Sears May Be Dying, but American Retail Is Not

Andrew Zirkle | @71RAndrewZirkle

The concept of what it means to be an American has changed a lot since its inception nearly two and a half centuries ago. One of the most drastic changes, brought upon by the industrial age and a capitalist mentality, is the concept of consumerism, which has entrenched itself into the lives of nearly all Americans. The largest single facilitating entity behind this rise of consumerism throughout the 20th century was catalog company-turned-retailer Sears, Roebuck and Company, better known today as Sears. Although now a shadow of its former self, Sears was the largest retailer in America until 1990 when it was passed by Walmart. Even though Sears is still a well-known brand, it’s better known for its prolonged struggle through bankruptcy court and its controversial “former” CEO, Eddie Lampert, who is still very much in control of the brand.

Although it seems logical to blame the downfall of Sears on its failed 2005 merger with Kmart, along with incompetent management and the financial crash of 2008, the truth is much more complex than that. In the late ’80s and early ’90s, Sears was actually well-positioned to become the dominant retail force in the 21st century before backward-thinking management sold their advantages away. This slow-motion-trainwreck of a story is more than just Sears and Eddie Lampert. It’s Amazon, Walmart, the internet, the Great Recession, and a three-decade head start that Sears had over the rest of American retail. Sears may have lost the title of America’s consumerism champion, but it can’t stop us from looking at the current landscape and wondering what could have been.

Amazon: The Online Titan

The widespread adoption of the internet as a tool for consumers has changed the defining characteristics of a successful business model in the retail market. The economic downturn of 2008, along with the factors associated with the rise of the internet and new consumer behaviors, compounded to cause downfall for many over-sized retail chains that were offering a traditional retail experience. Simultaneously, these market forces allowed chains with adaptive retail strategies to grow rapidly, while also providing an environment for internet-only retail companies to dominate the market and even expand their brands into physical brick-and-mortar stores.

According to the Census Bureau, online retail sales have grown from a relatively meager 4% of retail sales in 2009 to nearly 10% in 2019. This gap of online versus traditional sales is expected to continue to close, as online retail sales are currently growing at nearly three times the rate of traditional retail sales. This trend is expected to continue, as, among the American adult population, smartphone ownership rates continue to rise, internet usage rates are nearing 90%, and shipping rates and selection continues to improve in the online realm of retail. As online retail companies refine their business models and bring on more third-party vendors, their customer bases will continue to grow due to a more diverse selection and an increase in brand familiarity.

Brick and mortar retailers are being forced to develop new strategies when it comes to maintaining growth, including investing in online infrastructure in order to challenge online retailers and to take advantage of the growing numbers of American consumers who are choosing to shop online. The champion of these new online retailers, Amazon, was created by a former Wall Street executive, Jeff Bezos, in 1994, and was planned to initially be an online bookstore. As the scale of internet usage began to increase and the profitability of internet sales became apparent, investors flocked to Amazon, and it began to quickly grow past just book sales.

Throughout the mid and late 2000s, Amazon was able to secure its dominance in the online retail space, becoming the largest wholly online retail company in both sales and revenue. The only semblance of competition that existed in the online marketplace was eBay. However, the more centralized sales system of Amazon made it more appealing to both investors and customers. As the new decade rolled around, Amazon began to develop its own set of products and services. It has developed its own print publishing arm, TV and movie studio, and electronics line. They have also invaded the physical retail space by buying out Whole Foods as well as creating a number of “Amazon Go” grocery stores and “Amazon 4-Star” retail outlets. After surviving the dot com crash of the early 2000s, Amazon has experienced nothing more than small road bumps on their way towards dominance of the fastest-growing retail marketplace in the world: the internet.

The Rise From Bookstore to Marketplace

The success of Amazon appears to have been caused by the rise of the internet, as well as a change in consumer habits, which led to a tremendous alteration of the viability of various retail tactics. The rise of internet usage, specifically among consumers looking to purchase goods online, has been one of the largest driving factors behind the rise of companies like Amazon and eBay that limit themselves to online-only operations. In Amazon’s case, there were a number of other positive factors associated with its internet-only operations. Amazon did not have to purchase or lease any retail space in order to make sales. Instead, Amazon only needed to spend money on distribution warehouses and corporate infrastructure. Amazon also didn’t need retail staff to facilitate sales and maintain brick-and-mortar storefronts. This new business model allowed Amazon to avoid many of the costs associated with physical retail, allowing for a higher profit margin on goods sold.

In its early days, Amazon passed off the cost of delivery to the consumer, as many consumers would buy products at a marked-up price in exchange for not having to leave their home to shop. Although there were many benefits to the online retail realm, there were some glaring downsides. In the early days of online shopping, many older and less internet-savvy consumers were hesitant to use a credit card to purchase goods online, especially from an untrusted brand that existed nowhere but the internet. However, as online shopping became more common throughout the mid-2000s, fears regarding credit card scams from online retailers such as Amazon began to disappear. Amazon slowly began to build a brand image and positive reputation around its business model, which allowed it to expand from exclusively book retail to general retail and then again to a model that included first-party products and services including Kindle and Amazon video services. In just two decades, Amazon transformed from an entity confined to selling books to a catch-all retailer capable of engaging in markets that traditional retailers cannot participate in.

Walmart: The Brick-and-Mortar Juggernaut

Ever since its expansion out of the Mid-West and American South, Walmart has become a staple in the landscape and one of the largest corporate entities in the United States. With nearly $514.4 Billion dollars in revenue in FY2019 and over 11,000 stores, Walmart has achieved universal brand recognition with most low- and middle-class Americans. Although Walmart has been around since the 1960s, their brand has been continuously updated and their business model has evolved, allowing them to minimize the impact of the radical change in consumer practices presently occurring. Walmart has been introducing smaller stores, better online services, and a focus on food in order to outmaneuver its retail competition and ensure that it stays the number one catch-all retail choice for most Americans. Walmart is also notorious for its low wages and lack of employee benefits, practices that they have since doubled down on in an attempt to undercut expenses at physical locations, which is an issue that online retailers don’t have to deal with.

The success of Walmart has become apparent to investors and consumers alike in the form of tangible metrics, which paint a clear picture of the success Walmart is currently having. Walmart’s net total revenue worldwide has increased in all but one year since 2006. The number of Walmart stores has increased by nearly 400 in the same time-frame. In nearly every measurable area, Walmart’s business model has produced consistent results, allowing them to diversify their offerings. Walmart has also been expanding its business model past what is traditionally expected in the retail world. Food sales have transformed the company, accounting for nearly 200 billion dollars in sales, making Walmart the largest food retailer in the United States by volume. Initially, food was not a central focus of Walmart. However, as the brand has taken hold nationwide, food has become an increasingly central focus for the brand, especially in rural areas where traditional chain grocers have struggled to take hold. Food has become such a cornerstone for Walmart that they have begun to implement food-only stores as well as new infrastructure aimed at improving their food delivery services.

An Expansion From Physical to Digital

In addition to a growing focus on food, Walmart has also begun to challenge Amazon in the online realm. Walmart has had an online presence for a long time. However, they have not put much focus on it until recently. In 2017, Walmart’s online sales grew by 33% while its in-store sales only grew 2.1%, signaling that the returns brought in from improvements to its brick-and-mortar operations were drastically outpaced by the improvements to their online retail operations. Recently, Walmart has been focusing its advertising on elements of its online presence, including its smartphone applications, its home delivery services, and its online ordering for in-store pickup. This new focus has allowed Walmart to retain its established retail reputation while simultaneously adding elements of convenience in the online marketplace to its brand image.

Walmart has almost always been a trusted brand, which allowed its online marketplace to be instantly trusted by consumers who may have been otherwise suspicious about shopping online. Walmart has also diversified its services past just retail and grocery. They have started to offer credit and financial services, as well as cellular service, vehicle repair, and refueling services. This new broader range of services being offered by Walmart has allowed them to wrench more profit from consumers by using their existing retail popularity to hook customers on the new services they’ve added. These new services being offered are usually cheaper than the alternative offered by specialized vendors and are perceived by many consumers as convenient, as they already rely heavily on Walmart for grocery and retail.

Overall, Walmart’s transition to grocery, specialized services, and a hybrid-online approach has allowed them not only to remain competitive with Amazon but has also allowed them to outperform competitors by becoming a cornerstone of consumption for low- and middle-class Americana. Although online competitors will continue to challenge Walmart, it appears as though they have made the necessary changes to ensure that they remain a step ahead of their online counterparts as well as their lagging physical retail competition.

Sears: The Dying Giant

Sears once owned the throne of American consumerism that Walmart and Amazon now sit atop of. Its once far-reaching brand had a long and treacherous fall from grace starting in the late ’80s, despite being perfectly set up to become the dominating force in retail in the 21st century. Backward-thinking executives and upper-level management at Sears caused them to lose all the valuable tools and assets they had to expand their business past just basic retail and appliances in physical store locations. Sears began as a catalog company with no physical retail locations from its foundation in 1892. Its first retail location was opened in 1925. From there, Sears began to grow into the largest retail company in the United States and continued to grow past just retail and into other areas.

Sears’s first exploration into areas other than retail began when they founded Allstate Insurance Company as a subsidiary in 1931. Sears began to heavily invest in the growth of Allstate and by 1989, it has become one of the largest insurers in America, with 27.2 million policies in force. Starting in the late 1980s and early 1990s, Sears began to expand even more past retail into finance, real estate, and the burgeoning internet industry. In 1981, Sears acquired the 5th largest brokerage firm in America, Dean Witter Reynolds. Following this acquisition, in 1985, Sears merged Dean Witter Reynolds with a newly created subsidiary, Discover Financial. Discover was created with the aim of offering credit card services along with a wide range of other consumer financial services. In addition to Discover and Dean Witter Reynolds, Sears also acquired real estate giant Coldwell Banker in 1981. All three subsidiaries were operated under the banner of Sears Financial Services and despite initial difficulties relating to structuring, Sears eventually stabilized the subsidiaries and was able to integrate these new corporate elements with their business model in a rather successful manner.

By 1992, Sears financial services accounted for a quarter of Sears $1.3 billion in profits despite only representing 10% of revenue. In addition to financial services and insurance, Sears began to invest heavily in internet technology, partnering up with CBS, IBM, and AT&T to form the online service and internet service provider Prodigy Communications in 1984. Sears sank nearly 1 Billion dollars into the project and by 1990, it was the second-largest internet service provider in America with nearly 465,000 customers. Despite the efforts Sears was taking to diversify its business model and expand available services to its customers, investors began to get cold feet. By 1990, Sears had been eclipsed by retail giants Walmart and Kmart in domestic revenue, meaning for the first time in the 20th century, Sears was no longer the largest retailer in America by revenue. Sears was also struggling in other areas like consumer electronics and hardware, where specialized retailers like Circuit City and Home Depot began to gain the faith of consumers due to their wider section and product specialization.

The Beginning of the End

Other issues began to crop up for Sears in the form of finances. By 1992, it was clear to investors that Sears was hurting due to high operations costs and dwindling growth in revenue. Additionally, their credit rating was lowered by both Fitch’s Investor Service and Moody’s Investor Service due to “weaken[ed]… financial flexibility.” Investors began to worry over the operating cost of Sears and, despite strong sales, discount and specialized retailers that were able to keep operating costs low and profit margins high were much more appealing to investors than a retail revenue behemoth like Sears. Even though its non-retail assets were growing and, in most cases, outperforming merchandise sales, Sears began to sell off many of its non-retail assets to please investors and reduce debt. The companies under Sears Financial Services were the first to go. In 1993, Coldwell Banker, Dean Witter Reynolds, and Discover Financial were spun off from Sears. Allstate was next, and after nearly 65 years of ownership under Sears, it was spun off in 1995. Finally, in 1996, Sears sold their interests in Prodigy to Mexican business tycoon Carlos Slim Helu for less than $200 million, a fraction of what they had invested into the venture. Sears also began phasing out its catalog program throughout the mid to late nineties due to its high operating cost and diminishing sales.

By 2000, Sears was left with its main retail brand and its exclusive product brands, like Kenmore, Craftsman, and Lands’ End. Sears continued to struggle into the new century with a relatively unchanged mission and corporate structure until 2005, when CEO of struggling Kmart Holding Corporation, Eddie Lampert, announced it would buy Sears and Roebuck Co. for $11 billion. Kmart had just gone through a chapter 11 bankruptcy and was looking for ways to increase their market capitalization and acquiring one of their main competitors was expected to help. Kmart Holding Corporation changed its name to Sears Holding Corporation after the merger, and upper management began efforts to integrate the supply chains of both Sears and Kmart. Sears continued to lose ground to Walmart, other specialty stores, and by the late-2000s, online retail.

Sears upper management was clearly aware of the problem, as it was frequently mentioned in yearly reports and other communications with investors. However, Sears never made more than a token effort at online retail. The 2008 recession worsened the decline of Sears, forcing management to start the closure of stores. By 2010, the situation had gotten so bad that Sears was no longer turning a profit and from 2011 until 2016, Sears bled nearly $10.5 billion due to missed sales targets and high operating costs. Sears CEO Eddie Lampert has been in damage control mode to stop their recent tailspin; however, Sears had to sell off valuable assets like Lands’ End, Craftsman, and Kenmore and has had to close its extensive operations in Canada to avoid going under. Although these actions have prevented bankruptcy in the short term, the fix is only temporary, and Sears will continue to remain unprofitable in their current state due to past actions.

The New Reality of American Retail

Although Sears appears to be beyond saving now, there was a time where Sears was poised to retain its top spot in retail and its stability into the digital age. Sears had one of the most comprehensive distribution networks of any retailer in the early ’90s, mainly due to the capital they had invested in for the delivery operations associated with their catalog. As Sears began to consolidate its operations strictly around retail, they began to lose distribution flexibility that would have benefited the company immensely in a large-scale transition to online retail. Had Sears maintained its distribution network that propped up its catalog program into the 2000s, Sears would have been able to quickly transition into the emerging online retail market with a leg up on startups like Amazon due to its brand legacy and extensive distribution capabilities.

Sears also hurt itself in the mid-nineties when it chose to divest itself of its large range of non-retail services to focus explicitly around appliances, apparel, jewelry, hardware, and consumer electronics. Many of these aspects of retail were already being offered at lower prices by discount store competitors. However, Sears’ insurance, credit, and internet offerings were unrivaled by its competition. Many of the companies that Sears chose to spin off like Coldwell Banker, Discover Financial, and Allstate generate immense amounts of revenue today and, in their current state, earn enough revenue to cover much of Sears’ recent financial deficits.

Walmart, the current industry leader in retail, is expanding into financial services and cellular data service and reaping the profits from both lucrative industries. Sears was on the forefront of providing internet access in the mid-90s, a title which none of its competitors could come close to, and despite having this advantage, Sears reduced themselves to a retail-centric approach that its competitors were better at. Sears should have taken the short-term risk and loss associated with retaining its diverse offerings instead of caving to the cold feet of their investors.

What Could Have Been Done

Moving into the 2000s, they could have worked on integrating these new services into their brand and by the mid-2000s, they could have been offering a robust set of non-retail series that exceeds the non-retail services Walmart offers currently. From the early ’90s to the early 2010s, Sears upper management has done nothing but sell off the aspects of its company that differentiated it from its retail-centric competitors. Sears was unable to reduce the cost of its retail endeavors and was not effective at garnering sales, causing it to lose ground to its competitors and lose credibility among investors.

Throughout the 2000s, Sears dropped from the 4th largest retailer to the 31st largest, and their overall sales and same-store sales have dropped every year since their merger with Kmart in 2005. Sears’ strategy has not been successful and, had they held on to their non-retail assets and participated in the early adoption of the online marketplace, their style of retail and their level of success may have resembled Walmart and Amazon. Sears’ current bankruptcy and continual decline indicates that it may be too late to save Sears. However, its mistakes can serve as a valuable lesson to other companies that are seeking to consolidate and unwilling to evolve to the changing times.

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