Editor’s note: This article was first published in October 2014: nine consecutive quarterly losses, a $400 million loan, plans to close about 100 stores, shares down from nearly $200 to $24 and a 20% rise in the last five days. Sears Holdings later filed for bankruptcy in October 2018. Its remark about Sears 20 years earlier also refers to 2014.
For almost a century the retail chain Sears was an icon of business success, ever since its founder Richard Warren Sears started the business in 1893 selling by mail-order catalogue.
In 1973 the company opened the 108-storey Sears Tower, which at the time was the tallest skyscraper in the world.
It is often said that when the chairman of a listed company buys a corporate helicopter or builds a skyscraper, it is time to sell the shares, because it is a sign that the manager’s ego will drive the company into bankruptcy.
And Sears will probably become one of those companies held up as an example in the best business schools to warn future executives about some of the mistakes every manager should avoid.
This chain had everything going for it, including the brand, the money and the time, and yet the company has now run out of cash after losing money for nine quarters in a row.
That collapse in profits was no accident. There is an explanation, and it lies in the management of its new chairmen, vice presidents and board members.
What mistakes have led one of the best-positioned companies around to fight for its survival?
The industry analyst Robin Lewis explains the mistakes that are pushing Sears to the brink of bankruptcy, and they are mistakes that often happen in many companies.
1. Losing focus on the core business
Sears had saturated the market with stores in almost every city in the United States. Instead of concentrating on the quality of the products in its stores, the company began investing in businesses that were not directly related to retail.
It used the profits from its core business to invest in real estate and automotive companies.
Diversifying a company’s activity is not a bad strategy in itself, but in Sears’ case the company began starving its retail business of capital and management resources, failing to invest in new consumer needs and to compete in a constantly evolving market.
See also: Mistakes small hospitality businesses make, by Jon Taffer
2. It became far too bureaucratic
Sears ended up creating many different divisions, and as happens in many companies, when the left hand does not know what the right hand is doing, and the right hand has to ask the left for permission, the result is harmful to the company. It becomes more concerned with completing all kinds of procedures, sometimes pointless ones, than with reacting to changes in consumer behaviour.
Sears also came to have far too many managers, a very common mistake in the retail industry.
In the end, this situation left the company paralysed by constant infighting and disagreement, producing what is known in the business world as “cultural sclerosis”: a disease that some companies suffer from, which paralyses them and prevents them from taking quick strategic decisions to adapt to change.
See also: 10 reasons small businesses fail early on
3. Ignoring the competition
This was probably the company’s most serious mistake, and together with the others it could finish it off.
Sears reigned everywhere and never took Wal-Mart, JCPenney, TJ Maxx and a few others seriously. The number of competing stores within a 15-minute drive grew from 1,400 to 4,300 in just 10 years.
Sears could have drawn up hundreds of commercial strategies to defend its reign, but the company did nothing, even as it watched its market share suffer a massive, steady loss quarter after quarter.
In fact, Sears today does not have the same resonance or the same importance for consumers that it had just 20 years ago.
Sears’ last gasp?
After a huge fall in its share price, which has taken the company from trading at nearly $200 a share to $24, the stock has risen 20% in the last five days on the back of the news. Even so, the company is a candidate for bankruptcy: it has requested a $400 million loan because it has no cash, and it plans to close around 100 stores.
The company’s current core business is not profitable, with nine straight quarters of losses, and closing stores without any other kind of strategy only suggests it could have even more trouble just repaying the loan.
The analysts at SeekingAlpha, who have studied the company’s accounts, seem to be in no doubt: in their view, Sears has entered a retail death spiral.
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Featured image: w_lemay, CC BY-SA 2.0, via Wikimedia Commons.
