Another Bankruptcy: Sears-ly

Posted on by Heather Bartels

What is the store you go to for everything – your “everything store”?1 It used to be Sears. Sears Holdings Corporation’s Chapter 11 bankruptcy filing has reignited the question of how to keep a company afloat in the modern world of retailing.2 After seven straight years of losses, hedge-fund manager and former Sears CEO Edward Lampert failed to compete with retail giants like Amazon and Wal-Mart.3 While history often repeats itself, competing retail companies and their management are trying to assess Sears’ business strategy and learn from its mistakes now.4 Is Macy’s next? What about Dillard’s? Can we learn from the mistakes of Sears? In this blog post I will examine some of the business strategies of Edward Lampert since his takeover of the corporation to try to further understand what led to the company’s more than $10 billion in losses. I will then transition to some recommended business strategies for Sears’ modern-day retail counterparts who are trying to compete in a fast-paced retail market.

Many wondered whether the company would survive under “hedge-fund moneyman Edward Lampert” and critics have frequently commented on his poor management that resulted in stores “starved for cash” and “infighting.”5 From the “ill-advised” merger with Kmart to Edward Lampert’s lack of experience in the retail world, many have criticized the business strategy of the firm since his take-over.6 He came into the picture for Sears Holdings “with his reputation riding high after turning a once-bankrupt Kmart into a cash business.”7 But what did go wrong for the mail order company that has lasted since the 1880s?8

By 2017 Sears was on the “short list of most-likely-to-go-bankrupt retailers” with more than $26 billion of market value gone over just a decade.9 While it is easy to blame the company’s bankruptcy on Lampert’s lack of expertise in the retail world, there are many who claim the company “would have gone bankrupt long ago without his efforts.”10 According to the New York Times, Lampert stated: “I did everything I could think of to try to make [Sears] great again.”11 Below, I have listed some of the business strategies that Sears hoped would save it from filing for Chapter 11 bankruptcy.

Sears Business Strategies:

  1. Cut store inventory. Instead of “stuffing the stores with goods, [Lampert] cut back inventory to avoid markdowns.”12 This contributed to stores often looking rundown and shabby next to rivals like Target and JC Penny.13 It also left stores without enough inventory on the shelves that employees could replace “sold out” products.14 Additionally, the company did not invest in modernizing the brick-and-mortar stores.15 Typically, retail companies that are struggling might try to refurbish stores to attract customers.16 Instead, customers found “mismatched floor tiles in the lobby, Reagan-era beige shelves in the food aisles and a ragged brown carpet in the clothing department” when visiting the stores.17
  2. E-commerce focus. Lampert foreshadowed that “e-commerce would be a game-changer” for retail companies.18 He focused resources on website marketing and a customer loyalty program.19 The loyalty program encouraged customers to become loyal members of the company to receive rewards.20 Maybe if he had more capital to feed into e-commerce and the brick-and-mortar stores together, then there might not have been the recent Chapter 11 filing. After-all, in 2011, the Forrester research firm estimated that “e-commerce [was] approaching $200 billion in revenue in the United States alone.”21 Digital marketing has transitioned to “omnichannel retailing” as retailers connect with customers beyond just websites and catalogs, but on almost every platform available.22 It is almost impossible to scroll through Instagram without an “influencer” advertising the latest trend.
  3. Holiday advertisement cutbacks. Sears did not buy national TV ads during the 2017 holiday season.23 Lampert instead “scaled back television advertising and newspaper circulars in favor of email marketing.”24 While investors have often praised the focus on digital advertising that is oftentimes more quantifiable and cost-effective, the complete absence of traditional TV and print advertising was considered “too far” by many executives.25 The newer forms of advertising for the company included having its brand integrated into the late-night talk show of “Jimmy Kimmel Live.”26 Executives met with Lampert to show data that indicated deep cuts to TV and newspaper advertising had hurt sales since a majority of the company’s revenue still came from its brick-and-mortar stores.27
  1. Sears Essentials. In one of its “biggest bets”, Sears hoped to convert a quarter of its stores into an off-mall format.28 One hundred Kmarts were ultimately converted to this format to help the company compete more directly with stores like Wal-Mart.29 However, this Sears Essentials or Sears Grand strategy completely flopped.30 According to Gretchen Morgenson from the New York Times, “[it did not flop] because Kmart shoppers rejected Sears products, but because the experiment seemed to consist only of tossing Kenmore stoves and Craftsman hammers into an old Kmart store, rather than creating a vibrant new shopping experience.”31
  1. Share buybacks. Sears used cash to buy back shares from 2005 to 2012.32
  1. This is often done to increase share prices.33 Over time, the company spent a total of $6 billion buying back its own shares.34 Bill Dreher of Deutsche Bank Securities described the process as the following: “Poor operating performance can be disguised by aggressive share repurchases, and Lampert is very, very aggressive.”35
  1. Decentralized management. Lampert split the company into divisions hoping the competition would increase profits.36 This is oftentimes a strategy used at hedge funds so that different teams can “compete with one another for scarce company resources.”37 However, this led to clashes within department stores where managers would train their staff not to help customers in adjacent sections, even if a customer requested help.38
  1. Store closures. Sears closed thousands of its Sears and Kmart stores.39 It has less than 900 stores left since more than 3,000 have closed since 2011.40 The property sales from these closures have helped to pay down its debt.41 Using its large real estate portfolio to make retail space available for stores and companies that are still expanding was one of its most traditional and predictable business strategies over the past decade.42
  1. Brand sales. Sears sold its Craftsman tool brand to Stanley Black & Decker for $900 million.43 This sale provided Sears with an upfront cash payment of $525 million which was supposed to give the company immediate liquidity.44 The company also sought to sell its Kenmore brand, but Lampert’s hedge fund was the only offer, which the board ultimately rejected.45
  2. This past year, the company combined the corporate functions of its Sears and Kmart brands in its promise to cut $1 billion in costs.46 Many have been skeptical each time the company has announced restructuring plans, one critic stated: “We just can’t avoid the cliché ‘rearranging the deck chairs on the Titanic’ when considering the proposed new operating structure for Sears.”47

So why was Lampert’s business strategy over the past ten years so risky, or why didn’t it work? And what was he missing? Bruce Greenwald, a professor of finance and economics at Columbia University, described the effect of Lampert’s past successes in retail and how it formed his Sears/Kmart business strategy: “Most of his stocks are retail stocks, and he has done really well with them. So he decided he was a genius at retail, and it didn’t occur to him he could be wrong about it.”48

Sears is a one-shop stop that lost its ability to distinguish itself as a relevant brand in the modern retailing market.49 It is likely that none of these business strategies worked because no-one knew what the theme or purpose of Sears was as a brand. Why should someone shop at Sears over Wal-Mart or Home Depot? What does it actually stand for – its brand? Is it simply a “big and old” company?50

Sears is a name “steeped in American Culture as Coke and Levi’s,” yet it has become associated with older, non-renovated stores and recognized as brand of the past.51 If it comes out of the Chapter 11 bankruptcy without full liquidation, it will need to focus on how to restore its brand to something that will excite and draw customers to its doors. To avoid what happened to Radio Shack, Sears will need to “make some sort of big, bold, visible move.”52

Looking forward, traditional retailers like Macy’s will need to focus on how to turn their brick-and-mortar stores into assets. But how do you balance store upkeep and a strong online presence? Darrel K. Rigby, a partner at Bain & Company, recommends applying innovative technologies to the stores themselves, not just to websites and social media.53 This includes giving sale associates the tools to understand customers and to provide them with customized experiences and recommendations.54 If Sears does successfully restructure, maybe it needs to focus on applying its innovative e-commerce ideas to the stores themselves. It needs to find a way to keep customers in the door.

Quick and easy shipping. Quick and easy returns. Modern retailers should invest in an infrastructure that gives customers the “simple and seamless process not only for receiving the products they’ve purchased but also for returning unwanted products.”55 One of the advantages of shopping in-person has always been the instant gratification of having a product within your hands. You can immediately wear the outfit or use the tool. With the rise of e-commerce, companies will need to focus on how to keep customers engaged and excited when they make an online purchase.56 Retailers should focus on the experience of anticipation and how to build excitement with their customers.57

Ian MacKenzie, Chris Meyer, and Steve Noble of McKinsey & Company, a worldwide management consulting firm, recommended five imperatives for modern retailers going forward:58

  1. Expand revenue and profit pools. Remember Amazon? It acts as a “traditional retailer” in only 35% of its customer transactions because it has focused on assets that it can exploit to maintain long-term growth and profitability.
  1. Create a roadmap to cut costs. While Lampert tried to cut costs with his low maintenance of brick-and-mortar stores, this backfired and drove customers away. Offshoring portions of support functions like IT and marketing analytics are one way to cut costs in a less pervasive manner.
  1. Reduce – and reconfigure – the real-estate portfolio. Understand the square footage of physical space that you need for customers. Are you just selling products in this space, or are you carving out a place for innovative concepts to take place? Do customers visit the store frequently to pick-up their online orders, and does this space make that an enjoyable, exciting experience?
  1. Get serious about using data and analytics for decision making. What is the customer base you are targeting, and how does it change based upon geographic location? Knowing who the customers are, what they want, and when they are coming through the store ensures the store is efficient and that the inventory will sell at its full price.
  2. Rethink assortments and product offerings. I rarely only look at one website for a product I want. I am constantly comparing quality, price, and convenience. Online shopping has forced retailers to become more transparent in their pricing and has heightened the need for them to differentiate themselves in some way. Why would I buy an appliance from Sears if I know the sales associate from Home Depot has a deeper understanding and better expertise about the same exact appliance.

Only time will tell if Sears will avoid complete liquidation.59 Toys “R” Us filed for bankruptcy hoping to stay in business but came to the stark reality that it would need to close its remaining stores and liquidate its remaining inventory to pay back creditors.60 Lampert still hopes Sears can emerge from its Chapter 11 bankruptcy filing and restructure with less stores.61 The company’s website reinforces its dedication to reorganize around a smaller platform of profitable stores.62 However, it could be time for us to officially turn the final page on the pioneering catalogues that shaped American consumerism.

  1. Miranda Green, Opinion Today: Pioneer Retailer Left on the Shelf, Fin. Times (Oct. 18, 2018), https://www.ft.com/content/14a3c6b6-d272-11e8-a9f2-7574db66bcd5. ↩

  2. Suzanne Kapner, Rachael Levy, & Juliet Chung, Edward Lampert, the Hedge-Fund Star Who Bet on Sears, Is Unrepentant, Wall St. J.: Bus. (Oct. 17, 2018, 1:12 PM), https://www.wsj.com/articles/edward-lampert-the-hedge-fund-star-who-bet-on-sears-is-unrepentant-1539796363?mod=searchresults&page=1&pos=17. ↩

  3. Id. ↩

  4. Id. ↩

  5. Julie Creswell, The Incredible Shrinking Sears, N.Y. Times, Aug. 13, 2017, at 1 BU N. ↩

  6. The Collapse of an American Retail Giant, The Economist, Oct. 20, 2018. ↩

  7. Andrew Edgecliff-Johnson, Sears: How a Pioneering Brand Found Itself Left on the Shelf, Fin. Times (Oct. 17, 2018), https://www.ft.com/content/6b1238ee-d127-11e8-a9f2-7574db66bcd5. ↩

  8. Alistair Gray, Sears Races to Avoid Outright Liquidation After Bankruptcy Filing, Fin. Times (Oct. 15, 2018), https://www.ft.com/content/57cd862a-d038-11e8-a9f2-7574db66bcd5. ↩

  9. Julie Creswell, The Incredible Shrinking Sears, N.Y. Times, Aug. 13, 2017, at 4 BU N. ↩

  10. Andrew Edgecliff-Johnson, Sears: How a Pioneering Brand Found Itself Left on the Shelf, Fin. Times (Oct. 17, 2018), https://www.ft.com/content/6b1238ee-d127-11e8-a9f2-7574db66bcd5. ↩

  11. Julie Creswell & Michael Corkery, How the Hedge Fund Manager Running Sears Cut His Losses, N.Y. Times: Bus. Day (Oct. 18, 2018), https://www.nytimes.com/2018/10/18/business/sears-bankruptcy-edward-lampert.html. ↩

  12. Suzanne Kapner, Rachael Levy, & Juliet Chung, Edward Lampert, the Hedge-Fund Star Who Bet on Sears, Is Unrepentant, Wall St. J.: Bus. (Oct. 17, 2018, 1:12 PM), https://www.wsj.com/articles/edward-lampert-the-hedge-fund-star-who-bet-on-sears-is-unrepentant-1539796363?mod=searchresults&page=1&pos=17. ↩

  13. Gretchen Morgenson, A Hedge Fund Manager’s Troubled Foray Into Retailing, Y. Times: Int’l Bus. (Feb. 8, 2008), https://www.nytimes.com/2008/01/28/business/worldbusiness/28iht-hedge.4.9555298.html. ↩

  14. Id. ↩

  15. Chris Isidore, Sears, the Store that Changed America, Declares Bankruptcy, CNN Bus. (Oct. 15, 2018, 12:58 PM), https://www.cnn.com/2018/10/15/business/sears-bankruptcy/index.html. ↩

  16. Suzanne Kapner & Imani Moise, Sears Vows to Cut $1 Billion in Expenses, Wall St. J.: Bus. (Feb. 10, 2017, 2:24 PM), https://www.wsj.com/articles/sears-shares-surge-on-new-restructuring-plan-1486733935?mod=article_inline. ↩

  17. Gretchen Morgenson, A Hedge Fund Manager’s Troubled Foray Into Retailing, N.Y. Times: Int’l Bus. (Feb. 8, 2008), https://www.nytimes.com/2008/01/28/business/worldbusiness/28iht-hedge.4.9555298.html. ↩

  18. Suzanne Kapner, Rachael Levy, & Juliet Chung, Edward Lampert, the Hedge-Fund Star Who Bet on Sears, Is Unrepentant, Wall St. J.: Business (Oct. 17, 2018, 1:12 PM), https://www.wsj.com/articles/edward-lampert-the-hedge-fund-star-who-bet-on-sears-is-unrepentant-1539796363?mod=searchresults&page=1&pos=17. ↩

  19. Julie Creswell, The Incredible Shrinking Sears, Y. Times, Aug. 13, 2017, at 4 BU N. ↩

  20. Barbara Farfan, Why Sears’ Policies and Business Strategy Are Leading to its Decline, the balance small bus. Blog (July 23, 2018), https://www.thebalancesmb.com/sears-worst-practice-core-business-strategy-2891858. ↩

  21. Darrell K. Rigby, The Future of Shopping, Harv. Bus. Rev. Blog (Dec. 2011), https://hbr.org/2011/12/the-future-of-shopping. ↩

  22. Id. ↩

  23. Suzanne Kapner, Rachael Levy, & Juliet Chung, Edward Lampert, the Hedge-Fund Star Who Bet on Sears, Is Unrepentant, Wall St. J.: Bus. (Oct. 17, 2018, 1:12 PM), https://www.wsj.com/articles/edward-lampert-the-hedge-fund-star-who-bet-on-sears-is-unrepentant-1539796363?mod=searchresults&page=1&pos=17. ↩

  24.  ↩

  25. Suzanne Vranica & Suzanne Kapner, Sears Stopped Buying National TV Ads in Critical Holiday Season, Wall St. J.: Bus. (Dec. 31, 2017, 7:00 AM), https://www.wsj.com/articles/sears-stopped-buying-national-tv-ads-in-critical-holiday-season-1514721602?mod=article_inline. ↩

  26. Id. ↩

  27. Id. ↩

  28. Becky Yerak, Sears Boils Down Sales Strategy to Essentials, Chicago Tribune (June 17, 2005), https://www.chicagotribune.com/news/ct-xpm-2005-06-17-0506170076-story.html. ↩

  29. Suzanne Kapner, Rachael Levy, & Juliet Chung, Edward Lampert, the Hedge-Fund Star Who Bet on Sears, Is Unrepentant, Wall St. J.: Bus. (Oct. 17, 2018, 1:12 PM), https://www.wsj.com/articles/edward-lampert-the-hedge-fund-star-who-bet-on-sears-is-unrepentant-1539796363?mod=searchresults&page=1&pos=17. ↩

  30. Gretchen Morgenson, A Hedge Fund Manager’s Troubled Foray Into Retailing, Y. Times: Int’l Bus. (Feb. 8, 2008), https://www.nytimes.com/2008/01/28/business/worldbusiness/28iht-hedge.4.9555298.html. ↩

  31. Id. ↩

  32. Julie Creswell, The Incredible Shrinking Sears, Y. Times (Aug. 13, 2017), https://www.nytimes.com/2017/08/11/business/the-incredible-shrinking-sears.html. ↩

  33. Id. ↩

  34. Id. ↩

  35. Gretchen Morgenson, A Hedge Fund Manager’s Troubled Foray Into Retailing, N.Y. Times: Int’l Bus. (Feb. 8, 2008), https://www.nytimes.com/2008/01/28/business/worldbusiness/28iht-hedge.4.9555298.html. ↩

  36. The Collapse of an American Retail Giant, The Economist, Oct. 20, 2018. ↩

  37. Julie Creswell, The Incredible Shrinking Sears, Y. Times, Aug. 13, 2017, at 4 BU N. ↩

  38. Id. ↩

  39. Alistair Gray & Andrew Edgecliffe-Johnson, Sears Chief Proposes Debt Restructuring to Avoid Bankruptcy, Times (Sept. 24, 2018), https://www.ft.com/content/c913656a-bffe-11e8-95b1-d36dfef1b89a. ↩

  40. Alistair Gray & Andrew Edgecliffe-Johnson, Trailblazing Retailer Sears Fights for its Survival, Fin. Times (Sept. 26, 2018), https://www.ft.com/content/597468d8-c10e-11e8-95b1-d36dfef1b89a. ↩

  41. Alistair Gray & Andrew Edgecliffe-Johnson, Sears Chief Proposes Debt Restructuring to Avoid Bankruptcy, Fin. Times (Sept. 24, 2018), https://www.ft.com/content/c913656a-bffe-11e8-95b1-d36dfef1b89a. ↩

  42. Barbara Farfan, Why Sears’ Policies and Business Strategy Are Leading to its Decline, the balance small bus. Blog (July 23, 2018), https://www.thebalancesmb.com/sears-worst-practice-core-business-strategy-2891858. ↩

  43. Alistair Gray & Andrew Edgecliffe-Johnson, Sears Chief Proposes Debt Restructuring to Avoid Bankruptcy, Times (Sept. 24, 2018), https://www.ft.com/content/c913656a-bffe-11e8-95b1-d36dfef1b89a. ↩

  44. Lisa Burden, Sears Sells Craftsman Brand But Gets 15-Year Royalty-Free IP License, Westlaw Mergers & Acquisitions Daily Brifing (Jan. 9, 2017), https://www.westlaw.com/Document/I3ef7400308d011e798dc8b09b4f043e0/View/FullText.html?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0. ↩

  45. Chris Isidore, Sears, the Store that Changed America, Declares Bankruptcy, CNN Bus. (Oct. 15, 2018, 12:58 PM), https://www.cnn.com/2018/10/15/business/sears-bankruptcy/index.html. ↩

  46. Suzanne Kapner & Imani Moise, Sears Vows to Cut $1 Billion in Expenses, Wall St. J.: Bus. (Feb. 10, 2017, 2:24 PM), https://www.wsj.com/articles/sears-shares-surge-on-new-restructuring-plan-1486733935?mod=article_inline. ↩

  47. Gretchen Morgenson, A Hedge Fund Manager’s Troubled Foray Into Retailing, N.Y. Times: Int’l Bus. (Feb. 8, 2008), https://www.nytimes.com/2008/01/28/business/worldbusiness/28iht-hedge.4.9555298.html. ↩

  48. Id. ↩

  49. David Vinjamuri, Can Sears Be Saved? Four Strategies for Success, Forbes (Jan. 10, 2012, 2:00 PM), https://www.forbes.com/sites/davidvinjamuri/2012/01/10/can-sears-be-saved-four-strategies-for-success/#5a23946335b6. ↩

  50. Barbara Farfan, Why Sears’ Policies and Business Strategy Are Leading to its Decline, the balance small bus. Blog (July 23, 2018), https://www.thebalancesmb.com/sears-worst-practice-core-business-strategy-2891858. ↩

  51. Denise Lee Yohn, Is it Too Late for Sears to Save Itself?, Harv. Bus. Rev. Blog (Mar 30, 2017), https://hbr.org/2017/03/is-it-too-late-for-sears-to-save-itself. ↩

  52. Id. ↩

  53. Darrell K. Rigby, The Future of Shopping, Harv. Bus. Rev. Blog (Dec. 2011), https://hbr.org/2011/12/the-future-of-shopping. ↩

  54. Id. ↩

  55. Ian MacKenzie, Chris Meyer, and Steve Noble, How Retailers Can Keep Up With Consumers, McKinsey & Co.: Retail (Oct. 2013), https://www.mckinsey.com/industries/retail/our-insights/how-retailers-can-keep-up-with-consumers. ↩

  56. Pamela N. Danziger, Why Instant Gratification Isn’t So Gratifying, Forbes Blog (Sept. 19, 2017, 8:00 AM), https://www.forbes.com/sites/pamdanziger/2017/09/19/why-instant-gratification-isnt-so-gratifying/#22c94f0c5725. ↩

  57. Id. ↩

  58. Ian MacKenzie, Chris Meyer, and Steve Noble, How Retailers Can Keep Up With Consumers, McKinsey & Co.: Retail (Oct. 2013), https://www.mckinsey.com/industries/retail/our-insights/how-retailers-can-keep-up-with-consumers. ↩

  59. Katherine Burton, Lauren Coleman-Lochner, Eliza Ronalds-Hannon, and Tiffany Kary, Sears Tries Again for Cash as Lenders Balk on Loan Deal, Bloomberg (Oct. 25, 2018) https://www.bloomberg.com/news/articles/2018-10-25/sears-tries-again-for-cash-as-lenders-said-to-balk-on-loan-deal. ↩

  60. Chris Isidore, Sears, the Store that Changed America, Declares Bankruptcy, CNN Bus. (Oct. 15, 2018, 12:58 PM), https://www.cnn.com/2018/10/15/business/sears-bankruptcy/index.html. ↩

  61. Alistair Gray, Sears Races to Avoid Outright Liquidation After Bankruptcy Filing, Fin. Times (Oct. 15, 2018), https://www.ft.com/content/57cd862a-d038-11e8-a9f2-7574db66bcd5. ↩

  62. SHC Staff, Accelerating Our Strategic Transformation and Facilitating Our Financial Restructuring, Sears Holdings Blog (Oct. 15, 2018), https://blog.searsholdings.com/shc-updates/accelerating-our-strategic-transformation-and-facilitating-our-financial-restructuring/. ↩

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