Luxury · Uncategorized

Luxury retail’s big stall

Neiman Marcus and Saks both just reported disappointing sales and earnings. And both cast most of the blame on the strong dollar’s effect on their tourist business. There was also some whining about the unseasonably warm weather, low oil prices and volatile capital markets.

To be sure, these factors have not been helpful. But the problems in the luxury market go deeper, particularly among the department store players. First some quick context.

The widely held notion among analysts that luxury brands are immune from the vicissitudes of the economy reveals a fundamental misunderstanding of their actual customer base. Yes, a significant percentage of the business comes from the very wealthy, who are not very price sensitive and not affected much by the sturm und drang of the economy. But for all but the most rarified brands, most luxury retail spending comes from what I call the “solidly affluent” (others call them HENRY’s–High Earners Not Yet Rich). These customers have much more volatile spending and much greater price sensitivity (I know this well from 4 years at Neiman Marcus diving into the data and conducting scores of studies). When the economy wanes they pull back. When prices get too high they shop less frequently or trade down to lower priced brands.

So with that as a backdrop–and going beyond the near-term headwinds– here are the key reasons I see a tough longer-term outlook for luxury retail–at least in North America:

  • Little new customer growth. Other than through e-commerce, luxury retail has had a tough time with customer acquisition for more than a decade. With e-commerce maturing, unfavorable demographics (see below) and few, if any, new store openings, luxury department stores, in particular, will struggle to replace the customers they lose.
  • Little or no transaction growth. While not widely appreciated, most of the comparable store growth in luxury retail for quite some time has come through prices increases, not growth in transactions. There is nothing to suggest this trend will change.
  • Unfavorable demographics. Affluent Baby Boomers have propped up the sector for the past decade or so. But as customers get older they spend less in general and quite a bit less on luxury products. The Baby Boomers are slowly but surely “aging out” of the sector. Gen X is a smaller cohort and there is little evidence they will spend as much on average as the Boomers. Over the longer term, Millennials will need to make up for the Boomers who, to put it bluntly, will be dying off. So far, most studies suggest Millennials will be more price sensitive and less status conscious then then the cohorts ahead of them.
  • Limits to price increases. For about 15 years, average luxury retail prices have grown at more than twice the general rate of inflation. In accessories it’s more like three times. Prices just don’t rise forever without affecting demand.
  • Shifts in spending. The affluent continue to value experiences and services over things–and are allocating their spending accordingly. Maybe this multi-year trend will start to reverse itself. Color me skeptical.
  • The omni-channel migration dilemma. Saks, Neiman’s and others are spending mightily on all things omni-channel and frankly the ROI is often terrible. Now they must do so to remain competitive. But it’s incredibly expensive to create a more integrated customer experience and, for the most part, the better you get at it the more you accelerate a shift to digital away from physical stores. Most often this is not accretive to earnings. For either Neiman Marcus or Saks to get a pay-off they need to grab market share. And the reality is they have more competition on the higher end part of their business from the wholesale brands that continue to open up stores and dramatically improve their e-commerce game. And on the lower end of their business they are playing catch up with Nordstrom.

For me, what I see is a sector that clearly has immediate term headwinds. But, more importantly, I see a sector that has much more profound long-term demographic and psycho-graphic headwinds. A sector that will have increasing difficulty wielding it’s tried and true big hammer of price increases. A sector that can no longer count on e-commerce for much new customer growth A sector that has 2-3 years of significant investment in digital and omni-channel capability building just to remain competitive.

Even if the dollar weakens or oil prices rise or we have colder winters, it’s still not a very pretty picture.

 

 

 

Being Remarkable · Winning on Experience

Attraction, not promotion (redux)

If you are familiar with 12-step recovery programs you know about the Eleventh Tradition of Alcoholics Anonymous, which goes as follows: “Our public relations policy is based on attraction rather than promotion.”

The obvious reason for this practice is that 12 Step programs have the anonymity of their attendees at their core. Moreover, AA–and its spin-off programs–reject self-seeking as a personal value. But it goes deeper.

Most people do not wish to sold to. If I have to hit you over the head again and again with my message, perhaps you are not open to receiving it. Or maybe what I’m selling just isn’t for you. Shouting louder and more often, or pitching all sorts of enticements, may be an intelligent, short-term way to drive a first visit, but all too often it’s a sign of desperation or lack of inspiration.

12 Step programs were among the first programs to go viral. They gained momentum through word of mouth and blossomed into powerful tribes as more and more struggling addicts learned about and came to embrace a recovery lifestyle. No TV. No radio. No sexy print campaigns. No gift cards. No ‘3 suits for the price of 1’. When it works it’s largely because those seeking relief want what others in the program have.

In the business world, it’s easy to see some parallels. Successful brands like Nordstrom, Apple and Neiman Marcus run very few promotional events and have little “on sale” most days of the year. And, it turns out, they sell a very large percentage of their products at full price and have low advertising to sales ratios. Customers are attracted to these brands because of the differentiated customer experience, well curated and unique merchandise and many, many stories of highly satisfied customers. Net Promoter Scores are high.

Contrast this with Macy’s, Sears and a veritable clown car of other retailers who inundate us with TV commercials, a mountain of circulars and endless promotions and discounts. Full-price selling is almost non-existent. How many of these brands’ shoppers go because it is truly their favorite place to shop? How many rave about their experience to their friends? Unsurprisingly, marketing costs are high, margins are low and revenues are stagnant or declining.

Migrating to a strategy rooted in attraction vs. promotion does not suit every brand, nor is it an easy, risk-free journey. Yet, I have to wonder how many brands even take the time to examine these fundamentally different approaches?

How many are intentional about their choices to go down one path vs. the other? How many want to win by authentically working to persuade their best prospects to say “I’ll have what she’s having” instead of beating the dead horse of relentless sales promotion and being stuck in a race to the bottom.

Maybe you can win on price for a little while. Maybe you can out shout the other guys for a bit. Maybe, just maybe, if you can coerce a few more suckers, er, I mean customers, to give you a try, you can make this quarter’s sales plan.

And sure we didn’t make any money, but we’re investing in the future, right?

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Being Remarkable · Customer Growth Strategy · Winning on Experience

When cheap rules

In case you haven’t noticed, the retail apparel market is kind of a hot mess. Sales are going nowhere. Profits are waning. Many store closings have occurred, with more on the horizon. And for two basic reasons.

First, we aren’t buying as many items. It turns out that we actually don’t need so much stuff. It also turns out that, more and more, we are starting to value experiences over things. As Millennials become more important contributors to the market–which, after all, is merely the passage of time–this likely only gets worse.

Second, the average unit price of what customers are buying is declining. Some of this is due to the frenzy of discounting that most retailers can’t seem to break out of. But mostly it’s a substitution effect: people trading down from Neiman Marcus to Nordstrom, or from department stores to off-price stores, or from specialty stores to places like H&M, Zara and Primark.

In many cases, the consumer is saying “no” to excess, unwilling to pay a lot merely for status. Still others are reticent to support a high markup that goes to what they have come to see as needless frills and overhead.

As leaders of brands we are powerless over the first factor. But when it comes to the second we have choices. Many of us are trying to solve for this market shift by cutting expenses and closing stores. Others have launched discount versions of their core brand and are aggressively investing behind this cheaper version of themselves. Some of us are doing a combination of both.

When cheap rules it’s certainly fair game (and simply good management) to look at our cost structure, to consider rebalancing our assortments, to seek ways to become more effective and efficient.

But as leaders–as a matter of strategy–we face the proverbial fork in the road. Do we chase cheap or do we seek reasons other than price for consumers to choose us over the competition? Do we risk entering a race to the bottom or do we choose to become more personal, more relevant, more remarkable? Do we go with the flow (and what Wall St. seems to demand) or do we confidently embrace a stance of “yeah, we’re more expensive, here’s why and we’re worth it.”

Every brand is different, so the right answer must be situation specific. But we shouldn’t lose sight of the fact that it is a choice. We shouldn’t forget that once a brand trades-down there is usually no turning back. And we should always remember that the biggest problem with a race to the bottom is that we might win.

Being Remarkable · Customer Growth Strategy · Innovation

No new stores ever!

What if your company could never open another store? I’m not talking about relocations. I mean a truly new unit that adds top-line growth for your brand.

That’s pretty much the case in the US department store sector. Macy’s, JC Penney, Dillard’s and Sears (obviously) are closing far more full-line stores than they will open.

The generally more resilient luxury sector isn’t exactly booming. Nordstrom will open only 3 new stores in the US over the next 3 years. Neiman Marcus will open 2 full-line stores over 4 years. Saks is probably done finding viable new locations. It’s hard to imagine how this current outlook will get better.

Major sectors like office supplies and specialty teen are going through wrenching consolidations and hemorrhaging sites. And for every Dollar General, Charming Charlies and Dick’s Sporting Goods that have decent opportunities for regional expansion and market back-fill, there are far more that have overshot the runway.

“But Steve”, you say, “we’re seeing great growth in our online business. That’s our future.” That may be true, but how much of that is actually incremental growth? For most “omni-channel” retailers–particularly those that aren’t playing catch up in basic capabilities (I’m looking at you JC Penney)–more and more of what gets reported as digital sales is merely channel shift.

In fact, you don’t have to be Einstein to understand what’s going on when brands report strong e-commerce growth, yet overall sales growth is barely positive. For a great discussion of this check out Kevin’s blog post on hiding the numbers.

The fact is we have too many stores and most consumers have too much stuff.

The fact is the retailers that operate the most stores and sell the most stuff are rapidly reaching the point where, for all practical purposes, they will never open a new store.

The fact is very few large retailers are experiencing much incremental growth from e-commerce and, either way, that growth is small relative to their base and beginning to slow substantially.

The fact is, going forward, most brands will only grow the top-line above the rate of inflation by developing strategies that steal market share. And the me-too tactics and one-size-fits all customer strategies that currently account for the bulk of most brands time and money simply won’t cut it.

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Amplify · Customer Growth Strategy · Customer-centric · Frictionless commerce · Omni-channel · Retail

An end to omni-channel?

I have a little confession to make.

Despite my including “omni-channel” liberally in speeches I give, in the hashtags of my tweets and in my often shameless self-promotion of my alleged retail strategy and marketing expertise, I kind of hate the term. Here’s why.

First, it’s hardly a new concept or a revelatory insight. I was leading the “anytime, anywhere, anyway” initiative at Sears in 2001 (not a typo). Companies like Nordstrom, Williams-Sonoma, REI and Neiman Marcus, among others, have been working in earnest on the essence of cross-channel integration and customer-centricity for more than a decade. If a brand has started throwing out the term in their annual priority statements and investor presentations more recently–or injecting it into the titles of staff members–it only means that company was late to the realization that it mattered, not that they are some kind of innovator or industry savant.

Second, it’s vague. As it’s applied relentlessly in retail do we ever actually mean “all”? Home shopping? Cruise ships? Military bases? University book stores? Of course not. Good strategy is rooted in choice, not trying to do it all. It’s not enough to say we’ve embraced all things omni-channel. In fact that’s quite sloppy and unhelpful. We need to lay out the customer relationships that are essential to our brand, the channels that matter for them and what we are doing specifically to eliminate the friction–and amplify the intensely relevant and remarkable–in their experience.

Third, it’s over-used. At conferences, in white papers and among industry observers it’s a virtual hype-fest. It often seems as if certain brands think that if they say “omni-channel” enough their needed (or hoped for) capabilities will magically appear. In my experience if a company is throwing around jargon a lot there is a pretty good chance it’s to obfuscate their lack of strategic clarity and/or executional progress.

Lastly, and most importantly, by itself becoming “omni-channel” is simply not good enough. Regardless of exactly what a brand means when they extol their omni-channel strategy, capabilities like cross-channel inventory availability, order-online-pick-up-in-store, and a host of other functionality that add up to the much vaunted “seamlessly integrated” experience, are rapidly becoming table-stakes, not differentiators.

Certainly retailers must root out the friction in their customer-facing processes and strive for a one brand, many channels experience. But they also need to accept that the power has shifted to the consumer and it’s become much harder to get a brand’s signal to command attention amidst all the noise. The reality is that in a slow growth world, more and more, sales increases must come from stealing share from the competition and mass, one-size-fits-all strategies are rapidly dying. Without making customer insight a core capability–and adopting a treat different customers differently commitment–market share losses and shrinking margins are almost certain.

Ultimately, I don’t care if you use the term “omni-channel” so long as you are clear about exactly what you are doing, how it benefits your efforts to retain, grow and acquire your core customers and why, when successful, it will be truly remarkable. But I’d also like to hear an acknowledgement that those efforts are simply necessary, not sufficient, to win in an ever noisier, customer empowered, slow growth world.

Customer Growth Strategy · Customer Insight

The easy prey

In most endeavors it’s a good idea to start with the easiest sale. Get the quick win. Gain some traction. Build a base. Rinse and repeat.

Organizations with any chance of staying around all have easy prey. The easy prey need the least convincing. The easy prey likes just about everything we do. They buy more often and more broadly. They’re typically the least price sensitive and provide the strongest word of mouth.

The tendency in established organizations is to rely on the easy prey too much, to go back to the well too many times. When I was at Neiman Marcus, our easy prey were the super wealthy who were intensely interested in the latest fashion. We raised our prices 8-10% per year and they kept buying. They loved the ridiculously expensive and exotic redemption opportunities in our InCircle Rewards program. We offered ever more exclusive merchandise and events and they cried “more, more, more!”

Unfortunately, the majority of our profits came from folks that weren’t in this elite segment, and our over-reliance on the best of the best started to chase them away (you’re welcome Nordstrom). When the recession came we were hit unnecessarily and devastatingly hard by the lack of balance in our customer portfolio.

For newer, rapidly growing brands, the typical mistake is to optimistically project that early success will readily scale. Many hot e-commerce brands are classic examples. These start-ups hyper-focus on a particular demographic and product-niche and use the advantages of the internet to quickly and cost effectively acquire an initial batch of customers. The metrics for the easy prey are impressive and venture capital dollars follow. Alas, the dynamics that worked so well for the easy prey become quite different (and challenging) as the business scales.

The next tranche of customers don’t get the value proposition as readily as the easy prey. They are harder to convert, requiring more expensive marketing and more costly incentives. Some may like the offering in concept, but want to see, touch and try on the product to be certain they wish to buy it. Acquisition costs go up and physical retail stores are often needed to scale the business to the next level. This isn’t necessarily a bad thing, but it is a big change and fundamentally alters the nature of how the business operates and makes money.

All brands of any size are composed of multiple customer segments, each with somewhat different needs, values, emotions and behaviors. Some are easier to acquire, grow and retain than others. Some aren’t worth the effort. A well crafted growth strategy is rooted in a solid understanding of each segment and employs a targeted and balanced portfolio approach to maximizing customer value. It necessarily involves moving beyond the easy sale and moving outside of our comfort zone.

I suppose it’s human nature to choose the path of least resistance. Ironically, it’s when we get stuck in what is easy that suddenly things get very, very hard.

Customer Growth Strategy · Retail

The outlet store long con

One of the hottest sectors in retail is the “off-price” or outlet segment. Established players like TJX, Ross and Nordstrom Rack continue to open stores at a solid clip while also expanding their e-commerce capabilities. Neiman Marcus, Saks and Macy’s have identified their outlet store strategy as a growth platform. Scores of fashion designers and other manufacturers have joined Ralph Lauren and Nike in filling up outlet centers across the globe. And despite their stumbles, so-called “flash-sales” sites like Gilt and HauteLook have developed significant market share.

Clearly there are aspirational customers at every price point, not to mention plenty of people who just simply hate to pay full price. For both types of customer segments the outlet store value proposition is straight-forward and compelling: well-known brand names at 20-60% off the regular price.

The appeal to brands can be compelling as well. An off-price strategy can be a sensible way of creating an “opening price” point format that generates incremental growth while bringing new customers into the brand’s eco-system. And to be completely transparent, I strongly advocated precisely this type of approach when I headed strategy at the Neiman Marcus Group–a version of which they have been implementing in recent years.

Yet with all the touted strategic benefits, not to mention all the hype that surrounds the sector, there is more and more deception and denial creeping in. I suspect it won’t be long before we see a major recalibration of the prospects for the sector and many of its participants. Here’s why.

The product con. While the industry tries hard to create the impression that the product in outlets is the same as the consumer would find in full-price stores, that is rarely the case. In fact, whether we are talking about Neiman Marcus’ Last Call Studio, Saks Off 5th or the Gap Factory Outlet stores, the vast majority of the merchandise carried is made specifically for those channels. For more on this check out this story on Racked.

The price con. So if most of the product was never for sale anywhere else how does the retailer come up with the  “compare at” price to calculate those big savings? Great question. Here’s the answer: They make it up–or as TJ Maxx likes to say,  it’s “estimated.”

The brand con. Any time a strong brand launches a derivative, lower-priced version they are entering treacherous waters. Done properly, the core brand suffers no loss of equity and benefits from a growing customer base. Done poorly, the effort can be highly dilutive, confusing and ultimately unprofitable. Nordstrom has done a masterful job of segmenting its customer base for the full-line and Rack stores and has been able, thus far, to make the strategy additive. But not every brand has been so disciplined (I’m looking at you Coach) and many are now opening outlet stores at such a rate–and out of proportion to their full-price business–that red flags need to be raised, even at Nordstrom.

The growth con. When the core business is stagnant, it’s easy for retailers to chase the growing bright shiny object. Yet it’s hard to escape the reality that North America is severely over-stored and that overall retail spending is barely growing above the rate of inflation. So for the many retailers opening many outlet stores over the next few years it’s mostly about grabbing market share. That’s fairly easy when it’s a few new locations. It’s not so easy when everyone is opening a lot of new stores and there are many new competing business models. When some of these new stores don’t make their numbers there will be pressure to “open the aperture” on product, pricing and promotion. And it’s Coach all over again.

Of course it’s fair to say that even if consumers knew the whole story they might not care. It’s fair to say that given the challenges to the traditional department store model, many of these retailers have no choice but to double down on outlet stores.

But it’s also fair to say that we’ve seen many of these companies overshoot the runway before. And it’s fair to say that in what’s becoming a zero-sum game not everyone can be a winner.

 

Being Remarkable · Growth · Innovation · Leadership

But first you have to believe

I’m all for market studies. And consumer research. And fact-based analysis. I’ve rarely met a 2 x 2 matrix I didn’t like.

I’m all for laying out reasonable hypotheses and putting together a sound testing plan. If I’m honest, I’m pretty solidly in the  “in God we trust, all others must bring data” camp.

But for me there’s no getting around this pesky little slice of reality. More times than not, the truly innovative, the remarkable, the profoundly game-changing, emerges not from an abundance of analysis and left-brain thinking, but from an intuitive commitment to a bold new idea.

More than a decade ago the folks at Nordstrom didn’t have an iron-clad, ROI supported business case when they made the big leap into investing behind channel integration. They believed that putting the customer at the center of what you do is ultimately going to work out.

Steve Jobs eschewed logic and conventional wisdom to pursue Apple’s strategy of “insanely great” products. He believed that leading with design and focusing on ease of use creates breakthrough innovation and customer utility.

Just about every successful entrepreneur adopts a strong and abiding belief in her product or service in the face of facts and history that suggest that, at best, they are wasting their time and money and, at worst, they are simply nuts.

On the other side–with clients and in organizations where I’ve been a leader–a lack of belief that getting closer to the customer is generally a good idea or that it’s okay to fail has resulted in an unwillingness to invest in innovation. Any meaningful action was predicated on a tight business case and, when that was lacking, it was easier to do nothing than to take a chance. All these brands are now struggling to catch up.

Obviously commitment to a belief is not, in and of itself, sufficient. Execution always matters. And there are certainly plenty of strongly held beliefs that are wildly misguided or morally reprehensible.

Yet, when I embrace the notion that just about every great idea starts with a belief not a compelling set of facts–or that often some people see things way before my logical brain can-the field of possibilities expands.

And I believe that sounds like a pretty good thing.

 

 

Being Remarkable · Bricks and Mobile · Customer-centric · Multi-channel · Omni-channel · Personalization · Winning on Experience

Different, not dead: The future of brick & mortar retail

“Reports of my death have been greatly exaggerated.” 

Mark Twain*

Media reports highlight the dramatic shift of spending from traditional stores to e-commerce. Industry analysts and pundits predict the demise of brands with substantial investments in retail real estate. We live in an increasingly virtual world, they say, and those with deep roots in the physical realm are starting to look more and more like dinosaurs.

The transformation of shopping fueled by all things digital is profound with no signs of deceleration. The crazy little thing called the internet is changing virtually (pun intended) everything. But anyone who thinks that brick and mortar stores are going away has it wrong. Here’s why.

Brick and mortar retail can enhance the value proposition. Physical retail offers many important advantages–the ability to see and try on products, instant gratification, face-to-face customer service, social interaction and so on–that digital selling cannot readily replicate.

Purchase events matter. There is a reason that e-commerce penetration in many product categories remains low. Where the risk of buying online is perceived as high (apparel, many big ticket items), direct-to-consumer shares remain in the single digits. Brands like Zappo’s have innovated in customer service to overcome some of e-commerce’s limitations, but long-term growth potential is modest. In fact, e-commerce darlings like Bonobos, Nasty Gal and Warby Parker have begun to broaden their reach–and address flattening growth–by opening physical stores. Plenty of products–particularly perishables and low-priced items–also have underlying economic reasons why direct selling volume will remain constrained.

Consumer segments matter. Great customer intimate brands embrace the notion of treating different customers differently. When you do this, you understand the different needs, wants and behaviors of varied customer types. Depending on the product and the particular consumer, the purchase journey may begin and end at a physical store. For others, they will never set foot in a brick & mortar location. Others will research online and buy in store. You get the idea. Your mission is to understand the role your physical locations play in being intensely relevant and remarkable for the customers you need to attract, retain and grow. Then build out and customize the experience accordingly.

The blended channel is the only channel. Stop thinking channels and start thinking about a consistent, integrated customer experience for your brand. Other than products and experiences that can be delivered completely digitally, the majority of retail purchases are influenced by both the digital and physical realms. More and more data is emerging to confirm this. Your mileage will vary, but silo-ed thinking, organizations, incentives and metrics confuse, rather than illuminate.

Frictionless commerce is essential. Let’s be blunt: there’s more heat than light in the discussion of omni-channel capabilities. Strategically, the key is to hone in on how to be differentiated, relevant and remarkable for the customers you wish to serve. And then you must root out the sources of friction in your customer experience. With more consumers going back and forth between digital and physical channels in their decision journey, if you don’t make it easy to do business with you chances are there is a competitor who is ready to pounce.

Mobile adds value to physical retail. When e-commerce was either sitting at your home or office surfing the web, the distinction between digital and brick & mortar really meant something. Now with consumers untethered and having increasingly powerful devices with them 24/7, mobile becomes the great integrator–and makes the distinction between e-commerce and brick & mortar less relevant all the time.

Seismic changes ARE impacting retail. With the exception of companies in the early stages of maturity, most retailers need fewer stores and many of the stores they have will need to be smaller. But assuming that physical retail is going away any time soon is just plain wrong. The tendency to isolate e-commerce and brick & mortar performance is equally misguided.

Amazon and a handful of best-in-class e-commerce companies will continue to thrive. And new pure play digital models will undoubtedly emerge to captivate consumers and gobble up share.

But there is plenty of business to be done in physical stores. Less, but still plenty. And most of the growth in what is counted as e-commerce is not a shift to online-only brands, but rather to brands that have cohesive omni-channel strategies. Think Nordstrom and Macy’s so far. For them, stores are assets, not liabilities. But the way brick and mortar retail drives consumer engagement and loyalty is morphing quickly.

These emerging winners follow a simple but compelling formula:

More focused.

More differentiated.

More relevant.

More remarkable.

More personalized.

More integrated.

See you in the blur.

 

* This isn’t, apparently, the actual quotation, but one that has become part of his folklore.

Being Remarkable · Bricks and Mobile · Leadership · Omni-channel · Retail · Winning on Experience

5 reasons Sears should liquidate ASAP

As a former Sears senior executive I’ve followed the once mighty brand’s journey from mediocrity to bad to just plain sad. What a long strange trip it’s been.

When I left in late 2003 we were gaining traction in our core full-line department store business and piloting several important growth initiatives. To be fair, whether we could pull off the necessary transformation was highly questionable. But one thing is now certain. The subsequent actions taken under a decade of Eddie Lampert’s leadership have assured the retailer’s demise.

For some time now, I’ve been referring to Sears as the world’s slowest liquidation sale. After yesterday’s annual shareholder meeting, it is time to stop the charade and embrace the inevitable. Here are the 5 reasons Sears needs to throw in the towel:

  • No value proposition. No reason for being. After all this time Lampert has still failed to articulate a vision of why and how Sears will fight and win in the intensively competitive mid-market sector. In fact, just about every action that has been taken over the last 10 years has weakened Sears competitive position. And the horrific results make this plain for all to see. The world–and particularly the mall–does not need a place to buy a wrench and a blouse and a toaster oven.
  • The competitive gap continues to widen. In every major product category Sears has lost relevance (and market share) while key competitors continue to improve. In hard goods, Sears is fundamentally disadvantaged by their real estate and as a practical matter there is not enough time nor capital to fix this core issue. In soft lines, they have been given a great gift by the recent foibles of JC Penney and Kohl’s and yet still woefully under-performed. Both competitors have key advantages relative to Sears. As they start to execute better they will win back the share they lost.
  • Digging a deeper hole.  For Sears to be a successful omni-channel retailer their core physical stores have to be compelling. Sears has under-invested in their brick and mortar stores for years, so not only do they have a lot of catching up to do, they have to develop and roll-out a new store design and related technology support. One need only to look at the capital that successful retailers like Nordstrom and Macy’s are investing to get a sense for the magnitude of what will be required. There is simply no way for Sears to earn an adequate return on this level of investment. More practically, Sears can’t possibly fund this.
  • A leader who is either a liar or delusional. The results speak for themselves: Lampert doesn’t know what he is doing. After 28 straight quarters of declining sales–let THAT sink in for a minute–he has the chutzpah to assert, among other things, that Sears is investing in where retail will be in the future (huh?), that the “Shop My Way” member program is some huge differentiator, that having fewer, less convenient locations than the competition is a good thing and that Sears can compete effectively with Amazon. All of these hypotheses would be laughable if the implications were not so tragic. Whether he really believes any of this is, or is merely spinning the story to buy time, remains an open question. But regardless of whether he is being disingenuous or whether he is nuts, you’d be crazy to give him your money.
  • Valuable assets get less valuable every day. There are pockets of meaningful value within Sears Holdings. But proprietary brands like Craftsman, Kenmore and Diehard are not sold where the majority of customers wish to buy them. Ultimately the brands are only as good as their distribution channels. Simply stated, as Sears and Kmart continue to weaken, so do the value of these brands. Side deals with hardware stores and Costco barely move the dial. Sears real estate is also cited as a major source of value, yet the real estate portfolio is a very mixed bag: some great properties in A malls, but lots of locations that are mostly liabilities. Regardless of how this all nets out, it is becoming increasingly clear that, on balance, mall-based commercial real estate has lots of supply, but relatively little demand for new tenancy. As retailers continue to prune and down-size their locations it is difficult, if not impossible, to make a case for Sears real estate value increasing over time.

The uncomfortable and sad reality is this: Sears has zero chance of transforming itself into a viable retail entity. Any further investment in this sinking ship is throwing good money after bad. Stripping out the idiosyncratic technical reasons for gyrations in the Sears stock, the underlying true company economic value declines each and every day. There is no plausible scenario where this trajectory will change.

Frankly, it’s been game over for some time now. It’s only Sears legacy equity and Lampert’s ability to pick at the carcass that has propped up the corpse.

Let’s stop the insanity.