon of its day.
It’s a tempting line to pursue - for the first 40 years after its founding in 1886, Sears ran a primarily catalog-led business model that could be positioned as an offline version of the Amazon online market.
One of Sears biggest selling points was that its legendary catalog contained everything you could want to buy, from clothing through TVs and fridges to toys and novelties - which is a pretty good descriptor for Amazon these days. The other selling point was the ability to shop from the comfort of your own home. Again, the Amazon comparison holds.
Where it starts to fall down is the investment it started to make in real estate, building up a costly infrastructure of retail stores that sat alongside the catalog until 1993 when the book was canned…just a year before Jeff Bezos founded Amazon.
As Amazon began its remorselessly disruptive rise, Sears compounded earlier errors - it diversified too far; it ran up debts it couldn’t manage - $5.6 billion as of this week; its customer experience became old-fashioned; and, crucially, it never got properly to grips with the internet, even as offline rivals such as Walmart engaged with omni-channel investment to good effect. Meanwhile a merger with Kmart that was supposed to deliver new opportunities never succeeded in its ambitions.
It’s a long story of ongoing decline from its 1960s status as the world’s largest retailer. In its bankruptcy filing, Sears Holdings, which owns both Sears and Kmart stores, cites assets of $1 billion to $10 billion and liabilities of $10 billion to $50 billion. From a headcount that once reach 350,000, it now only employees 68,000 people. The catalog of gloom goes on and on.
There’s been a grim inevitability about this week’s developments, but nonetheless it remains a turning point in US retail history. As Neil Saunders, Managing Director of GlobalData Retail, puts it:
Today is a day that will live in retail infamy. That a storied retailer, once at the pinnacle of the industry, should collapse in such a shabby state of disarray is both terrible and scandalous in equal measure. However, it is not surprising because this is a destination that Sears has been headed towards for many years, with virtually no serious attempt having ever been made to change the trajectory.
In our view there are a multitude of factors that have contributed to Sears’ demise, but foremost among them is management’s failure to understand retail and evolve Sears in a way that would have given the chain a fair chance of survival. Although the present leadership team needs to shoulder much of the responsibility, the missteps arguably go back to the 1980s when Sears became too diversified and lost the deftness that had once made it the world’s largest and most innovative retailer.
Opting for Chapter 11 protection buys Sears some time to try (again) to put its house in order, particularly with the crucial Holidays season fast-approaching in the US. The firm plans to shutter around 142 stores - both Sears and Kmart branded - by year end and has lined up $1.875 billion in bankruptcy financing to keep the lights on elsewhere.
Edward Lampert - at whom most accusatory fingers have been pointing - has stepped down from his role as CEO of the company, effective immediately, but will remain chairman of the board. The company's board has created an Office of the CEO, which will be responsible for managing day-to-day operations during this process.
In an address to 1000 Sears staffers after news of the Chapter 11 move was made public, Lampert tried to encourage them to view the Holiday season as an opportunity, but it was a speech that had to acknowledge failure:
When Sears and Kmart merged in 2005, I envisioned a company that would be different and relevant for the 21st century…These were two, iconic companies that had lost their way…As we all know, we haven't capitalized on this opportunity the way I would have liked. Instead of growth and investment we have faced retrenchment and restructuring…There were mistakes along the way, for which I take responsibility.
For his part, GlobalData’s Saunders is downbeat in his assessment of Sears chances. While noting that trading through the upcoming Thanksgiving and Christmas period will allow the firm to burn off inventory at the very least, he concludes:
Even so, Sears will still be running up a down escalator. This is all the more so as many consumers will now be nervous about buying bigger ticket items from the retailer for fear that it may not be around to back guarantees or fix problems come the new year. Moreover, our own survey data of where people are intending to shop over the holidays shows that Sears is facing the prospect of another year of sliding customer numbers.
Over the longer term it is still unclear what Sears hopes to accomplish. We believe there is no clear path to success. The group has tried to shrink its way to profitability for years to no avail, so it is hard to see why pursuing the same strategy under the auspice of Chapter 11 would result in a different outcome. Further asset sales may reduce debt, but they would not put the company on a sound financial footing nor would they solve the operating losses the group is racking up. Ultimately, Sears needs not just to fix its financial problems. It also needs to repair the deficiencies in terms of retail strategy. In our opinion, only a complete change of management will bring this about.
A sad day, but one that’s been a long time coming. The question that’s been hanging over Sears for years has been ‘when?’, not if. Even US President Donald Trump chipped in yesterday to state that the business had been “improperly run for many years” and I find myself in the hugely uncomfortable position of actually being in agreement with him.
Once upon a time, Sears was, in its own words, “Where America Shops”. The problem is, where America shops now is Amazon and Walmart and Target, not Sears. It’s a crippled brand and it’s difficult to see how that damage can be fixed at this stage.
But while it’s tempting to chalk this up as just another retail victim of Amazonian voracity, Sears has to take a lot of the blame for its own troubles. There’s been a singular lack of investment in data and analytics to understand the customer, for example. Once, Sears was an icon of stability and Americana. It had a brand loyalty that should have provided buried treasure galore when it comes to customer engagement, but never did.
Who wins out of this? Well, all eyes immediately turned to Walmart, which opportunely was holding its investor day yesterday to talk up its own omni-channel strategic direction. JC Penney has a strong customer demographic overlap with Sears, so could be in line to pick up some additional business.
On a wider note, this is another retailer started as a catalog firm but which stumbled by the wayside even as the online catalog model of Amazon and the like rose up. There are other examples. JC Penney has singularly failed in its ambition to re-capture Middle America with online investment, while Lands End, which had been acquired and then spun-off by Sears, looks more like a retail cliff-edge. It might be thought that having a catalog-based , direct-to-consumer business model would give a head start in competing in an e-commerce world, but that doesn’t appear to be the case in practice.