Let Sears Go! No Subsidies, and Sell the Stock. Invest in Groupon


Sears is threatening to move its headquarters out of the Chicago area.  It’s been in Chicago since the 1880s.  Now the company Chairman is threatening to move its headquarters to another state, in order to find lower operating costs and lower taxes. 

Predictably “Officals Scrambling to Keep Sears in Illinois” is the Chicago Tribune headlined.  That is stupid.  Let Sears go.  Giving Sears subsidies would be tantamount to putting a 95 year old alcoholic, smoking paraplegic at the top of the heart/lung transplant list!  When it comes to subsidies, triage is the most important thing to keep in mind.  And honestly, Sears ain’t worth trying to save (even if subsidies could potentially do it!)

“Fast Eddie Lampert” was the hedge fund manager who created Sears Holdings by using his takeover of bankrupt KMart to acquire the former Sears in 2003. Although he was nothing more than a financier and arbitrager, Mr. Lampert claimed he was a retailing genius, having “turned around” Auto Zone. And he promised to turn around the ailing Sears. In his corner he had the modern “Mad Money” screaming investor advocate, Jim Cramer, who endorsed Mr. Lampert because…… the two were once in college togehter.  Mr. Cramer promised investors would do well, because he was simply sure Mr. Lampert was smart.  Even if he didn’t have a plan for fixing the company.

Sears had once been a retailing goliath, the originator of home shopping with the famous Sears catalogue, and a pioneer in financing purchases.  At one time you could obtain all your insurance, banking and brokerage needs at a Sears, while buying clothes, tools and appliances.  An innovator, Sears for many years was part of the Dow Jones Industrial Average.  But the world had shifted, Home Depot displaced Sears on the DJIA, and the company’s profits and revenues sagged as competitors picked apart the product lines and locations.

Simultaneously KMart had been destroyed by the faster moving and more aggressive Wal-Mart.  Wal-Mart’s cost were lower, and its prices lower.  Even though KMart had pioneered discount retailing, it could not compete with the fast growing, low cost Wal-Mart. When its bonds were worth pennies, Mr. Lampert bought them and took over the money-losing company.

By combining two losers, Mr. Lampert promised he would make a winner.  How, nobody knew.  There was no plan to change either chain.  Just a claim that both were “great brands” that had within them other “great brands” like Martha Stewart (started before she was convicted and sent to jail), Craftsman and Kenmore. And there was a lot of real estate.  Somehow, all those assets simlply had to be worth more than the market value.  At least that’s what Mr. Lampert said, and people were ready to believe.  And if they had doubts, they could listen to Jim Cramer during his daily Howard Beale impersonation.

Only they all were wrong.

Retailing had shifted.  Smarter competitors were everywhere.  Wal-Mart, Target, Dollar General, Home Depot, Best Buy, Kohl’s, JCPenney, Harbor Freight Tools, Amazon.com and a plethora of other compeltitors had changed the retail market forever.  Likewise, manufacturers in apparel, appliances and tools had brough forward better products at better prices.  And financing was now readily available from credit card companies. 

Surely the real estate would be worth a fortune everyone thought.  After all, there was so much of it.  And there would never be too much retail space.  And real estate never went down in value.  At least, that’s what everyone said.

But they were wrong.  Real estate was at historic highs compared to income, and ability to pay.  Real estate was about to crater.  And hardest hit in the commercial market was retail space, as the “great recession” wiped out home values, killed personal credit lines, and wiped out disposable income.  Additionally, consumers increasingly were buying on-line instead of trudging off to stores fueling growth at Amazon and its peers rather than Sears – which had no on-line presence.

Those who were optimistic for Sears were looking backward.  What had once been valuable they felt surely must be valuable again.  But those looking forward could see that market shifts had rendered both KMart and Sears obsolete.  They were uncompetitive in an increasingly more competitive marketplace.  As competitors kept working harder, doing more, better, faster and cheaper Sears was not even in the game.  The merger only made the likelihood of failure greater, because it made the scale fo change even greater. 

The results since 2003 have been abysmal.  Sales per store, a key retail benchmark, have declined every quarter since Mr. Lampert took over.  In an effort to prove his financial acumen, Mr. Lampert led the charge for lower costs.  And slash his management team did – cutting jobs at stores, in merchandising and everywhere.  Stores were closed every quarter in an effort to keep cutting costs.  All Mr. Lampert discussed were earnings, which he kept trying to keep from disintegrating.  But with every quarter Sears has become smaller, and smaller.  Now, Crains Chicago Business headlined, even the (in)famous chairman has to admit his past failure “Sears Chief Lampert: We Ought to be Doing a Lot Better.”

Sears once built, and owned, America’s tallest structure.  But long ago Sears left the Sears Tower.  Now it’s called the Willis Tower by the way – there is no Sears Tower any longer.  Sears headquarters are offices in suburban Hoffman Estates, and are half empty.  Eighty percent of the apparel merchandisers were let go in a recent move, taking that group to California where the outcome has been no better. Constant cost cutting does that.  Makes you smaller, and less viable.

And now Sears is, well….. who cares?  Do you even know where the closest Sears or Kmart store is to you?  Do you know what they sell?  Do you know the comparative prices?  Do you know what products they carry?  Do you know if they have any unique products, or value proposition?  Do you know anyone who works at Sears?  Or shops there?  If the store nearest you closed, would you miss it amidst the Home Depot, Kohl’s or Best Buy competitors?  If all Sears stores closed – every single location – would you care? 

And now Illinois is considering giving this company subsidies to keep the headquarters here?

Here’s an alternative idea. Using whatever logic the state leaders can develop, using whatever dream scenario and whatever desperation economics they have in mind to save a handful of jobs, figure out what the subsidy might be.  Then invest it in Groupon.  Groupon is currently the most famous technology start-up in Illinois.  Over the next 10 years the Groupon investment just might create a few thousand jobs, and return a nice bit of loot to the state treasury.  The Sears money will be gone, and Sears is going to disappear anyway.  Really, if you want to give a subsidy, if you want to “double down,” why not bet on a winner?

It really doesn’t have to be Groupon.  The state residents will be much better off if the money goes into any  business that is growing.  Investing in the dying horse simply makes no sense.  Beg Amazon, Google or Apple to open a center in Illinois – give them the building for free if you must.  At least those will be jobs that won’t disappear.  Or invest the money into venture funds that can invest in the next biotech or other company that might become a Groupon.  Invest in senior design projects from engineering students at the University of Illinois in Chicago or Urbana/Champaign.  Invest in the fillies that have a chance of winning the race!

Sentimenatality isn’t bad.  We all deserve the right to “remember the good old days.”  But don’t invest your retirement fund, or state tax receipts, in sentimentality.  That’s how you end up like Detroit.  Instead put that money into things that will grow.  So you can be more like silicon valley.  Invest in businesses that take advantage of market shifts, and leverage big trends to grow.  Let go of sentimentality.  And let go of Sears.  Before it makes you bankrupt!

 

You gotta move beyond your “base” – expand beyond your “brand”

What is a brand worth?  Do you spend a lot of time trying to "protect" your brand?  A lot of marketing gurus spent the last 20 years talking about creating brands, and saying there's a lot of value in brands.  Some companies have been valued based upon the expected future cash flow of sales attributed to a brand.  Folks have heard it so often, often they simply assume a recognized name – a brand – must be worth a lot.

But, according to a Strategy + Business magazine article, "The trouble with brands," brand value isn't what it was cracked up to be.  Using a boatload of data, this academic tome says that brand
trustworthiness has fallen 50%, brand quality perceptions are down 24%,
and even brand awareness is down 20%.  It turns out, people don't think very highly of brands, in fact – they don't think about brands all that much after all. 

And according to Fast Company in the article "The new rules of brand competition" the trend has gotten a lot worse.  It seems that over time marketers have kept pumping the same message out about their brands, reinforcing the  message again and again.  But as time evolved, people gained less and less value from the brand.  Pretty soon, the brand didn't mean anything any more.  According to the  Financial Times, in "Brands left to ponder price of loyalty," brand defection is now extremely common.  Where consumer goods marketers came to expect 70% of profits from their most loyal customers, those customers are increasingly buying alternative products.

Hurrumph.  This is not good news for brand marketers.  When a company spends a lot on advertising, it wants to say that spend has a high ROI because it produces more sales at higher prices yielding more margin.  Brand marketers knew how to segment users, then appeal to those users by banging away at some message over and over – with the notion that as long as you reinforced yourself to that segment you'd keep that customer.

But these folks ignore the fact that needs, and markets, shiftWhen markets shift, a brand that once seemed valuable could overnight be worth almost nothing.  For example, I grew up thinking Ovaltine was a great chocolate drink.  Have you ever heard of Ovaltine?  I drank Tang because it went to the moon, and everyone wanted this "high-tech" food with its vitamin C.  When was the last time you heard of Tang?  It was once cache to be a "Marlboro Man" – rugged, virile, strong, successful, sexy.  Now it stands for "cancer boy."  Did the marketers screw up?  No, the markets shifted.  The world changed, products changed, needs changed and these brands which did exactly what they were supposed to do lost their value.

Lots of analysts get this wrongBillions of dollars of value were trumped up when Eddie Lambert bought Sears out of his re-organized KMart.  But neither company fits consumer needs as well as WalMart or Kohl's for the most part, so both are brands of practically no value.  People said Craftsmen tools alone were worth more than Mr. Lampert paid for Sears – but that hasn't worked out as the market for tools has been flooded with different brands having lifetime warranties — and as the do-it-yourselfer market has declined precipitiously from the days when people expected to fix their own stuff.  So a lot of money has been lost on those who thought KMart, Sears, Craftsman, Kenmore, Martha Stewart as a brand collection was worth significantly more than it's turned out to be.  But that's because the market moved, and people found new solutions, not because you don't recognize the brands and what they used to stand for.

Every market shifts.  Longevity requires the ability to adapt.  But brand marketers tend to be "purists" who want the brand to live forever.  No brand can live forever.  Soon you won't even find the GE brand on light bulbs.  That's if we even have light bulbs as we've known them in 15 years – what with the advent of LED lights that are much lower cost to operate and last multiples of the life of traditional bulbs.  GE has to evolve – as it has with jet engines and a myriad of other products – to survive.

Think for a moment about Harley Davidson.  Once, owning a Harley implied you were a true rebel.  Someone outside the rules of society.  That brand position worked well for attracting motorcycle riders 60 years ago.  As people aged, many were re-attracted to the "bad boy" image of Harley, and the brand proliferated.  A $50 jacket with a Harley Davidson winged logo might sell for $150 – implying the branding was worth $100/jacket!!  But now, the average new Harley buyer is over 50 years old!  The market has several loyalists, but unfortuanately they are getting older and dying.  Within 20 years Harley will be struggling to survive as the market is dominated by riders who are tied to different brands associated with entirely different products.

If you see that your sales are increasingly to a group of "hard core" loyalists, it's time to seriously rethink your future.  Your brand has found itself into a "niche" that will continue shrinking.  To succeed long-term, everything has to evolve.  You have to be willing to Disrupt the old notions, in order to replace them with new.  So you either have to be willing to abandon the old brand – or cut its resources to build a new one.  For example, Harley could buy Ducati, stop spending on Harley and put money into Ducati to build it into a brand competitive with Japanese manufacturers.  This would dramatically Disrupt Harley – but it might save the company from following GM into bankruptcy.

The marketing lore is filled with myths about getting focused on core customers with a targeted brand.  It all sounded so appealing.  But it turns out that sort of logic paints you into a corner from which you have almost no hope of survival.  To be successful you have to be willing to go toward new markets.  You have to be willing to Disrupt "what you stand for" in order to become "what the market wants."  Think like Virgin, or Nike.  Be a brand that applies itself to future market needs – not spending all its resources trying to defend its old position.

Don't forget to download the new ebook "The Fall of GM" to learn more about why it's so critical to let Disruptions and White Space guide your planning rather than Lock-in to old notions.