Curiously, success has a way of blinding businesses to the need for change because it lulls managers into a false sense of security. They believe that since what they are doing has worked so well, they should continue to do it even though the conditions that fostered that success may be radically altered.
Sears, one of the iconic names in global business, is, sadly, a classic example of this. The decline of Sears as a retailer has been well documented. There are many reasons for its loss of power and prestige; enough to fill a book, of which there have already been several. Among the causes of its slow descent are the shifting demographics and needs of its customers, the scale and design of its marketing efforts and the loss of focus driven by its size and the insatiable demands of investors for growth at any cost.
The latter led Sears to become a victim of the economic financialization that swept the business world in the late 80s. The irony is that the company's final chapter may be written not as a merchant that lost its way, but as a depreciating asset because even as a financial pawn its essential value was misguided.
What follows is a cautionary tale. JL
Brigid Sweeney reports in Crain's Chicago Business:
At 7 a.m., 10 senior Sears executives gather in a sixth-floor conference room in Hoffman Estates for a daily meeting — or, as some refer to it, a "daily beating" — with Edward "Eddie" Lampert.
Via teleconference from his home base in Greenwich, Conn. (and, at least one time, via a call from his yacht in Italy), the famously mercurial Sears Holdings Corp. chairman listens to updates on everything from the company's market segmentation strategy to its IT issues. Some days, he barely glances up from his laptop. Other days, he rips into executives before they've gotten through the second screen of their PowerPoints. But not knowing whether it's going to be a good Eddie day or a bad Eddie day is just the beginning of the uncertainty that plagues the hallways of Sears' northwest suburban corporate complex.
"You never know what the strategy or the plan is," says one executive who requested anonymity because of a confidentiality agreement. "What are we building? What are the criteria for success?"
Sears soon may face more fundamental questions. After the second-worst year in the company's history, and with its annual shareholders meeting two weeks away, there is open discussion of a once-unthinkable proposition: Will this 126-year-old company, which helped define modern America, continue to exist?
"The challenges the company faces today are far worse than ever before, but they're very much self-inflicted," says Arthur Martinez, who served as CEO from 1995 to 2000.
From its origins peddling watches to Minnesota farmers, Sears Roebuck & Co. morphed into one of America's corporate juggernauts. Along with a handful of other corporations — General Motors Co., IBM Corp., General Electric Co. — Sears created the cultural and economic context of the American Century. But even more than those other companies, Sears reflected everyday Americans' way of life.
In its early years, the Sears catalog offered a previously unimaginable cornucopia of merchandise to a rural nation lacking many creature comforts. Those pages of baby buggies and dresses, shoes and sewing machines — even violins and ready-to-build homes — helped conjure dreams of a better life.
As both Sears and America flourished, the company's goods transformed those dreams into middle-class realities. Sears' best-selling Craftsman tools, Kenmore appliances and DieHard batteries built, furnished and ran the American household. By the 1960s, 1 out of nearly 200 U.S. workers received a Sears paycheck, and 1 out of every 3 carried a Sears credit card. By catering to prosaic daily needs, the retailer grew into a behemoth that defined not only the Chicago economy but American business.
For nearly a century, the company was able to anticipate important changes in the marketplace and profit from them. It mastered mail-order when America was young and rural. Foreseeing the rise of the automobile and the shift to cities, it began building stores. Next came the suburban shopping mall revolution of the 1960s: Sears seemingly anchored every last one.
But like so many other once-unbeatable companies, Sears eventually turned inward, intent on maintaining its success by repeating what had worked before. As a mall-based mass merchant, Sears failed to specify a niche and articulate the well-defined identity necessary to compete with 21st-century rivals. Its mall-heavy real estate portfolio suffered as Americans flocked to stand-alone big-boxes like Target, Wal-Mart and Costco, while its stores, starved of capital investment, often felt dingy. It also failed to listen to customers — or to keep an eye on new competitors springing up in places like Bentonville, Ark.
By the time Sears realized the danger poised by Wal-Mart Stores Inc., Best Buy Co. and Home Depot Inc., it was too late. Transformation efforts through the 1990s and early 2000s showed early promise but failed to gain traction. Ironically, what began as an attempt to keep pace with the big-boxes by buying bankrupt Kmart stores ultimately led to the 2005 Kmart-Sears merger under hedge-fund manager Mr. Lampert. Since his arrival, things have spiraled from bad to worse.
Today the mood in Hoffman Estates is described by some former employees as toxic and defeated, as even high-level executives lack the chairman's trust and approval to implement strategic transformations.
In February, in the face of a monstrous $2.4 billion fourth-quarter loss and mounting concerns about the company's liquidity, Sears announced it would sell 11 stores to General Growth Properties Inc. for $270 million and raise $400 million to $500 million more by spinning off its Hometown franchise plus its outlets and some hardware stores.
In his annual letter to shareholders that day — one of the only vehicles through which Mr. Lampert comments publicly on Sears — the chairman hinted that more asset sales may follow. "We intend to evaluate other opportunities to separate parts of our portfolio into separately owned companies," he wrote. Since then, there has been speculation that Mr. Lampert is shopping the Lands' End clothing division for $2 billion. He's also hired a company to license Kenmore, Craftsman and DieHard for sale at other retailers.
Sears spokeswoman Kimberly Freely says the company's leadership is going to "accelerate the transformation of Sears Holdings" by using technology to integrate its bricks-and-mortar store experience with its web and mobile shopping. Counting both real-life and virtual trips, she says Sears and Kmart clocked more than 1 billion shopper visits in 2011.
Ms. Freely also says licensing the company's flagship brands "will drive long-term value" by "allow(ing) us to reach new customers and create new brand enthusisasts."
Wall Street remains skeptical. "We continue to believe that Sears will sell off or spin off assets in a controlled liquidation of its chain, monetizing the assets least tied in with Sears' U.S. stores first," New York-based Credit Suisse analyst Gary Balter wrote in a note. However, "over time, selling off the profitable assets is unlikely to be a winning strategy."
That's a scary thought for Sears' 293,000 employees, including 6,000 at its Hoffman Estates headquarters. But the thought of a nation without Sears also is one more sign that the economic archetype of 20th-century America, built on manufacturing and distributing hard goods to an expanding middle class, is winding down.
"Sears was so powerful and so successful at one time that they could build the tallest building in the world that they did not need," says James Schrager, a professor of entrepreneurship and strategy at the University of Chicago's Booth School of Business. "The Sears Tower stands as a monument to how quickly fortunes can change in retailing, and as a very graphic example of what can go wrong if you don't 'watch the store' every minute of every day."
RETAIL PIONEER
Like so many other stories of the American Century, the tale of Sears begins with the railroads.
In 1886, at a terminal in rural Minnesota, 23-year-old Richard Sears bought a shipment of gold pocket watches for $12 apiece and began selling them for $14 to men who previously had kept time by the movement of the sun. Thanks to both the recent introduction of time zones and the watches' hint of modern sophistication, those timepieces netted Mr. Sears $5,000 in six months. He promptly moved to Minneapolis, founded R.W. Sears Watch Co. and began to sell by mail-order, placing ads in farm publications.
The following year, he relocated his burgeoning company to Chicago and hired a watch repairman, Alvah Roebuck, to fix returned merchandise. In 1893, the two co-founded Sears Roebuck & Co., published a catalog featuring watches and jewelry, and pulled in sales of more than $400,000. Two years later the 532-page catalog featured the famously wide range of merchandise, and sales exceeded $750,000.
Mr. Sears wasn't the first entrepreneur to enter the catalog business: Chicagoan Aaron Montgomery Ward had established his own book in 1872. But Sears grew rapidly, posting $10 million in sales in 1900, versus Montgomery Ward's $8.7 million. Along with Montgomery Ward, Sears Roebuck saved farmers from high-priced rural general stores and, moreover, created a book of dreams for people in remote places.
"The catalog was pure brilliance at a time when (America) was a far-flung nation without a lot of stores," Mr. Schrager says. The catalog was "really the Internet of the day — a place where anyone, at any time, in any place could take a look, say, 'Oh my gosh, I need that' — and get it."
The rapidly expanding company quickly outgrew its original five-story building in current-day Greektown and moved into a sprawling 40-acre campus on Chicago's West Side in 1906.
Two decades later, Sears' leadership recognized that stores were poised to usurp mail-order as America's population became increasingly urban. It opened its first store within its headquarters in 1925.
Soon there were hundreds. During one 12-month period in the late 1920s, the company opened an average of one store every other business day.
In 1931, Sears' retail sales topped mail-order for the first time, accounting for 53.4 percent of total sales of more than $180 million. That same year, recognizing America's increasing reliance on the automobile, Sears launched Allstate Insurance Co. and soon opened sales locations inside its stores. (The company was spun off in 1995.)
Sears' first downtown Chicago store, on State Street between Van Buren Street and Congress Parkway, opened in 1932, when the country was deep into the Great Depression. Local newspapers reported that 15,000 shoppers visited the store on its first day, and several thousand flooded its employment office. Despite the Depression, Sears continued to open stores, establishing more than 600 by the time the U.S. entered World War II.
Under Chairman Robert Wood, Sears smartly anticipated the postwar boom and the growth of the suburbs. From 1946 to 1952, the company opened 92 stores and either expanded or relocated more than 200 others. By 1951, Sears sold $2.8 billion worth of merchandise, more than twice as much as Montgomery Ward.
"Sears' history is one of both adapting and leading as American culture changed, and that served them extremely well right up to the 1990s," says Steve Kirn, who ran the company's "Sears University" through much of the 1990s. "Sears began placing stores in what would become the suburbs. In the 1960s, when the first enclosed shopping malls started going up, Sears was a key anchor for just about every one that was built."
The 110-story Sears Tower (now Willis Tower) became the world's tallest building at 1,454 feet when it was completed in 1974. But Sears' aura of invincibility was fading even as the massive monument to its success was going up.
After expanding so rapidly through the '60s, the company was hit hard by the 1974 recession. Profits declined by $170 million that year, and layoffs began almost immediately after Sears took possession of its namesake building. Newly unemployed workers exiting the skyscraper crossed paths with workmen carrying up hundreds of thousands of dollars' worth of houseplants to decorate it, according to David Katz's authoritative history, "The Big Store."
Like the larger American economy, Sears' performance was stagnant through much of the '70s. The company's core clientele — postwar blue-collar families who relied on Sears to outfit their households with appliances and their children in sturdy, if unexciting, clothing — had aged and was no longer buying as much.
At the same time, competition was increasing. Within malls, Sears' smaller specialty neighbors began grabbing market share. Operating under the assumption that retailing's profit margins would never again measure up to those of the emerging financial services sector, Sears acquired stock brokerage Dean Witter Reynolds and real estate firm Coldwell Banker in the 1980s.
In a move reminiscent of its omnibus catalog days, the company boasted that middle-class Americans could come to Sears not only for clothing and appliances but for investment advice and a mortgage. In 1986, CEO Edward Brennan oversaw the introduction of the Discover Card, the first major bank credit card launched in two decades.
The strategy boosted revenue, but it sucked attention and resources from Sears' traditional merchandising core, which continued to languish. Ironically, the company, historically so adept at anticipating and adapting to fundamental market shifts, was caught flat-footed by the big-box revolution.
Wal-Mart, created by Sam Walton in Arkansas in 1962, came of age in the 1980s. Sales grew from $1 billion at the beginning of the decade to $32 billion in 1990, when it surpassed Sears as the world's largest retailer. By 2001, Wal-Mart's sales were six times those of Sears.
"Sears wasn't even tracking Wal-Mart as a competitor until the '80s, because we were Sears — come on," Mr. Kirn says. "These people were in Bentonville, Ark., for crying out loud. But suddenly Wal-Mart is breathing down our neck, and then passing us."
Sears' retail profits dropped by almost 8 percent a year in the second half of the 1980s, despite the renovation of hundreds of locations into gleaming, neon-colored "Stores of the Future."
As business declined, so too did the once-proud, tightly knit corporate culture.
When Mr. Brennan stepped down in 1995, Sears no longer owned the Sears Tower. The company found it difficult to rent out the cavernous building, which was built under the assumption that massive 1970s-era computers would take up dozens of floors. As the value of the building fell dramatically, Sears negotiated a 20-year state tax break worth an estimated $75 million to move its headquarters to Hoffman Estates rather than North Carolina. (This year, the deal was extended for another decade, worth $150 million in tax savings.) It changed addresses in 1992 and handed ownership of the tower over to a mortgage trust two years later.
Mired in a major funk, Sears turned to Arthur Martinez, a former Saks Fifth Avenue executive, to quarterback a turnaround.
When he became CEO, "Sears still had many very useful assets," Mr. Martinez says. "It still had a high standing with the consumer. It had a well-deserved reputation for quality and satisfaction. It had a store footprint that was very appropriate at the time."
Inside the walls, though, "it was a very dispirited place. The smell of failure pervaded the company, and it had a culture that didn't know how to look outside itself," he says. Mr. Martinez considered his biggest task to be overcoming what he calls "the morass of desperation."
Embarrassed employees removed their ID badges before going out to lunch. During one team-building exercise in which workers were asked to write Sears' story as though they were Wall Street Journal reporters, many turned in blank sheets of paper or penned obituaries.
Mr. Martinez made quick inroads. The retail veteran and Harvard Business School alum (whose Westport, Conn., home used to share a fence with Martha Stewart's) immediately shut down the catalog, which by the 1990s was a relic that employed 50,000 people and lost $150 million a year.
He also oversaw the Young & Rubicam-produced "Softer Side" ad campaign in 1993 that helped Sears return to the black with stronger sales in apparel and home goods. In addition to a memorable jingle, the initial commercial featured a woman wearing "this spangly, flirty blue dress that everyone on the face of the planet wanted," according to Mr. Kirn. The only problem? Sears, surprised by the overwhelming response after years as an afterthought in the apparel business, didn't even carry it.
The success of the Softer Side campaign, along with a face-lift of the stores and introduction of new clothing brands, reinvigorated Sears for a few years.
But despite the intermittent success, the clothing lines started to slump again by 1998.
Alan Lacy arrived at Sears in 1994 with a résumé featuring high-level positions at Kraft and Philip Morris with an emphasis on finance and cost control. He managed Sears' online business and credit operations, became chief financial officer and succeeded Mr. Martinez in 2000.
"As the internal candidate, you see some things that work and some that don't work," Mr. Lacy says today. "While we had made progress on several dimensions, we were still substantially a mall-based retailer that lacked an off-mall growth vehicle."
By Mr. Lacy's count, about 1,000 new Wal-Marts, Targets, Home Depots and Best Buys opened annually during his years in charge. "We did the analysis," he says. "Shoppers who used to go to the mall eight times a year now went three."
In addition to the overwhelming competitive landscape, Mr. Lacy also had to deal with a problematic credit portfolio.
For years, many American families relied on their Sears cards as their sole source of credit, used to finance washing machines and other big-ticket purchases.
Sears' credit portfolio included 60 million card-holders and more than $28 billion in consumer debt. Profit margins were huge, thanks to the high interest rates on its cards. Where Sears' retail group had a profit margin of between 2 and 3 percent, the credit division returned double-digit margins, kicking in about 10 percent of the company's overall revenue and as much as 70 percent of its operating profit.
But just as big-box stores changed the merchandising status quo, the growth of Visa and MasterCard changed the credit equation. The number of transactions made on Sears' charge cards fell dramatically through the 1990s, and millions of Sears accounts became inactive.
As head of the credit unit in the late '90s, Mr. Lacy oversaw the switch from the old Sears card, which could only be used at Sears and generally came with a $1,000 limit. The new Sears MasterCard could be used anywhere and allowed customers to rack up balances as high as $20,000.
But as accounts and balances surged, so did delinquencies, and Standard & Poor's lowered its rating on Sears' debt in 2003. Less than a month later, CEO Mr. Lacy put the credit unit up for sale.
Mr. Lacy defends the sale today, saying Sears' $30 billion credit business was dwarfed by competitors, including Citigroup's $1 trillion balance sheet. Federal regulators were investigating credit companies, including Sears, for being overly leveraged, which drove down the stock.
Some onlookers, however, considered the deal "a panic sale," in Mr. Martinez's words. Credit "was not only an important source of value creation for the company but also a critical source of loyalty that bound people to the stores," he says. "When they lost that, they lost their customers."
After selling the credit business, Mr. Lacy tackled the big-box problem. Sears planned to open 12 off-mall stores in 2005, but he knew it wasn't enough. "The thing that was gnawing at me was that this was too little, too late," he remembers. "We couldn't move fast enough to mitigate the thousand competitor openings" — and with the profit-rich credit operations gone, Sears couldn't afford to fall further behind.
So Mr. Lacy approached Mr. Lampert. The head of Connecticut's ESL Investments had just taken control of bankrupt Kmart Corp., and Mr. Lacy agreed to buy 54 Kmart stores for $621 million in June 2004. Converting them to Sears stores, Mr. Lacy says, was intended to be a cost-effective way of accelerating growth.
But "out of those conversations, Eddie came to believe that putting Sears and Kmart together was a better thing to do," Mr. Lacy says, as it provided more scale and more brands with which to compete against Wal-Mart.
And so, in November 2004, Mr. Lampert announced a complicated cash-and-stock merger worth $11 billion. The move created what was then the third-largest retailer in the country, with 3,500 stores.
STUCK
Today, Sears is the 10th-largest retailer in the U.S. based on revenue, and the fourth-largest "broadline" merchant behind Wal-Mart, Costco Wholesale Corp. and Target Corp.
Sears is stuck in the middle of an increasingly polarized department store market that has diverged into low-end and high-end spheres.
At the low end, Wal-Mart pulled in $307.7 billion in revenue, nearly eight times as much as Sears' $41.6 billion. Target clocked in at $65.8 billion and Costco at $59 billion. Moreover, all of these retailers grew at least slightly in 2011. Sears' sales fell 2.2 percent.
At the other end of the spectrum, upscale retailers like Nordstrom Inc. and Saks Fifth Avenue also are doing well. Nordstrom's revenue jumped 12.7 percent to $10.5 billion in 2011, while Saks' increased 8.2 percent to $3 billion.
Today, the downtown Sears store's State Street windows feature attractive, bright displays of Lands' End apparel. But upstairs, the no-name men's clothing area, like other stores across the country, suffers from faded paint and outdated signage.
Mr. Lampert, who was hailed as the next Warren Buffett around the time of the merger, has seen his star dim considerably. The third quarter of 2007 marked a turning point, as Sears reported a 99 percent drop in earnings, at the time its worst quarter since Mr. Lampert took over. Equity analysts and other onlookers began to say that the combined entity had little chance of succeeding as a retailer.
Yet Mr. Lampert publicly flouted Retailing 101, voicing skepticism about the value of same-store sales metrics and capital investments in stores. Sears currently spends less than a quarter of the $8 per square foot typically invested into stores, according to New York-based International Strategy & Investment Group.
After a terrible 2011 holiday season, Sears ended the year more than $3 billion in the hole, with cash reserves that had dwindled to $754 million from $1.4 billion a year earlier.
Today, several former executives portray Mr. Lampert, who owns 62 percent of the company through ESL Investments, as a capricious micromanager fond not only of 7 a.m. teleconferences but also of bouncing from one pet project to another. Initially obsessed with e-commerce and online sales, he next became enamored of social media, going so far as to establish a proprietary internal Twitter-like system over which he prolifically communicated with employees via a nom de plume, Eli Wexler (a reference to Yale, his alma mater).
Executive turnover is high. Aylwin Lewis, the Kmart CEO who took over Sears Holdings' top post after the merger, left abruptly in early 2008 and was replaced by an interim chief, Bruce Johnson, for three years. Louis D'Ambrosio, a tech veteran with no retail background, was named CEO in 2011.
In the past year, the high-level managers who departed include: Chief Financial Officer Michael Collins; marketing chief David Friedman, who left at the end of 2011 and was replaced by Monica Woo, who departed last month after only five months on the job; Scott Freidheim, a former Goldman Sachs executive who oversaw the Craftsman, Kenmore and DieHard brands for less than a year; Dev Mukherjee, who joined as president of the home appliance business in November 2010; John Goodman, who had been head of the company's apparel and home unit for just more than two years; Mark Snyder, Kmart's chief marketing officer; and Mark Shipley, who had overseen the company's shopper rewards program for a year.
Several sources say that Mr. Lampert bought into Sears at approximately $16 a share. The stock is currently trading near $58 (off a 2007 high of nearly $200), meaning he's not close to losing his money and won't throw in the towel soon.
"He's in it all the way," one high-level executive says. "It's a go-for-broke fight. I believe he'll invest everything he has to prove he's right."
But others see a plan to liquidate the company by selling off valuable parts.
"I believe that he believed at the time (of the merger) that he had the God-given talent to create a brand-new retail operating model, but he never articulated how his model was going to be any different," Mr. Martinez says. Now "Sears is past the tipping point. He's going to preside over a slow liquidation of the company."
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