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Additional Cases
Can Sears Reinvent
Itself? |
Sears, Roebuck and
Co. used to be the largest retailer in the United States, with sales
representing 1 to 2 percent of the United States gross national product
for almost 40 years after World War II. Its legendary Big Book catalogue
was considered the primary (and sometimes the only) source for everything
from wrenches to bathtubs to underwear. During the 1980s, Sears moved into
other businesses, hoping to provide middle-class consumers with almost
every type of banking, investment, and real estate service in addition to
selling appliances, hardware, clothes, and other goods.
This diversification tore Sears away from its core business, retail
sales. Sears has steadily lost ground in retailing, moving from the Number
1 position to Number 3 behind discounters Wal-Mart Stores, Inc. and Kmart
Corporation. Sears had been slow to remodel stores, trim costs, and keep
pace with current trends in selling and merchandising. Sears could not
keep up with the discounters and with specialty retailers such as Toys R
Us, Home Depot, Inc., and Circuit City Stores, Inc. that focus on a wide
selection of low-price merchandise in a single category. Nor could Sears
compete with trend-setting department stores.
Yet Sears has been heavily computerized. At one time it spent more
on information technology and networking than other noncomputer firms in
the United States except the Boeing Corporation. It was noted its
extensive customer databases of 60 million past and present Sears credit
card holders, which it used to target groups such as appliance buyers,
tool buyers, gardening enthusiasts, and mothers-to-be with special
promotions. For example, Sears would mail customers who purchased a washer
and dryer a maintenance contract and follow up with annual contract
renewal forms.
Why hasn't this translated into competitive advantage? One big
problem is Sears' high cost of operations. Nearly 30 percent of each
dollar in sales is required to cover overhead (e.g., expenses for
salaries, light bills, and advertising) compared to 15 percent for
Wal-Mart and about 21 per cent for Kmart.
In 1991, retail operations contributed to 38 percent of the
corporate bottom line. The rest of the merchandising group's profits came
from the lucrative Sears credit card. Strategies that worked well for
competitors fizzled at Sears. J.C. Penney successfully refocused its
business to emphasize moderately priced apparel. Everyday low pricing, the
pricing strategy used by Wal-Mart and other retailers, bombed at Sears
because the firm's cost structure, one of the highest in the industry, did
not allow for rock-bottom prices. Everyday low pricing has become
"everyday fair pricing" supplemented by frequent sales.
Sears' catalogue sales also stagnated. While the Sears Big Book
catalogue, founded in 1887, had the largest revenues of any mail-order
business, sales had not been profitable for twenty years; and the
catalogue had lost ground to specialty catalogues such as those of L. L.
Bean and Lands' End. On January 25, 1993, Sears stopped issuing its famous
"big book" catalogues, closed 113 of its stores, and eliminated 50,000
jobs. In order return to its core business and recapture its leadership in
retailing, the company also disposed of its Dean Witter securities,
Discover credit card, Coldwell Banker real estate, and Allstate insurance
subsidiaries.
To help turn Sears around and refocus on retailing, CEO Edward A.
Brennan hired executive Arthur C. Martinez away from Saks Fifth Avenue in
September 1992, naming Martinez his successor as Sears Chairman and Chief
Executive Officer two years later. Martinez ordered the company to combine
its half-dozen disparate customer databases to find out who was really
shopping at Sears. It turned out that Sears' biggest shoppers were not men
looking for Craftsmen tool belts but women aged 25 to 55 with average
family incomes of $40,000 who were in the market for everything from
skirts to appliances.
Under Martinez, Sears stopped trying to sell everything and started
focusing on seven core types of merchandise--men's, women's and children's
clothing, home furnishings, home improvement, automotive services and
supplies, appliances, and consumer electronics. The company is rearranging
its merchandise displays to resemble those of more upscale department
stores, with more attention to women's apparel, which is considered a
highly profitable segment of merchandising. Sears is also offering special
merchandise in each store geared to its local customer base. And it is
relieving managers and clerks of some reporting and administrative tasks
so they have more time to actually sell. Beginning in 1996 every
employee's compensation included a measurement for customer service. Sears
realized that it could not compete with discounters such as Wal-Mart
Corporation on price alone and focused on building a competitive edge
through superior service.
Sears embarked on a $4 billion five-year store renovation program
to make Sears stores more efficient, attractive, and convenient by
bringing all transactions closer to the sales floor and centralizing every
store's general offices, cashiers, customer services, and credit
functions. New Point-of-Sale (POS) terminals allow sales staff to issue
new charge cards, accept charge card payments, issue gift certificates,
and report account information to card holders. The POS devices provide
information such as the status of orders and availability of products,
allowing associates to order out-of-stock goods directly from the sales
floor.
Some stores have installed ATM machines to give customers cash
advances against their Sears Discover credit cards. Telephone kiosks have
been installed throughout the Sears retail network. Customers can use them
to inquire about service, parts, and credit, check the status of their car
in the tire and auto center, or call the manager.
Customer service desks have been largely eliminated. Sales
personnel are authorized to handle refunds and returns, eliminating the
need for two separate staffs. If a customer forgets his or her charge
card, he or she can obtain immediate credit by telling the cashier his or
her name and address and presenting identification. Streamlining of
patterns of work in back rooms and loading docks also trimmed staff and
create savings. These changes also increased the ratio of selling space to
nonselling space at Sears, so that an additional 6 million square feet of
space could be used to generate revenues.
Sears has been moving its suppliers to an electronic ordering
system similar to that described for Baxter Health Care. By linking its
computerized ordering system directly to that of each supplier, Sears
plans to eliminate paper throughout the order process and hopes to
expedite the flow of goods into its stores.
Sears further tightened its grip over the business by building an
even larger database for its Sears Credit and Home Services businesses. It
consolidates information on 90 million households, 31 million Sears Card
users, transaction records, credit status, and related data. Sears hopes
to use this information to provide even more finely targeted database
marketing. The database houses Sears' Strategic Performance Reporting
System (SPRS), helps the company manage pricing and merchandising for its
1950 North American stores.
Until a few years ago, Sears merchandise buyers lacked reliable
information on precisely what customers were buying at each store. They
could not view anything more specific than each division's daily
performance. Management relied on 18 separate systems that often contained
conflicting and redundant pricing information. Today, any authorized Sears
employee can use SPRS to look up any sales figure by store, by area, by
item, right down to the size and color of a sweater. Sales can be analyzed
by item or product category, by individual store or company wide. Sales of
items advertised in newspapers for a specific day can be tallied so that
Sears' 1000 buyers and managers can know what hot-selling merchandise to
replenish right away. Buyers can compare current performance of
merchandise with that of the previous week or the previous year. The data
can be displayed in a number of different ways, including pie charts or
graphs.
The Sears charge card, with over 32 million accounts, is the
fourth-largest credit card operation in the United States, serving nearly
half the households in the United States. Sears' credit card business
generates almost half of corporate profits. About half of all purchases
made in Sears stores are made with the Sears credit card. Starting in
1993, Sears aggressively courted new credit card customers, doubling the
rate at which it issued new credit cards to more than 6 million per year.
The increase in credit helped fuel Sears' rising store sales. Although
Martinez claims that Sears did not reduce its standards for determining
credit-worthy customers, Sears attracted too many high-risk customers, and
many of its new credit card customers defaulted on paying their bills.
Steve Goldstein, who took charge of Sears Credit in 1996, invested in
technology to bring Sears' risk-management systems up to the level
leading-edge credit card issuers, such as Citicorp.
Troubles mounted in early 1997. Some cardholders in Massachusetts
sued Sears over the intimidating methods it used to persuade bankrupt
customers to pay their credit card balance. Sears wound up paying $475
million to settle lawsuits in all 50 states. Later that year, bad-debt
charge-offs for uncollectible credit card accounts skyrocketed to over 8%
of Sears' receivables, twice the level of two years earlier. Goldstein's
group could not properly analyze the delinquent accounts. Although teams
of people worked day or night, Sears' computer systems still weren't state
of the art and analysis that should have taken a few hours took weeks.
Goldstein resigned in December 1997.
To stem the rising loan losses, Sears cut back on new credit
accounts to 4.2 million. But as the credit business was reined in, retail
sales flattened out. Sales at Sears stores open at least one year only
rose 1.1% during 1998, when the retail climate was very strong and
competitors posted an average sales increase of 4.4%.
Martinez hoped the Internet could play an important role in Sears'
turnaround. Sears set up a separate Internet division with 50 employees on
its campus in Hoffman, Illinois. The mission of this group was to make
Sears the "definitive source for the home." Consumers can use the Sears
Web site to purchase appliances, automotive parts, apparel, housewares,
tools, lawn and garden accessories, and other merchandise online. The Web
site also features capabilities for customers to arrange for repair
service online.
Sears is using Internet technology to develop a system that will
let suppliers check the status of their invoices. Sears wants to give
vendors access to SPRS so that they can check the sales of their products
and provide just-in-time inventory service. It is also working with Sun
Microsystems and other technology companies to create home appliances and
services that use the Internet.
Sears has acted as if it is showing some progress. In January 2002
the company announced that during that year it would add 15 new stores, so
that it would have about 900 nationwide, and it would remodel 50 others.
At the same time it announced that it would stop selling and installing
carpets to free up more space for more profitable products such as
appliances. This action also allowed the company to eliminate 1,500 jobs.
In May 2002 Sears announced it was purchasing catalog and Web
retailer Lands' End, the highly impressive direct-marketing company. In
2001 Lands' End reported a net profit of $66.9 million on sales of $1.6
billion---a margin of 4.3% (compared with Sears' profitability of only
1.8%). Lands' End CEO will manage Sears' online and catalog businesses,
and Sears will gain access to Lands' End's customer file of about 30
million families. Sears also hopes this acquisition will give its apparel
products a more stylish look. Sears planned that by the end of 2002 Lands'
End good would be sold in 180 of its retail outlets. The two companies
have very different cultures in addition to the major differences in their
businesses. Lands' End is considered top notch in its customer service.
For example its return policies can't be beaten, while the company answers
e-mails within four hours. It also is a much younger and more nimble
company than is Sears. Many question the ability of the two companies to
benefit significantly from the merger. Moody's Investors Service lowered
its rating on Sears debt as a result.
In October 2002 Sears warned that its third-quarter profit would be
below Wall Street expectations because its credit card business appears to
be "losing steam." It is clear that the size of its unpaid credit card
debt has been growing rapidly. In October the company also appointed a new
CIO, Garry Kelly, who was given the task of addressing Sears' fragmented
information technology.
Can the Internet help Sears to turn around? Will Sears be able to
prosper without easy credit? After Martinez arrived, Sears had a measure
of success in lowering its margins and increasing same-store sales. The
question is whether Sears can sustain this momentum. Its operating
expenses are still high compared with industry leaders. Market research
indicates that Sears continues to be the destination of choice for lawn
mowers, wrenches, washing machines, and other "hard" goods -- and its
tools and appliance businesses are posting large sales gains. But Sears
has not yet secured itself as a place for fashionable women's clothing. It
is too early to measure the impact of the acquisition of Lands' End on its
apparel business. Some critics believe that future earnings growth will
flag once the company completes its remodeling program and that Sears
remains vulnerable to aggressive discounters. CEO Alan J. Lacy, who
succeeded Martinez, wants to emphasize Sears as a one-stop source of
popular consumer brands rather than focus too much on price. Can Sears'
reinvention keep the company competitive now and in the future?
Sources: Sources: Carol Sliwa, "Sears CEO Says
Company will Standardize Technology," Computerworld, January 20,
2003; Kim S. Nash,"Sears: The Return on Returns," Baseline, January
17, 2003; Ari Weinberg, "Sears Chisels Out a Better Quarter,"
Forbes, January 16, 2003; Joanne Derbort, ""Sears' New CIO Starts
with Lands'End," Baseline, December 1, 2002; Linda Rosencrance,
"Sears Buying New Laptops, Wireless Hardware for Repair Technicians,"
Computerworld, October 20, 2002; "Sears Warns that Profits Will be
Lower," New York Times, October 8, 2002; Constance L. Hays, "Sears
to Buy Lands' End In a Deal That Unites Pants and Power Drills," New
York Times, May 14, 2002; "Sears, Roebuck Plans to Open 15 Stores,"
New York Times, January 8, 2002; Amy Merrick, "Fashion Victim:
Sears Apparel Sales Keep Unraveling," The Wall Street Journal,
April, 30, 2001 and "Sears to Shut 89 Stores and Report Big Charges," The
Wall Street Journal, January 5, 2001; Calmetta Coleman, "Sears CEO Wasts
No Time Putting His Brand on Stores," The Wall Street Journal, November 6,
2000; Bernhard Warner, "Sears Has AOL," The Industry Standard,
March 14, 2000; "Sears, Sun Microsystems Working on Internet-connected
Home," Sears Public Relations, January 6, 2000; Joseph P. Cahill, "Sears's
Credit Business May have Helped Hide Larger Retailing Woes," The Wall
Street Journal, July 6, 1999; Julia King and Thomas Hoffman, "Sears
Launches Do-It-Yourself Site," Computerworld, April 19, 1999; Gene
Koprowski, "The Harder Side of Sears," Software Magazine, January
15, 1998; Patricia Sellers, 'Sears' Big Turnaround Runs into Big Trouble,"
Fortune, February 16, 1998; Daniel Gross, "Remodeling Sears,"
CIO Magazine, December 1, 1996; "Yes, He's Revivied Sears. But Can
He Reinvent It?" The New York Times, January 7, 1996; John Foley,
"Sears'Data Store Grows," Information Week, June 24, 1996; Susan
Chandler, "Sears' Turnaround Is for Real--For Now," Business Week, August
15, 1994; and Stephanie Strom, "Sears Eliminating Its Catalogues and
50,000 Jobs," The New York Times, January 26, 1993.
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