Once the greatest retailer in the modern world, Sears Roebuck, now saddled by debt and declining sales, filed for Chapter 11 bankruptcy on Oct. 15 after 125 years in business. The company was unable to pay $134 million in loans and announced it would close 142 unprofitable stores near the end of the year.
These closings are in addition to 46 others that were expected by next month. That will leave roughly 500 store locations. It is unclear whether the company will survive beyond the holiday season and the bankruptcy reorganization plan.
It was not always like that for the institution that was once regarded as America’s Everything Store. At the top of its game for decades, Sears was regarded as one of the best-managed retailers in the world. It accounted for more than 2 percent of all U.S. retail sales, selling everything from TVs to dresses to lawn mowers. The target customer was the average American, neither the richest nor the poorest 10 percent.
The often-overlooked thing about the company is that it was a technological wonder, the Amazon of its day. It pioneered supply chain management, store brands, catalogue retailing, and credit card sales, all of which are critical to the success of today’s most admired retailers.
Sears planted the seeds of its demise when it jumped from one strategy to another in the 1980s. For example, it acquired the financial services firm Dean Witter in 1981 and tried to sell investment products as well as power saws under the slogan “From Stocks to Socks”. Customers could not reconcile the new image with the old. Inconsistencies like these confused customers and undermined Sears’ credibility and reputation.
While the firm shed Dean Witter in the 1990s, another big challenge loomed. It had to deal with heightened competition from big-box stores such as Walmart and Target throughout the 1980s. Sears was late to grasp the power of discounting and later the rise of online shopping. The company failed to understand that retailing was changing and, like other old-economy, big-name retailers such as Toys “R” Us and A&P, it failed to change with the times.
In 2005 the company merged with Kmart, which was headed by hedge-fund manager Edward Lampert. He believed that merging the two firms, with a combined 355,000 employees and more than 3,500 stores in 2006, would make them strong. At the beginning of 2018, that workforce totaled less than 68,000 across fewer than 700 shops. The bankruptcy threatens to put these employees out of work and throw the financial security of its 100,000 pensioners into doubt.
Lampert’s strategy was to run the company like a hedge fund, cutting spending on advertising, inventory, and store improvements, as well as spinning off many of Sears’ best properties into a real estate trust he controlled. Over the past decade, the company sold or spun off many of its most valuable brands, such as Craftsman tools and Lands’ End clothing to stay afloat and pay the bills as it lost sales to Walmart, Target, Home Depot, and Amazon with its endless online catalog. All this hastened Sears’ decline.
The story of Sears’ demise is another cautionary tale about the ruthless process of creative destruction – new innovations driving out old ones. Once again an established company fell victim to the “creative destruction” – a term coined by Joseph A. Schumpeter, an economist working in the first half of the 20th century – of new entrepreneurs.
Technology and customer tastes change and provide opportunities for competitors, especially those regarded as “too small to worry about”, to develop new strategies that are better aligned with the altered industry landscape and ultimately eat established players’ lunch (and breakfast and dinner).
All in all, not a pretty story. One that once again proves that nothing is forever; not now, not ever.
Originally Published: October 21, 2018