Focus
Lo L Los os o ost st in Space st How management of the world’s two largest retailers in the last century, Sears and Kmart, lost their way by acquiring non-core businesses, failing to stay ahead of technological advances, and insulating themselves from criticism.
wo entrepreneurs, Sebastian S. Kresge and Richard W. Sears, each established storefronts and built them into the twin titans of retail during the last century. But today the merchants represent a sliver of their once immense size, having closed thousands of stores and leaving only a handful of locations scattered around the country. In fact, what became Sears, Roebuck and Co. and The Kresge Co. could be considered the retail innovators of the late 19th century, with both Sears and Kresge seen as that era’s Elon Musk and Jeff Bezos. The lesson for today’s high-fliers is that as invincible as they appear, a lack of innovation, flawed customer insights, and arrogance can conspire to bring the greatest companies to their knees. Sears’ business began to decline in the late 1980s when the company went on an acquisition spree, believing it could entice its millions of customers into other revenue-bearing services by leveraging brand affinity. The retailer acquired Allstate Insurance, Dean Witter Investment Services, and Coldwell Banker Real Estate, and launched the Discover Card. “They poured billions of dollars into these disparate businesses, which required an enormous amount of capital,” says Mark Cohen, director of retail studies and adjunct professor at the Columbia University Business School and former chairman and CEO of Sears Canada Inc. “The money came from the cash flow that they were harvesting from the retail business. While this diversion of energy, effort, and funds took place over a period of years, the stores received less investment and became less focused.” From 1984 through 1992, Kmart also caught the acquisition bug, purchasing Waldenbooks, Builder’s Square, Pace Membership Warehouse, Sports Authority, and Border’s Books and Music. Industry observers say Kmart shoppers were confused by the mixed signals: While Kmart was supposed to be a discounter, it had deals with glitzy names like designer Ralph Lauren and model Kathy Ireland. In addition, instead of running television spots, Kmart continued with Sunday supplements in major metropolitan newspapers despite declining circulation. Kmart was hobbled by its reluctance to invest in technology, as well.
CLOSEOUT Sears, Roebuck and Co. dominated the last century, and moved fairly quickly when retail demand shifted to emerging suburbs around the country. But by the mid-1980s, Sears became insulated and failed to keep up with fashion trends, while its store layouts failed to match newcomers like Target.
“Even though (Walmart founder) Sam Walton didn’t like computers, he liked what computers could do,” says Erik Gordon, clinical assistant professor at the University of Michigan’s Ross School of Business in Ann Arbor. “Walmart built this tremendous computer system that was designed to take costs out of the logistics process and to assure that stores had needed inventory. Kmart didn’t, believing a discount store couldn’t spend that kind of money on computers.” The benefit of Walmart’s investment in technology is borne out by the numbers. “In the 1980s, Kmart had a 20 percent gross margin on sales and Walmart, with its policy of everyday low prices, had a 10 percent gross margin on sales,” says Ivan Feinseth, chief investment officer at Tigress Financial Partners in New York. “However, Kmart did $75 a square foot in sales while Walmart was doing $175 a square foot in sales. Do the math; 20 percent times 75 is $15, 10 percent times 175 is $17.50. Walmart could turn inventory better.” In 2018, when both retailers were fading into obscurity, a report from Susquehanna International Group revealed that capital spending on store remodeling and e-commerce by Sears and Kmart in 2017 totaled 91 cents per square foot, compared to $8.12 at Kohl’s and $15.36 at Best Buy. To appreciate how far the companies fell, and why, lessons can be gleaned from their respective origins and the subsequent succession to the next generation of leadership teams.
ASSOCIATED PRESS
BY TOM BEAMAN
30 DBUSINESS || JULY - AUGUST 2022
030.Focus-LostInSpace.Jul.22.indd 30
6/16/22 2:01 PM
