Avoiding A Sears Tragedy
In March, Sears disclosed significant doubt regarding the company’s ability to sustain operations. Just one month earlier, Sears had reported a loss of $2.2 billion for 2016, marking the sixth year in a row in which the company posted a substantial loss.
Only a few decades ago, Sears was an unstoppable retail machine. What happened, and more importantly, what can we learn from the failure of a once-great American institution?
The hero of the saga is Richard Sears, who worked as a humble station agent in Minnesota in the 1880s while honing his business skills by selling lumber and coal on the side. A series of serendipitous encounters led him to partner with Alvah C. Roebuck and found the R.W. Sears Watch Company in Minneapolis, Minnesota. In 1893, they launched a catalog of jewelry and watches; two years later, they launched the soon-to-be iconic 532-page Sears catalog.
Sears went public in 1906, and by 1931 the company had achieved $180 million in annual revenue. Soon, the company was opening physical retail stores, introducing its own brands and even selling insurance through its Allstate subsidiary.
By 1969, Sears was the biggest retailer in the world. Around the same time, they teamed up with International Business Machines Corp., and for a short while, CBS Inc. to create what would become known as “Prodigy,” their pre-web online portal. The company built Prodigy on a private network outside of the Internet, but it offered some of the same features we enjoy today such as shopping, sports, weather, news, email and games.
The famous Sears catalog was discontinued in 1993, and Prodigy was sold off in 1996. Prodigy turned out to be a prodigiously ill-conceived investment, since Sears only received $200 million for a project into which it had sunk $1 billion.
By the close of the millennium, Sears was trying to return to its retail roots. Suddenly dependent on retail again, Sears’ interest in the web was reignited. It started selling electronics, office supplies, appliances, cookware, uniforms, toys, baby products and computers online at the same time that Amazon had only begun to offer video games, software and books.
Sears grew worried about Walmart, which had quickly become the biggest retailer in America by offering ultra-low prices, and that brings us to the denouement. On November 17, 2004, Kmart announced that it would purchase Sears for $11 billion. Edward Lampert, Kmart’s chairman and an alumnus of the Goldman Sachs Group Inc., spearheaded the plan. He left Goldman to start a hedge fund in 1988 at the age of 25, and had bought up Kmart’s debt in 2002. After gaining 53 percent stake in the company for under $1 billion, he helped field the merger. Naturally, he took the position of CEO.
Sears did not enjoy resuscitation for long. Though the stock rose slightly following the merger, the financial crisis in 2008 wiped out 85 percent of its value in less than a year. Sears never recovered.
In the meantime, Amazon was busy building its retail empire. While Sears faced falling revenue, Amazon’s quadrupled. They surpassed Sears in 2011 and lapped them in 2013. In 2016, Amazon saw $136 billion in sales, compared with Sears’ paltry $22 billion.
As with any tale of failure, there is a major lesson to be learned from the Sears story: Business leaders and entrepreneurs must never grow complacent. Sears had what was ostensibly a precursor to online shopping – the iconic Sears catalog – yet they failed to develop an online platform that carried anywhere near the same clout. They would not have just been Amazon – they could have been Amazon, Google, Facebook, Yahoo, Netflix and TWC combined.
By failing to stay fluid and adaptable to changes in technology, consumer preferences and their surrounding business climate, Sears fell into the trap of chasing competitors rather than remaining a leader in retail innovation. While it’s often unwise to chase the latest fads, business leaders and entrepreneurs must understand the seismic shifts in their industries and decisively adapt. Ignoring important trends will ensure both short-term and long-term struggles.
Time will tell the ultimate fate of Sears, but the same outcome does not necessarily need to befall those who understand the series of mistakes that put the retail giant in its grim situation.
Brian Hart is an award-winning financial communications consultant and founder of Flackable, a national public relations and digital marketing agency headquartered in Philadelphia. Follow Brian on Twitter at @BrianHartPR.
