Introduction
In the last three decades, the world has experienced the fall of multinational corporations that once dominated the business world. In many instances, the collapses were associated with a failure to innovate, poor leadership, the mismanagement of resources, and too much diversification. For instance, the decline of companies such as Kodak, HMV, and Nokia changed the business landscape because they were dominant in their respective industries. The United States’ retail industry has experienced its share of unexpected corporate failures. One such example is the decline of the once-largest retailer in the world, Sears.
Sears Holdings is an American retailer that was founded in 1892, and has been operational for over a century. Initially, it operated as a mailing company, but converted into a retailer in 1925. The company has undergone numerous financial challenges that culminated in its sale to Kmart in 2005. The merger led to the formation of Sears Holdings, under which it now operates. The decline of Sears came as a shock to the business world because it was the largest retailer in the world in the 1980s.
In three decades, it was overtaken by other firms, and in 2018, it was ranked as the 31st-largest retailer. The company experienced several years of dwindling sales and marginal profits, and in 2018, it filed for Chapter 11 bankruptcy (Gray, 2019). Even though the company won the bankruptcy auction, several stores were closed and many people lost their jobs. Its decline can be attributed primarily to several strategic mistakes, including diversification, corporate merger with Kmart, and poor management.
Company History and Strategy
Sears was founded in 1892 by Richard Warren Sears and Alvah Curtis Roebuck as a mailing company situated in Chicago, Illinois. As the company grew, it faced stiff competition from departmental stores in the city. As a result, the founders decided to build their retail stores that had three distinct features: an innovative store design, a unique product mix, and they were located away from shopping complexes (Edgecliffe-Johnson, 2018). The success of the first location led to the opening of more stores across the United States. In all instances, they were located away from the cities’ shopping districts.
The company departed from the culture of following fashion trends, and instead, focused on providing goods and services based on practicality and durability. The customers could walk into the store and do their shopping without the assistance of a clerk. This model increased the company’s acceptance among the people, and its catalog became a standard in the retail industry (Gray, 2019).
Between 1920 and 1950, the company increased its presence across America, Mexico, and Canada, and became a dominant force in the mail-order industry (Edgecliffe-Johnson, 2018). After World War II, they opened stores in malls and suburban locations. The company’s diversification strategy was implemented in the 1930s following the formation of the Allstate Insurance Company. Over the years, it has created famous brands such as DieHard, Toughskins, Kenmore, and Silvertone among others.
The company was at its best in the 1970s, a period during which it built the world’s tallest building in Chicago and expanded immensely. However, its decline began in the 1980s, owing to its move to diversify into non-retail entities (Gray, 2019). The purchase of Dean Witter and Coldwell banker, as well as the launch of Prodigy and Discover credit card shifted the management’s attention from the core retail business to the new ventures that needed more devotion and resources (Edgecliffe-Johnson, 2018). This loss of focus allowed its competitors to gain more ground in the retail industry and expand their market shares. As a result, Walmart became the largest retailer in the US in 1990, signaling a weakened market share for Sears.
To remedy the situation, the company began to let go of several of its non-retail divisions because they were affecting its profits negatively. For instance, it lets go of its financial services entity and sold its business that majored on the construction of malls (Klingel, 2018). In 1996, it bought Orchard Supply Hardware and founded The Great Indoors, a company that offered home improvement goods and services (Edgecliffe-Johnson, 2018).
This loss of focus led to a decline in sales and profits, and as a result, the catalog was discontinued and more than 50,000 people lost their jobs. About ten years ago, the company operated more than 3,500 stores. However, that number has decreased to about 182 locations, and a $26 billion dollar drop in sales between 2010 and 2017 (McDowell, 2020). The changing retail landscape that was characterized by technological advancement and fickle customer behavior led to its decline.
Reasons for the Failure
Diversification
The major strategy that Sears implemented in its business model was diversification; this same strategy led to its downfall. Before the company came under the leadership of Lampert, it had struggled for several years. It was famous for its DieHrad, Kenmore, and Craftsman brands that were responsible for its dominance in the retail industry (Thomas & Hirsch, 2018). These brands mainly attracted male shoppers, and Sears thought it wise to diversify its services to cater to the female demographic. The launch of “The Softer Side of Sears’ was aimed at appealing to female consumers (Thomas & Hirsch, 2018). The company’s management team thought that this ad campaign would widen its customer base by attracting women and back-to-school shoppers (Klingel, 2018).
However, there was a stark contrast between the clothes they introduced and the other products that they were selling. That move complicated its merchandising model confused the shoppers even more (Thomas & Hirsch, 2018). Internally, the ad campaign was frowned upon because it failed to achieve the intended goals. Many insiders described it as a sign that the company was heading toward the wrong direction.
Furthermore, Sears diversified its operations to include insurance, real estate, banking, and investments. For many years, the company operated as a household goods retailer before incorporating other services in its portfolio. As mentioned earlier, the diversification into non-retail entities beginning in the 1980s could have heralded its decline (Siemaszko, 2018). For example, the launch of Prodigy and Discover credit card diverted significant amounts of resources from the core retail business, thus allowing competitors to take away their customers (Thomas & Hirsch, 2018). Critics cite this move as the main reason for the company’s decline because it diverted its focus from its core business that had pushed to become the largest retailer in the United States (Colvin, G., & Wahba, 2019).
During this time, Sears’ competitors such as Home Depot and Walmart capitalized on its loss of focus, and widened their market share (McDowell, 2020). Sears realized the mistake they had made and began to get rid of various non-retail entities that were affecting its earnings negatively. However, it was too late because Walmart had by then become the largest retailer in the United States.
Merger with Kmart
Another strategic mistake that the management made was merging with Kmart. Before Lampert acquired Sears in 2004, he had purchased another failing retailer, Kmart, that had also filed for bankruptcy (McDowell, 2020). As a hedge fund owner, Lampert had a strategy that he thought would revive the two failing companies by merging them to form a single, stronger entity (Thomas & Hirsch, 2018).
He believed that bringing together the products offered by both retailers would allow the new company to compete effectively with the likes of Walmart and Target (Siemaszko, 2018). A mix of products from Craftsman and Kmart’s Martha Stewart Everyday was projected to be the magic wand that would revamp the failing company (Cohen, 2018). Moreover, the management team supposed that getting rid of underperforming stores and building a sizeable but stronger business would lower the operating costs and increase profitability.
The strategic move failed because customers had moved to other retailers that were offering better services. Since the merger, the company’s sales have not increased, and they are closing more stores across the country (Colvin, G., & Wahba, 2019). Fierce competition from other retailers is forcing them to downsize as customers have access to better options elsewhere (McDowell, 2020).
The earnings increased only during the first year in operation after the merger, and afterward, the sales declined year after year, signaling the ineffectiveness of the merger (Thomas & Hirsch, 2018). For a short while, the company’s stock was performing well and it gave shareholders hope for a brighter future. However, the 2007/2008 financial crisis wiped approximately 85% of its market value (McDowell, 2020). It did not recover until Sears was delisted from NASDAQ in 2018 due to bankruptcy.
Poor Management/Leadership
The purchase of Sears by Lampert in 2004 was welcomed by stakeholders as a positive move that would revamp the company. However, his poor leadership did little to revive the failing business. His hedge fund was highly successful, and he took his business ethos and applied it to the new venture (Cohen, 2018). Some of the mistakes that he made include merging Sears and Kmart, splitting the company into 40 divisions that operated individually, and forming a real estate investment trust (REIT) (McDowell, 2020). Each division operated like a firm, compete with the others, and reported their profits separately.
In certain instances, some divisions even entered into contractual agreements with others. As a result, the costs of running the company increased drastically as each division had its management team (Colvin, G., & Wahba, 2019). While this was happening, other retailers like Amazon were building their brands through innovation and advanced technologies. The formation of Seritage in 2015 led to the sale of the company’s best real estate, leaving its future in the hands of weak stores that are not profitable (Hudspeth, 2018). Sears had to sell some of its most valuable real estate to pay off its debts.
How the Failure could be Avoided
The decline of Sears could have been avoided in two main ways: focusing on the retail business and merging with a financially-stable company. As noted earlier, the downfall of Sears began when the management decided to venture into other businesses, thus neglecting its core operations (Hudspeth, 2018). That meant that resources that should have been used in expansion and the revamping of the stores were allocated to other business entities that contributed little to the company’s bottom line (McDowell, 2020). Instead of pursuing other interests, Sears should have focused solely on what it did best: the sale of tools, clothes, and home appliances.
Second, the company should not have merged with Kmart, which had also declared bankruptcy. Instead, they should have looked for a retailer that was performing well financially and merged. By the time both retailers had declared for bankruptcy, the industry had been taken over by their competitors, including Target and Walmart (Kapner, 2019). Therefore, merging them was a bad idea because the majority of their customers had moved on to other businesses. Sears should have focused on expanding its presence in the communities rather than competing with the likes of Amazon that had taken over the online retail space. Online companies have a major weakness in that they lack physical presence in the communities (Kapner, 2019).
They should have pursued community-based retailing as they had opened more than 3,000 stores and they had a strong presence across the US (McDowell, 2020). Moreover, their operations that span more than a century gave them an edge over their competitors. However, the management ignored the strategy’s potential and opted for a merger. Companies like Apple and Costco have benefited greatly from community-based retailing.
Conclusion
Many critics foresaw the failure of Sears’ diversification and merger strategies. The company’s involvement in financial and insurance ventures led to its gradual decline as resources were diverted from its core business. Moreover, this loss of direction motivated its competitors like Target, Walmart, and Amazon to create better products and services that could rival them and widen their customer bases. Sears’ poor leadership is also to blame for the failure of the aforementioned strategy because of the mistakes made that led to its downfall. The company should have not diversified into other industries. Moreover, they should not have merged with Kmart because both retailers were struggling financially.
References
Cohen, M. (2018). Sears: A case study in business failure. Columbia Business School. Web.
Colvin, G., & Wahba, P. (2019). Sears’ Seven Decades of Self-Destruction. Fortune. Web.
Edgecliffe-Johnson, A. (2018). Sears: How A pioneering Brand Found Itself Left on the Shelf. Financial Times. Web.
Gray, A. (2019). Sears Prepares for Possible Liquidation with Rescue Bid in Doubt. Financial Times. Web.
Hudspeth, M. (2018). What’s in stores for Sears?. CBS News. Web.
Kapner, S. (2019). How Sears lost the American shopper. The Wall Street journal. Web.
Klingel, L. (2018). Sear’s slow decline kills iconic brand-recapping the downfall. Fox Business. Web.
McDowell, E. (2020). The Rise and Fall of Sears, once the Largest and Most powerful Retailer in the World. Insider. Web.
Siemaszko, C. (2018). Sears declares bankruptcy, but for its proud workers the decline was years in the making. NBC News. Web.
Thomas, L., & Hirsch, L. (2018). Here are 5 Things Sears got Wrong that Sped Its Fall. CNBC. Web.