Lessons from a Sears’ century of success and troubles

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Bad news recently hit about the Sears Holding Company. Or, perhaps it’s more accurate to say that more bad news was reported. After all, this is nothing new for the long-troubled retailer.

It’s easy to forget that Sears once ranked as the nation’s largest retailer. Today, though, Sears serves as another example of how vulnerable even the most successful businesses are if they fail to serve customers well in a dynamic, competitive marketplace.

On December 27, Sears Holding announced it would be closing between 100 and 120 Sears and Kmart stores after a tough holiday shopping season. Comparable store quarter-to-date sales ending on December 25 were down by 4.4 percent at Kmart and off by 6 percent in Sears domestic stores. Year-to-date, Kmart was down 1.8 percent and Sears had declined by 3.3 percent.

In a statement, Sears Chief Executive Officer Lou D’Ambrosio declared, “We intend to implement a series of actions to reduce on-going expenses, adjust our asset base, and accelerate the transformation of our business model. These actions will better enable us to focus our investments on serving our customers and members through integrated retail — at the store, online and in the home.”

But assessments from independent retail analysts and the recent history of the retailer do not exactly boost confidence. For example, as quoted by the Associated Press, New York-based retail analyst Brian Sozzi observed, “There’s no reason to go to Sears. It offers a depressing shopping experience and uncompetitive prices.” That’s blunt, but nonetheless accurate.

Others highlight the lack of investment in upgrading stores and service. A Wall Street Journal report said, “While retailers generally spend $6 to $8 per square foot a year on updating their stores, Sears spends only about $1.50 to $2, notes ISI analyst Greg Melich. That is not even enough to keep up with depreciation and amortization.” Assorted critics see matters getting worse for the retailer.

It’s important to understand how far the firm has fallen, however. In the years following the Civil War, with the spread of railroads and an improved postal system, the mail catalogue business became a viable tool for selling goods to people across the nation, including in rural communities where competition was limited to small-town mom-and-pop shops. Richard Sears used his considerable entrepreneurial, sales and communication skills to push Sears, Roebuck and Company into the lead with the Sears catalogue.

In a chapter from a National Bureau of Economic Research book titled “Learning by Doing in Markets, Firms, and Countries,” Daniel Raff and Peter Temin noted, “The catalogue presented such a cornucopia of goods that it created what we might now call a virtual reality in the minds of Sears’s rural customers. It seized their imagination at the same time that it offered countless items that would make their lives more convenient and productive. No other retailer-fixed or mail-offered the range and verve of Sears.”

When the migration from farm to cities accelerated, Sears management made a big decision in the 1920s to emphasize retail stores in larger communities, as well as aiding customers in taking care of and servicing the automobiles used to reach their stores. The Sears charge card was introduced during this period as well.

So, twice — in the late nineteenth century and in the 1920s — Sears made the right decisions by innovating and capitalizing on major economic, technological and demographic changes. The firm stood out as the nation’s largest retailer. In fact, Raff and Temin pointed out that in some years, Sears’ revenue approached one percent of U.S. GDP.

From that awesome position, though, Sears eventually proved unable to adapt to new changes in the marketplace, including technological and operational developments in the retail business, and a consumer with increasing choices and better prices in the marketplace. Confronted by slowing sales and new competitors in the late 1970s, Sears sought synergies that never developed.

Sears has been on the decline since its misguided “socks and stocks” strategic decision in 1981. Management tried to boost the company by buying the Coldwell Banker real estate brokerage and the Dean Witter Reynolds stockbroker. But it turned out that people didn’t want to make investment decisions at the same place they bought clothes and tires. “Socks and stocks” didn’t boost retail sales. Go figure. In 1993, both Coldwell and Dean Witter were sold off. By then, both Wal-Mart and Kmart had passed Sears in terms of annual revenues.

Unfortunately, Sears subsequently has failed to regain traction in the marketplace. The 2005 merger of Sears and Kmart — after Kmart came out of bankruptcy in 2003 — did not revitalize either store. According to Stores.org, in 2010, Sears Holding had slipped to the tenth largest retailer based on domestic sales.

Sears was once an entrepreneurial, innovative, customer-centered company, and became the top U.S. retailer as a result. But after losing its focus on what the customer wanted, it took relatively little time for it to be toppled. If Sears Holding is to avoid the fate of defunct retailers, such as Gimbels and Borders, it must make the necessary investments to improve customer choice and service, while also competing on price. Sounds simple, but given where the company is now and has been for some time, particularly in the eyes of consumers, it will not be an easy feat.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.