Sears: Is The End Finally In Sight For The World’s Slowest Liquidation Sale?

When I left Sears in 2003, I was quite pessimistic about the company’s long-term prospects. Some initiatives we had put in place during a two-year strategic re-positioning effort were gaining traction, but most key metrics were alarming. The apparel business was well below a sustainable productivity level. The appliance and home improvement segments–which accounted for roughly 50% of our enterprise value–were losing market share to better positioned competitors, mostly notably Home Depot and Lowes. And the one strategy that might have saved us was no longer a feasible option. My fear was that Sears’ slow death was inevitable.

The following year Eddie Lampert put two failing retailers together and promptly made a bad situation even worse. While Sears and Kmart both suffered from challenges driving revenue, Lampert focused on cutting costs. As leading brands realized that retail was moving to an era of greater customer experience and shopping integration, Lampert set up merchandise categories as warring factions. Next came the idea of starving the stores further to focus on making Sears more digitally savvy. Then he became enamored with an emphasis on making Sears “member-driven” by launching “Shop Your Way,” a frequency shopping scheme that only served to lower margins without restoring necessary sales growth.

After witnessing nearly a decade of flailing, in 2013 I publicly declared Sears “the world’s slowest liquidation sale” and suggested that they were a dead brand walking.

I have to admit that Sears has hung in there longer than I would have thought. The degree to which Lampert has been able to extract value from Sears assets has been surprising and remarkable. But he is rapidly running out of rabbits to pull out of his hat.

First, and most importantly, Sears has never laid out any realistic strategy to reverse a nearly perfect string of comp store declines for both the Sears and Kmart brands extending back to 2004. Sears cannot possibly cut enough costs to restore positive operating cash flow without growing top-line sales significantly.

Second, most store closings only make things worse. Contrary to popular belief, stores are needed to drive online sales, and vice versa. Sears’ fundamental problem is not too many stores, it is that is has become a brand that is no longer relevant enough for the assets and operating scale it has in place.

Third, with massive operating losses assured for the foreseeable future, Sears must raise a lot of cash to stay afloat. And it has already sold almost all the good stuff.

Yes, the presumably imminent sale of the Kenmore and DieHard brands may fetch in excess of a billion dollars. Yes, there is some real estate left to unload. Yes, the Home Services and Auto Centers retain some meaningful value. But don’t let the financial engineering strategies gloss over the fundamental point. There is no viable operating strategy to restore Sears to a profitable core of any material size. And unless the company can generate cash from operations before running out of assets to fund its staggering losses, it is not, in any practical sense, a going concern.

The company has been liquidating for many years now. It’s just that some of us are finally starting to notice.

 

This post originally appeared on Forbes where I recently became a contributor. You can check out more of my writing by going here.

Working on the wrong problem

When we see a brand struggling–or we find ourselves working within a flailing or failing organization–the first order of business should be clear. We need to understand the root causes. Once we’ve become keenly aware of what’s driving our problem–and accepted the reality of the situation–we are then ready to move into developing and launching a course of action.

So if the path is clear and obvious, why do so many retailers–and scores of other types of organizations, for that matter–get it so very wrong, so very often?

We regularly see retail brands hyper-focused on cost reductions when by far the bigger issue is lack of revenue growth (I’m looking at you Sears).

We see brands falling prey to the store closing delusion when often it turns out that closing stores en masse only makes matters worse.

We see brands blindly chasing the holy grail of all things omni-channel when, in most cases, they are merely spending millions of dollars to transfer sales from one pocket to the other–often at a lower margin.

We brands engaging in price wars they can never possibly win or without regard to the possibility that their customers aren’t even interested in the lowest price.

We see brands chasing average, the lowest common denominator, the one-size-fits-all solution because it seems safe. Yet it is precisely the most risky thing they could do.

Far too often we fail to pierce the veil of denial.

Far too often we fall victim to conventional wisdom, what we’ve always done or what we think Wall Street wants.

Far too often we ascribe wisdom to shrewd salespeople or charismatic and clever charlatans.

Far too often we fail to do the work, to ask for help, to dig deep to understand what’s really going on.

We can work really hard. We can focus our energies and those of our teams we great alacrity and intensity. We can pile on the data, build persuasive arguments and rock a really slick PowerPoint presentation. We can tell ourselves a story that convinces us we must be right.

But if we aren’t working on the right problem that’s all a colossal waste of time.

 

 

Stop blaming Amazon for department store woes

Given Amazon’s staggering growth and willingness to lose money to grab market share it’s easy to blame them for everything that is ailing “traditional” retail overall–and the  department store sector in particular.

In fact, with announcements last week from Macy’s to Kohl’s and Sears to JC Penney that could only charitably be called “disappointing” many folks that get paid to understand this stuff reflexively jumped on the “it’s all Amazon’s fault” bandwagon. Too bad they are mostly wrong.

The fact is the department store sector has been losing consumer relevance and share for a long, long time–and certainly well before Amazon had even a detectable amount of competing product in core department store categories.

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The fact is it’s just as logical to blame off-price and warehouse club retailer growth–which is almost entirely done in physical locations, by the way–for department stores’ problems.

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The fact is that, despite other challenges along the way, Nordstrom, Saks and Neiman Marcus have maintained share by transitioning a huge amount of their brick & mortar business to their online channels and have closed only a handful of stores in the last few years. Nordstrom and Neiman Marcus now both derive some 25% of their total sales from e-commerce.

Don’t get me wrong, I’m not saying that Amazon isn’t stealing business from the major department store players. Clearly they are. And as Amazon continues to grow its apparel business they will grab more and more share.

But the underlying reason for department stores decades long struggle is the sector’s consistent inability to transform their customer experience, product assortments, marketing strategies and real estate to meet consumers’ evolving needs.

More recently, those brands that have been slow to embrace digital first retail are scrambling to play catch up. Those that still haven’t broken down the silos that create barriers to a frictionless shopping experience will continue to hemorrhage customers and cash.

Most importantly those that think they can out Amazon Amazon are engaged in a race to the bottom. And as Seth reminds us, the problem with a race to the bottom is that you might win.

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The store closing panacea

There has been a strong and growing narrative that the single smartest thing a struggling retailer can do is to close stores and, in some cases, a lot of them. I first touched on this nearly three years ago in my post “Shrinking to prosperity: The store closing delusion.”

There is no question that, in aggregate, the United States has too much retail space. There is no question that, in concept, the growth of e-commerce can allow an omni-channel retailer to serve some trade areas more profitably without a store and some trade areas with a smaller box. The key is to understand “some” and that starts with understanding why a given brand is under-performing in the first place. The other key is to understand the role that brick & mortar locations play in driving e-commerce–and vice versa.

In most cases, as recent events are bearing out more and more, store closings make an already irrelevant retailer less relevant. And frequently much less profitable as well.

Nearly 90% of traditional retail is still done in physical stores. In five years it will still be about 85%. The math is not that complicated.

Make it harder to get to a store OR make returns in a store OR order online and pick up in a store OR go to a store to research potential purchases OR learn about the brand, etc. and a retailer is almost certain to lose way more business (and margin dollars) to a competitor’s physical store in the vacated trade area than the brand “rationalizing” its store count will ever be able to make up through its website. This is why JC Penney, Home Depot and Lowes should write Eddie Lampert thank you notes pretty much every day.

Moreover, the symbiotic nature of digital and physical channels should not be ignored, yet often is. Several retailers–Sears is perhaps the best example–made the assumption that by investing in digital at the expense of physical stores they could more profitability serve their customer base over the long-term. As it turns out (and as more retailers are learning), e-commerce is often less profitable at the margin than brick & mortar operations and that when you close stores you actually make it more difficult for your e-commerce business to thrive. Oops.

Any retailer in trouble should absolutely analyze whether closing and/or “right-sizing” stores will be accretive to cash-flow. But that analysis MUST include the impact on long-term competitiveness and digital channel sales in the affected store’s trade area. Thinking you are helping when in fact you are merely initiating a downward spiral is a pretty big mistake to make.

Any analyst pushing for store closings and footprint down-sizing should be mindful that it is almost never the case that a struggling retailer’s ills are because they have too many stores or that the stores they have are fundamentally too large. Rather, it is because their brand relevance is not big enough for the channels, both physical and digital, that they have. Be careful what you wish for.

Show me a retail brand that is remarkable and relevant enough to command the share of attention that drives share of market and I’m virtually certain their executives are not spending a second on down-sizing. In fact, most are opening physical stores (e.g Nordstrom, Warby Parker, Amazon, TJX) and, in many cases, a bunch of them.

Show me a retail brand that is consumed with store closings and expense reduction and there is a pretty good chance they are a dead brand walking.

 

Thanks to those who have encouraged me along my path as I took a six month break from writing this blog. During my sabbatical I started a new blog on waking up to a life of love, purpose and passion at any age, which can be found at http://www.IGotHereAsFastAsICould.blog.

The two sides of ‘good enough’

It can be quite dangerous to believe that you are better than the competition when the customer evaluates your product offering in isolation and out of context. When I was at Sears our research regularly told us that our target consumers viewed us as the best provider of appliances and tools. Yet we continued to leak market share.

As it turns out, once customers checked out the appliance or tool offering at Home Depot and Lowes they learned that, while the product assortment wasn’t quite as good as ours, the prices were often better. And if they were doing a DIY home improvement project they could get everything they needed in one trip. Plus, having to jump back in the car and deal with the hassle of shopping in the mall added to the “cost” of buying from us. For many customers, at the moment of truth, Home Depot and Lowes were good enough.

The opposite side of good enough involves brands that managed to thrive for many years despite their mediocrity, despite their peddling rather average products for average people.

When consumers had few alternatives, little access to information about their options and weren’t all that demanding, they had little choice but to settle. Those days are rapidly disappearing. Today, in most instances, folks are faced with a virtually infinite amount of choice, information and access. This reality lays bear the deficiencies of any brand for all to see.

Good enough no longer is.

 

Retail’s museums of disappointment

The retail graveyard is already quite full. Sports Authority is on its way there and surely the Sears and Kmart that we used to know can’t be too far behind. They’ll hardly be the last.

In fact, considering the rapid shift in customer behavior and the blistering pace of retail disruption, one could readily argue that far more brands will disappear in the next decade than in the last one.

And it’s not just that brands are going away entirely. Malls, Main Streets, strip and power centers, are already littered with empty boxes, big and small. Some locations quite old and dated, others still bright and shiny, opened a mere few years ago, their carcasses now hollowed out, the result of a merger or, more likely, plain and simple irrelevance.

Maybe we can blame Amazon or the failed economic policies of the Bush administration. Perhaps we can put it all on Obamacare. Maybe some totally unanticipated event came out of left field. Maybe we were just unlucky. Maybe.

More often than not, by the time a brand is buried, there are few who truly will miss it. By the time the final padlock is secured after a store closes, most folks are hardly surprised.

Irrelevance rarely happens overnight. Most often, the brand and their stores have been disappointing customers for years.

Blame Amazon, blame the government, heck, blame Canada (NSFW). Just know that the reality is the symptoms of creeping irrelevance are almost always there if you actually pay attention and if you are willing to act upon what you see and learn.

Whether our stores and malls will become exciting destinations or simply museums of disappointment is, when all is said and done, nine times out of ten, a choice.

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Sears: The one thing that could have saved them

As much fun as it is to call out Eddie Lampert on his misguided, selfish and seemingly delusional decade-plus leadership of Sears Holdings, when the world’s slowest liquidation sale is ultimately complete–I’m guessing, for all intents and purposes, by this time next year–we should acknowledge that Sears fate was probably sealed well over 20 years ago, when Crazy Eddie was not even involved.

First a bit of context. I worked at Sears from 1991-2003 and my last job was head of strategy reporting to then CEO Alan Lacy. I also led the Lands’ End acquisition integration team. During my tenure, in addition to various operating and marketing assignments, I was either the #1 or # 2 strategy guy when we implemented the “Softer Side of Sears”, created and piloted The Great Indoors and Sears Grand concepts and launched or accelerated the growth of free-standing Sears Appliance and Sears Hardware stores. I worked on or led teams that evaluated the acquisition of Kmart, Lowes, Best Buy, Circuit City–and Builder’s Square and Eagle Hardware when they were still around. We also seriously assessed turning all Sears mall locations into home only stores (among other concepts) and, in 2003, analyzed selling Kenmore and Craftsman to Home Depot or Lowes. So it’s safe to say I have more than a passing knowledge of how Sears evolved (or more accurately devolved) over an extended period of time.

With the benefit of that experience (and a good amount of hindsight) my conclusion is this: the only thing that would have given Sears a chance to thrive–not merely survive–was to have either launched their own home improvement warehouse concept or to have acquired Home Depot or Lowes’s at a time when they were realistically affordable–and that’s probably prior to 1995.

The reasons are simple. First, well before Amazon was even a thing it was becoming abundantly clear that the moderate department store space was structurally challenged and that Sears weird mix of hardlines and apparel was not a winning formula. Even if the soft home and apparel business got significantly better that was neither a particularly good nor a sustainable outcome. Second, far and away what Sears had that WAS relevant, remarkable and highly profitable were its appliances and home improvement categories. Importantly, Sears also had several leading market share brands- Kenmore, Craftsman and Diehard–that were only available at Sears.

Yet by the early 90’s it was becoming increasingly clear that Home Depot and Lowes were transforming those categories by winning on more convenient locations, better pricing and the ability to serve a broader set of purchase occasions. As they rolled out their stores Sears share (and profits) in those markets dropped precipitously. And it was also clear–or should have been–that Sears could not mitigate those competitive advantages through its mall-based locations.

So what Sears missed (or more accurately, was unwilling to act on) was that the only way to meaningfully counteract the inevitability of the dominance of the home improvement warehouse (and preserve or grow the value inherent in their proprietary brands and strong customer relationships) was to become a leader in that format. Instead, Sears spent the past 25 years wringing out costs (when it mostly had a revenue problem), vainly trying to grow its off-the-mall presence with too few (and way too mediocre) formats, investing in cool digital stuff while starving their physical stores to the point of irrelevance and embarrassment and, apparently, hoping that the Kardashians could somehow turn around an apparel business that has struggled for more than a decade to consistently get to a 30% gross margin and $100/sf in many stores (or what I like to call the “lame brand instead of name brand” strategy).

To be sure, one can argue that there were any number of things Sears could have done over the past 25 years to have meaningfully altered its course. Certainly had Sears not run its catalog into the ground they would not only have had more money to invest in the core business but would have been beautifully positioned to benefit from the dramatic rise in direct-to-consumer commerce. Without a doubt, virtually all of the new formats that were rolled out could have been much better executed. And some of the fantastic consumer interest created by the Softer Side of Sears campaign was not fulfilled by store and merchandising execution. The Lands’ End deal, while strategically sound and potentially transformative, was botched by a too aggressive store-rollout and mishandled marketing. And on and on.

Of course, we will never know for sure. But ultimately, from where I sit, it would all probably just have been lipstick on the pig.

In my view the real fault lies at the leadership all those many years ago that was too busy diversifying Sears into insurance, real estate and mutual funds, while taking their eye off of the customer and the core business and, thereby, letting Home Depot and Lowes (and to a lesser degree Best Buy) gain an insurmountable lead. And that’s a real shame, not to mention a heartbreaking disservice to all those men and women who worked so hard to make Sears a retail icon.

Dead brand walking.