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Sears: ‘A Battleship In a Bathtub’

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At lot has been made about some of the more questionable decisions by Sears Holdings’ CEO Eddie Lampert and how they may have contributed to the American icon’s imminent bankruptcy. Certainly, RSR partner Paula Rosenblum has been outspoken about the problems the company is facing both in RSR’s Retail Paradox Weekly, and more recently on Forbes online. But Sears’ current problems didn’t just crop up; in fact, watching Sears fail has been a little like watching a glacier melt, and it’s not hard to trace the beginnings of its downward spiral all the way back to the 1980’s. And it turns out that the story of those times is instructive for retailers who are trying to respond to the looming threat of Amazon today.

One of my oldest retail contacts is a person who was an assistant manager at a large Northern California Sears store in the 1980’s, and so I reached out to him to get his perspective on all the Sears news. When I called to ask, he snorted, “what took so long? Sears was like a battleship in a bathtub – it just couldn’t get turned around.” That comment begged for a followup, and so last weekend I interviewed him about his opinion, and the experiences that led him to it (because my friend is still in-industry, I’ll call him ‘Jack’).

Jack worked at a Sears store from the early 1980’s to the end of that decade. He was an assistant manager with responsibility over ‘Brand Central’ (as Jack explained, “their ‘big dog’ electronics and appliances department”); he later became the store’s Home Center manager (hardlines). In the beginning of the 1980’s, Walmart’s effect hadn’t really hit the company. “Sears had a ‘sale’ mentality that was really good. People would come to Sears because of the yellow ‘sale’ signs – the company was good at executing power buys and passing the savings on to consumers with big events such as the ‘Super Saturdays’ – people really looked forward to Sears promotions.”

The company still had a strong catalog business in the early ‘80’s (which in retrospect bears a lot of similarity to today’s Internet-enabled shopping experience), “but the company started to stray away from it, and towards the end of the 1980’s there was talk of getting rid of it completely”. The company finally shut down catalog operations in 1993, which at the time was hailed as a bold stroke by CEO Arthur Martinez that “gets us out of a number of unprofitable businesses and frees up the playing field for us to move forward". The decision turned out to be almost cosmically badly timed (web-based shopping emerged soon afterwards – and Amazon.com opened its digital doors in 1995).

But in the early ‘80’s the catalog was still a ‘thing’; customers could call an ‘800’ number, order their products, and either have them shipped directly to them or pick up the in store (much like today’s omnichannel “click & collect” option). According to Jack, catalog orders were always fulfilled at a DC, and if the customer chose to pick up in the store, there was no fee. As to how returns were handled, “I honestly don’t remember that ever happening”, said Jack, “shoppers trusted Sears’ products, and had a lot of confidence in what they were buying.”

In the early 1980’s, Sears gave store management some discretion over merchandising decisions, but that began to change by the mid-1980’s, when decision-making become much more centralized. “More decisions started coming from Chicago, and frankly that’s when problems really began”, said Jack. “A classic example was how bulk purchases were allocated to the stores. Chicago would buy big, just like other companies would, but then the product was distributed equally among the stores. Air conditioners were being shipped to San Francisco and snow blowers were being shipped to Modesto – it was ridiculous!” By the mid-1980’s assortments were highly standardized, an outcome of both management decisions and system limitations, according to Jack. “Management at the Chicago Tower just stopped reacting to local management, and getting localized offers into the store became very difficult – we could no longer react to what was happening in our local market.”

Another big change that happened in the 1980’s had to do with labor. “Salary was base plus commission”, said the veteran, “there was a very attractive commission structure in those days. You always knew when you shopped at Sears that you were getting the top quality sales people in the department store business. Especially in Appliances, those people knew their stuff and were paid handsomely. Some of those ‘cream of the crop’ sales people were making six-figure incomes with commissions.”

But Sears made a fateful decision in the late-1980’s that accelerated its downward trajectory. In 1988 (in response to the growing threat from Walmart), the company decided to switch its pricing philosophy from exciting promotions to every-day-low-price (or as Sears called it, “ESDP” – “every single day pricing”). “It seemed to happen overnight”, said Jack. “The stores were shut down for a day and a half, and all the yellow tag signs were pulled, and every price was changed – and the commissions were scaled way back, from 13, 14, 15% on some items to 3, 4, or 5%. And we started losing all of those quality sales people. Initially, the exodus was slow, but as the new commissions started to hit home, more people left – and now we had new minimum wage sales people who didn’t know what they were doing. We definitely saw it in our weekly sales.”

But according to the retailer, Sears dropped “ESDP” pretty quickly, and the company went back to “yellow tag” sales. “But it was a day late and a dollar short”, said Jack. “The good sales people were gone. In a very short space of time, Sears went from being the #1 retailer to #3, behind Walmart and Kmart.”

So, were any of these mistakes fatal? Said the Sears veteran, “’every-single-day pricing’ was absolutely fatal. People went to Sears for the sales, and suddenly that was gone. We couldn’t get Walmart to compete with our rules, so we tried to play by theirs. But trying to go against them on price just didn’t work – Walmart was just too big of an animal and had its infrastructure in place. Sears didn’t think that Walmart could expand into California where I was – and suddenly they were showing up in some of the outermost towns like Susanville and Eureka – and started moving towards the more urban areas. And that’s how they snuck in!”

If the company had been paying closer attention, it would have seen Walmart’s impact on catalog sales in areas near where Walmart opened its new stores. “But that’s interesting”, said Jack, “there were other factors that made it hard to see what was going on. Sears had teamed up with IBM and CBS to launch the Prodigy network in 1984 or ’85. The whole Internet thing was new – and we were really excited about it. If you were a Brand Central manager like me, you got a new IBM PS1 and a modem. But the catalog that was featured wasn’t even the Sears catalog – it was JC Penney’s catalog. We all thought, ‘you’ve gotta be kidding me!’” The chagrin seems well-founded; the Chicago retailer had a real chance to emphasize its brand with a then-cutting edge innovation, but instead undercut its own sales.

Jack was lured away from Sears by a supplier in 1989. “We were losing so many people at that point that all I was doing was hiring and firing. We brought on people with fewer and fewer qualifications, often at minimum wage, and it just wasn’t fun anymore. We got a lot more customer complaints, and sales were really suffering. It was very, very difficult.”

So, when Jack heard recently that Sears is planning to file for bankruptcy protection? “I wondered why it took so long? I honestly thought they’d go out 20 years ago – every year I wondered, ‘who is going to stop the bleeding?’”

Those Who Don’t Know History…

There’s a lot to unpack in the story of Sears’ demise, probably enough to keep MBA classes busy for years. But retailers don’t have to wait for the books to come out – there are many lessons to be learned right now. I’ve often said that the seeds of every company’s demise are sown years in advance of the doors closing forever. Failing to see the value proposition through consumers’ eyes, often unintelligible and heavy handed management decision-making, a failure to listen to the people “on the ground”, poor responsiveness to local conditions, rigid business processes and weak supporting systems, and passing on opportunities to be first at something – all of those play a part in Sears’ problems now. But the two things that stick out to me in the story my friend Jack told is (1) the company chose to compete according to rules established by a new challenger – instead of defining its own value proposition and absolutely “nailing it”, and (2), Sears treated its people – who turned out to be the company’s best asset, as an expense that could be squeezed.

As 18th Century Irish statesman Edmund Burke famously said, “Those who don't know history are doomed to repeat it.” Every retailer trying to get ahead in a world now dominated by Amazon, “the new” Walmart, Alibaba, and other Retailer Winners, should learn from the Sears story. The company didn’t need to fail – but it did need to turn to face the new competition. But it was just another “battleship in a bathtub” – and now it’s finally sinking.

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Articles & Opinions October 30, 2018
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