The end to Sears’ long downward spiral could be nigh.
On Tuesday, Reuters reported that the bankrupt retail conglomerate would ask a federal judge for permission to liquidate after failing to reach an agreement on chairman Edward Lampert’s $4.4 billion takeover bid to keep it going as a smaller company, signaling the strong possibility of a likely ignominious end to the iconic Sears and Kmart chains, the two largest U.S. retailers only a generation ago. The Wall Street Journal later reported the court would hold a bankruptcy auction next week, conditional on Lampert submitting a deposit.
Of the many takeaways for other retailers in the sad saga, one stands out more than most: even in the era of Amazon.com and e-commerce, no retailer can expect to close hundreds of stores, or worse yet, tolerate their neglect and decay, and expect to thrive. Lampert, who created Sears Holdings in 2005 when he merged Kmart and Sears, has closed hundreds of each chain’s stores in the last decade, paring weaker locations, and yet business at remaining locations kept collapsing.
Lampert long maintained that Sears Holdings was early to see the importance of e-commerce and made clear that to him brick-and-mortar stores were secondary, positing that any investment in their upkeep and any investments would have to quickly pay off. Indeed, in 2007, he told investors that absent a clear return, “we will not spend money on capital expenditures to build new stores or upgrade our existing base simply because our competitors do.” So no one should have been surprised by the poor state of many Sears and Kmart locations in recent years. Instead, his focus would be almost exclusively on e-commerce.
On some fronts, Sears led rivals like Macy’s, (m) J.C. Penney (jcp) and Kohl’s (kss). It was years ahead of those chains in offering in-store pickup for online orders. On Lampert’s watch, Sears’ e-commerce site vastly improved its search capability, and ease of use, was an early user of online dynamic pricing, a real-time capability that in theory should have helped it compete with Amazon.
And yet, that didn’t help: Sears Holdings has never once since its create thirteen years ago had a year of comparable sales (a metric that strips out the impact of new or newly closed stores) growth. Online revenue performance has lagged rivals: according to data firm eMarketer, Sears U.S. e-commerce fell to $1.3 billion in the last twelve months from $2.6 billion in 2013. As a percentage of total sales, digital commerce was 13% of Sears’ business last year, well below the 20% or so you see at Macy’s or Kohl’s. The digital business was much more stable of late, but it could certainly have used an assist from a store fleet in good condition.
Lampert, a hedge fund manager who took the Sears reins in 2013 after cycling through quite a few CEOs in a span, had no retail experience. And that may explain why he thought online sales could pick up the slack easily. But two years ago, Macy’s, which was in the process of closing 100 of its stores, said that it held on to only about 12% of sales in a trade area where it had shuttered a store. For the same reason, Penney, whose sales fell 25% in 2012 and 2013 in the wake of a failed reinvention, held out for years before carrying out the inevitable mass store closings in the absence of any meaningful recovery of lost business.
Why? Because stores and e-commerce are essential for one another. You cannot close hundreds of stores and let the remaining ones fall into disrepair and expect shoppers to stay excited about your brand. Stores remain the center of how a retailer’s brand cements itself in a shopper’s mind. It’s great to offer in-store pickup for online orders, but if your store is a dump, or inadequately staffed, a shopper is unlikely to come away from the experience wowed. What’s more, a fleet of stores can also help a chain deliver goods more quickly and make efficient use of store inventory: Kohl’s for one fills about half its online orders during the holiday season from its stores.
Under Lampert, Sears also erred in merchandising. Wanting to avoid markdowns, he had managers cut back on inventory (a wise move to some degree when sales are falling 13% per quarter) but that only led to empty shelves that created the sense of a chain in permanent going-out-of-business mode. He also cut back on advertising, preferring digital marketing based on insights ostensibly gathered by online shopping and its Shop Your Way program. But that contributed to Sears’ aura of being a missing-in-action brand.
The financier often lamented how expensive it was to compete with Amazon. But if Sears was financially handcuffed, he has only himself to blame as its top shareholder, CEO for six years, and chairman. Between 2005 and 2012, in a stock-boosting move, Sears opted to buy back $6 billion in shares, instead of making the necessary investments in stores and e-commerce. (To be fair, Sears has a history of that: in the 1980s, while Walmart was investing in stores and infrastructure, Sears was buying back shares and managing its heavy debt, helping Walmart to soon eclipse it in size.) And Lampert’s strategy led to the Sears Holdings sales hemorrhage (sales in 2017 fell to $16.7 billion from $53 billion when he created the company) that limited Sears’ ability to invest.
Walmart, Nordstrom, Kohl’s, Home Depot and Target were traditional retailers that sometimes discomfited investors by making the needed big investments. And not coincidentally they are among the retailers not to have closed stores in any significant number while also enjoying booming e-commerce. Sears could have been in this cohort.