Sears: A Case Study in Business Failure

For years, Mark Cohen ’71 warned that Sears was doomed.

An insider-turned-critic, Cohen once served as chief marketing officer and president of soft lines for Sears and as chairman and CEO of Sears Canada from 2001 to 2004. But he became a vocal opponent of new leadership that merged Sears with Kmart in 2005 and launched a campaign of cost-cutting.

“The hard and cold reality is that Sears Holdings will disappear,” Cohen wrote in Forbes in 2016. “The only question yet to be answered is when.”

On October 15 — a few months after the 125th birthday of what was once the world’s largest retailer — Sears Holdings sought Chapter 11 protection from a $134 million debt payment and announced it would close 142 stores. That’s on top of the 2600 Sears and Kmarts already sold or shuttered over the past decade.

Cohen, who is teaching the MBA classes “Creation of a Retail Enterprise” this fall and “Retail Fundamentals” in the spring, describes Sears as a case study in management failure with lessons for MBAs and business leaders. The following has been edited and condensed for clarity.

What discussions has the Sears saga sparked in your classes?

Cohen: It has been a topic for as long as I’ve been teaching at Columbia. I’ve been a vocal and consistent critic of Sears and Lampert [hedge fund billionaire Eddie Lampert, who took ownership in 2005 and became chief executive of Sears Holdings in 2013]. Of course, the topicality exploded when the rumors emerged that it was about to file for bankruptcy. I basically have been foretelling this for years. I’ve been saying that this would be a train wreck of some consequence sooner than later.

When did you first see that Sears faced real trouble?

Cohen: Retail, not unlike any industry you can think of, lives and dies based on its leadership. There are technology companies that live on the basis of patents and proprietary ideas, but at the end of the day a retailer lives and dies on the manner in which it assembles products and services that its customers will seek out, and does it in the context of an enterprise that is efficient and successful. In a large organization as Sears once was, this is a management challenge of enormous consequence, and it all boils down to leadership.

Alan Lacy [CEO from 2000 to 2005] was not up to the job when he was given it. Further, nothing that he did in the five years he was in the job convinced me that he was even able to learn how to become effective in his role. You’ve got to have a tremendous amount of experience and skill to navigate and lead an organization, particularly a large legacy-based organization that’s under tremendous challenge from competition and changes in the marketplace. If you’ve got appropriate leadership skills, then almost anything is possible. If you don’t, you’ve got nowhere to go.

What are the takeaways here for MBAs and business managers? What did Sears’ leaders lack?

Cohen: You have to be able to provide an enormous, powerful platform, which rests on five pillars: product, price, presentation, productivity, and people. This is what I say in all my courses, and what I stand behind as the underlying basis of retailing.

You have to be a champion on behalf of assortments of merchandise that will differentiate you from your competition and be of appeal to your customers. You have to find a pricing regime that resonates with your customers, whether it’s luxury or low-end discount, and that is defensible from a profitability point of view.

Presentation is a broad characteristic that is dependent upon the appeal that your stores provide — not only where they’re located, but how they’re designed, how they present themselves, how they’re managed, the condition in which they are maintained. If you’re talking about a web business or an omnichannel business, it’s the manner in which your web presentation dovetails with your physical space.

From a productivity point of view, you’ve got to be able to be profitable without the benefit of endless, ongoing, and mindless cost-cutting. You can’t cost-cut your way to success. You can solve near-term problems with reductions in force or disposal of unproductive assets. But from a mid- to long-term perspective, an organization can’t thrive in a constant cut mode, which is all that [former CEO] Lacy basically stood for.

And, of course, it is always all about people. There’s nothing in and of itself that a retailer, with very few exceptions, has in its grasp that is truly proprietary. For the most part, a general merchandise retailer is an assembler of other people’s products. And the organization that does that work has to be clearly, consistently, and constantly led so that to the customer, the store, and the website feels as if it’s the outcome of one person’s efforts, speaks with one voice, with tremendous congruency and consistency. That requires leadership.

Sears Roebuck lost its forward momentum. It had powerful brand opportunities by virtue of Kenmore and Craftsman, and to a lesser extend Diehard. And these brands just stopped dead in the water because the product development efforts and the marketing investments in those brands were whittled down by Lacy, who saw in them opportunities to save money rather than expand volume and market share.

Can you give an example of these cuts?

Cohen: Sears always had a technical laboratory based in its headquarter facilities in Chicago. This is a facility that tested virtually all Sears private label products, and some branded products that the company intended to sell, to be sure that the products were safe. Remember, Sears sold everything from chainsaws to gas ranges to tractors. The company was devoted to being sure that any claims made about performance, features, and benefits were, in fact, substantiated. It was not an inexpensive group, because it was a fairly important team of engineers and testing professionals.

But one day, Lacy closed the lab because it gave him an opportunity to save $7 million a year in operating expense. Soon after Lacy made this decision, Sears discovered that they had started to sell a gas-fired kitchen range that was dangerous in that with enough weight put on the oven door — the ubiquitous 25-pound Thanksgiving turkey — the entire unit could tip. It’s a small engineering feature that would have been caught in the lab. They had to recall everything that they had sold.

This is the kind of short-sighted stupidity that financial-based executives with no bigger sense of their responsibility make, to the eventual detriment of the organizations they lead.

Do you see any overlap in mistakes made by recently bankrupted retailers?

Cohen: They’ve all fallen based upon poor and, in some cases, outright incompetent leadership. Taking Toys “R” Us as an example, it had a clear line of sight to success when it was founded, because it was literally the only game in town for all things toys and all things baby. Nobody else had this all-encompassing, extraordinarily overpowering assortment.

But the management of Toys “R” Us got careless and stupid, especially when Walmart said, “We’re going to go after toys in a consequential way and use price as a tremendous differentiator.” Walmart started building toy departments with far more merchandise on its shelves and lowered prices in concert with its overall everyday low pricing strategy. For a couple of years, Toys “R” Us ignored them.

Lo and behold, as Walmart began to become increasingly successful in selling toys, Target followed suit. Then, of course, Target and Walmart started dealing with the toy manufacturers with the same kind of clout that Toys “R” Us had. Whereas Toys “R” Us always had the hot toy in whatever quantities it wanted, now it was third in line, in some cases, behind commitments being made by Walmart and Target.

What did Toys “R” Us management do? They basically did nothing. Did they improve the presentation of their stores? No. In fact, they presided over their stores becoming increasingly dirty, dingy, and disheveled. Because as they attempted to protect their profitability, they took out the support needed at store level to protect the franchise.

What other retailers are on your watch list?

Cohen: JC Penney is hanging on by its fingertips. It doesn’t have any short-term crises looming by way of debt, but it is operating under a very dense cloud of issues. JC Penney has just hired a new CEO from Joann fabric and craft stores. Wall Street is already opining that JC Penney has to demonstrate a turnaround starting this holiday. The new CEO just started, so her ability to influence their holiday performance is nil and none. Her first acts of leadership won’t be visible until mid-2019 at the earliest.

Macy’s is not in danger financially, but they don’t have a forward-looking operating strategy. It faces the challenge that all US department stores face: What do they represent that acts as a destination for customers? Do they have powerful private label brands? Well, not really. Do they hold the exclusive to powerful brands? Well, not really. Most of the powerful brands that Macy’s represents have verticalized and sell their own goods in their own stores. There’s no reason to believe that Macy’s is going to be here in 10 or 15 years unless they figure out a new way to go to market.

How can retailers avoid the Sears spiral?

Cohen: Your stores have to be great places to go to browse and transact. They have to be tremendously attractive to customers who make a driveway decision to head your way. A retailer has to stay healthy, as would be described by a customer, not just a shareholder. Anything they do to protect themselves financially that a customer would not view as attractive is a terrible mistake. Letting stores go to hell, taking sales associates off the floor, not pricing properly, not marketing aggressively… Your reputation is only as good as your customer’s last interaction with you.

The internet has brought to the marketplace an untethered universe of choices. Customers don’t have to shop locally. Increasingly, they can transact anywhere in the world. There’s a lot of competition on the web, and your website has to be really good-looking and it has to be architected well, since Amazon has set a gold standard via one-click shopping that customers expect universally. If you don’t appeal to customers on their own terms, they go somewhere else, because now they can.

Who in the retail industry is doing things right?

Cohen: Costco is one of the largest, most productive and profitable retailers in the world. Their seemingly unappealing warehouse box is actually of tremendous appeal. The people that founded Costco placed the company on very sound and solid pillars. And as big as they’ve gotten, they’ve never abandoned any of them or seen fit to cut any corners.

They have this incredible subscription base of customers who re-up every year, who don’t abandon them. And oh, by the way, Amazon’s Prime is a reflection of this powerful subscription model, where you create a cohort that’s really bound to you because they love doing business with you.

Costco does business with everyone from small business owners to individual consumers. They do business the old-fashioned way. They stand and deliver based on very carefully assembled assortments that are priced extremely attractively. They offer tremendous customer service. They staff their stores with people who long ago were paid a lot more than minimum wage, who have been offered benefits, who don’t leave their jobs as many do at other retailers, who are assigned specific geography inside the store, who know everything there is to know about what is in that geography. Their private label business, which is Kirkland Signature, offers enormously powerful values. And oh, by the way, their merchants are margin constrained, which is to say a Kirkland product, no matter how good a deal a merchant might make in the marketplace, must pass muster from a testing point of view, and may not command more than a 14.5 percent selling margin.

Costco has been opening stores all around the world for years. Walmart, in contrast, has failed internationally, repeatedly. Costco does its homework and gets it right. I really hold the company in very high esteem.

Is there any way that Sears still pulls through?

Cohen: Chapter 11 is built to remediate a company’s debt problem. This company has far more than a debt problem. This company doesn’t have an operating model. This company’s been insolvent for years from a normal operating point of view. And it’s been propped up by [owner and CEO Eddie] Lampert through an ongoing variety of unconventional machinations and schemes.

The fact is, from an operating point of view, the company’s been losing a fortune for almost 10 years. Nothing’s going to change that. If Sears makes it out of bankruptcy, it will go right back in within six to 12 months. And then it will never emerge. Because the illusion that Lampert has thrown up is nothing more than that. It’s an illusion.

What will be the epitaph on Sears’ headstone?

Cohen: This business should not have suffered and died as it did with Eddie Lampert at its helm.

Read the original piece on Columbia Business School’s Ideas and Insights blog.