The Sad Saga of Sears

With the Kmart marriage going bad, employees jumping ship and a patriarch who doesn’t appear to know what he is doing, Sears is falling apart. Sears’ shares, which reached a high of $195.18 in April, fell to $98.49 on Monday as news broke that Aylwin Lewis, its president and chief executive, would step down.

With 3,800 Sears and Kmart stores, the company is still the fourth largest retailer in the U.S., but its future looks gloomy with many analysts suggesting they sell off the remaining assets for scrap.

How did it all go wrong? It is not such a mystery. A quick look at history explains the downfall of this American icon.

During the last century, Sears, Roebuck and Co. was the gold standard in the industry. Sears was the biggest, most profitable retailer in America. Hard to believe now, especially if you were born after 1985, but it is true. Sears was the “it” company of its day. The public, investors and Wall Street thought it could do no wrong.

The beginning of the end usually starts with that kind of thinking. When you think you can do anything with your brand, it all starts to fall apart.

Sears began as a mail-order catalog business back in the late 1800’s targeting primarily farmers. In 1925, the first retail store was opened and success came quickly. In particular, the Sears store-branded merchandise was a hit. After WW II things really took off. Sales hit $1 billion dollars in 1945 and doubled just a year later.

As the early explosive growth of a category slows (and it always does), a company usually tries expansion to compensate. This is the fatal flaw.

As sales of its core durable goods started to fall off, Sears started stocking more clothing to compensate. And so began the beginning of the end.

In the 1980s with sales continuing to slide, Sears sought expansion through diversification. Sears bought real estate company Coldwell Banker and stock brokerage firm Dean Witter Reynolds. Sears also launched the Discover credit card.

The purchases culminated in the now infamous “stocks to socks strategy.” Brilliant! You can buy your socks, your stocks, your real estate, your daughter’s prom dress all at Sears. Did it work? Of course not.

Expansion might help in the short term, but in the long term expansion a company unfocused. And an unfocused company stuck in the mushy middle of its category is ripe picking for competition. As an industry matures, competitors come in and steal market share from above you as well as below you. This is exactly what happened to Sears.

While Sears stayed in the middle of the department-store market, the department-store industry was diverging into two separate industries, one at the low end and one at the high end.

At the low end, Wal-Mart and Target have become big money-makers. Target has almost twice the revenues of Sears and Wal-Mart has more than 10 times the revenues. In 2006, Sears did $30.0 billion in sales while Target did $59.5 billion and Wal-Mart did an incredible $348.7 billion.

At the high end, retailers like Nordstrom and Saks Fifth Avenue are doing well as are a host of high-end boutiques.

What should Sears have done? Management-school logic would suggest that Sears, Roebuck and Co. should have either moved upscale or downscale in the department-store industry. But that’s not sound marketing logic.

Marketing logic states that once you have a strong position in the mind, you can’t change it. Therefore, the marketing answer to every problem is always the same.

Focus.

When faced with a broadening of its category, Sears should have narrowed its focus and become a specialist. Instead of shifting to the softer side of Sears, the retailer should have further embraced its harder side.

The harder side is where Sears was the strongest and had the most credibility anyway. Sears was once America’s leading seller of major appliances with 41 percent of the market. That share is steadily eroding as Lowe’s, Home Depot and Best Buy take appliance business away from Sears.

The mistakes of Sears have been compounding for decades. The company kept expanding into softer goods when they should have been focusing on harder goods.

Instead of advancing into its weakness (clothing and soft goods) by buying Lands End for $1.9 billion, Sears should have been retreating to its strength in hard goods and bought Black & Decker.

And let’s not forget, Sears has some of the strongest hard-good brands in the industry like Kenmore, Craftsman and DieHard. These brands could have crowned Sears as the hard goods king and blocked much of the progress Home Depot has been able to make.

But I think the final straw for Sears was Eddie Lampert’s unwise take-over. High-flying hedge-fund legend, Eddie Lampert acquired Kmart in 2003 and Sears in 2005. Combining the two struggling retailers was suppose to deliver synergy but instead brought misery.

Combining two losers doesn’t make a winner. It just doubles your problems. Sears and its owner Eddie Lampert whose fund holds 48% of the company are in deep trouble.

Eddie Lampert, a man who was once called the Warren Buffet of his generation, may have ruled out that comparison for good.

Lampert’s rise and current fall are emblematic of the recent trend of having money managers buy and run companies. The implication is that great value can be created by simply managing assets better. But nothing could be further from the truth. Managing assets usually translates into going over expenses and looking for ways to cut costs. And while saving money and cutting waste are good, those steps alone don’t make a company powerful.

What makes a company powerful? Size, strength, stock price? None of these.

What makes a company powerful is owning powerful brands. Powerful brands are brands that are singular, dominant and in growing categories.

Today, neither Sears nor Kmart are powerful brands. Bad news for Lampert and his legacy.

Warren Buffet is famous for buying the right brands on their way up. Lampert will unfortunately be known for buying the wrong brands on their way down.

Comments

[Geoff Dillon]

Laura is bang on here.

I would add that losing their focus had another side effect for Sears - they've become addicted to discounting.

When the Sears flyer arrives every week, it seems the soft goods are all 50% off.

This is hurting their once healthy hard goods brands. If Sears is all about discounting, I'm not inclined to pay full price for a Kenmore dishwasher or a Crafstman tool set. Sears is destroying the value in these brands by perpetually discounting everything else in the store.

A focus on these successful, hard goods brands would go a long way towards re-establishing their value, and moving away from the perception that everything at Sears is at least 50% overpriced.

[Scott Miller]

Growing up in the 70's and early 80's, my parents and I did a LOT of shopping at Sears. But nowadays, the idea of shopping at Sears doesn't even occur to me. Reading Laura's post makes me think, "Oh yea, is Sears still around?!" And the reason is clear: Sears stands for nothing in my mind. They've been entirely supplanted by stronger brands in every category.

Is Monkey Wards still around, too?

[Jay Godse]

I used to like Sears because you could buy your appliance there and get an assurance package where they checked your appliances, fixed them and just made sure they ran. Then they changed the terms of the plan for my lawnmower, and started nickel-and-diming the repair and maintenance line items to the point where it didn't make sense for me to stick with Sears. I found a place in a small town near by that did the same job for a fraction of the price of Sears.

Sears used to mean quality and assurance for appliances. Without a good assurance plan, I might as well go to Home Depot, Canadian Tire, Wal-Mart, Rona or Home Hardware.

[Geoff Livingston]

I wish you blogged more often, laura. You are always very insightful.

[Martin Calle]

SAVING SEARS

Pulling from studies under-taken to turnaround Sears pre and post Eddie.

At any average Costco, on any average day, 400 people per hour enter the store. During holiday peaks, that number hovers around 1,100. Average ticket is over $200.

Directly across the parking lot the average Sears store is lucky to break 1,800 visitors a day with average tickets far below half Costco's.

Strong brands sure. But Costco carries far fewer SKUs and moves entire pallets of strong brands in a tenth the time Sear's takes to move dozens.

For a while and to this day the only brands that keep Sears afloat are Craftsman and Kenmore. Were I the CMO at Sears I'd prune the tree and I'd be looking for ways to out Costco Costco and put more pressure on Vendors to be unique to the extent that Costco now tells P&G what to make, lest P&G get the [distribution] axe. That's the [re]tail wagging the dog. And it happened on AGL's watch.

[Scott Howard]

A couple weeks ago, I visited my local Sears store hoping to update my wardrobe, and walked out shaking my head. Prices were too high, for the selection and I was able to go to Steve & Barry's and spend 1/2 as much and get double the number of items.

Even the tool selection was skimpy. Sad.

[Ben Bacon]

My father purchased ONE brand of tools while I was growing up: Craftsman. He has drawers and chests and rolling, red cabinets full of Sears' flagship brand. This loyalty comes from a man who buys Kirkland jeans from Costco (because they're cheap) and his American automobiles from his brother (because he's his brother). He has little brand loyalty to any product outside of his Craftsman tools.

Sadly (for Sears), he stopped buying them once Sears stopped making such a quality tool (during their outsourcing fiasco).

It takes a brilliant bafoon—or series of bafoons—to blow a brand like Sears. It takes elegance and humility to admit a wrongdoing, turn an about face, and return to one's original marching pattern.

And yet, sadly, (once great) brands like Sears will slowly become the ends to sentences beginning with "Do you remember..."

I actually can't stand Sears. I go to Scottsdale Fashion Square; they don't have an ugly, cluttered, reminds-me-of-failure Sears (but they DO have a Lacoste. Now THERE is a brand revival story!)

Ries and Ries for President in '08. Haha. Brand America would never be so focused.

[Dennis D. Balajadia]

"What makes a company powerful is owning powerful brands. Powerful brands are brands that are singular, dominant and in growing categories."

Bulls Eye! Having strong brands and continuously creating new ones can shield the company from increasingly turbulent business times.

[Scott White]

Laura Dim Bulb wrote a great blog on this last week. Check it out:

http://dimbulb.typepad.com/my_weblog/2008/01/my-radical-plan.html

[noelle bates]

i went into a sears a few weeks ago with my husband and it literally made me sad, thinking about how excited i was as a little girl to get the sears catalog in the mail and what the brand represents today.