Sears Big Holiday Wish is Profitability
By George Anderson
Brit Beemer, founder and chairman of America’s Research Group, said retailers have one of two ways they can go this holiday season. “You can be promotional, give up some profit and get a lot of shoppers, or not be as promotional, not get as many shoppers and lose a lot of money,” he told Crain’s Chicago Business.
According to many retail industry watchers, Wal-Mart, Target, Kohl’s and J.C. Penney have gone the first route with aggressive discounts and stepped up advertising schedules.
Taking the less traveled path has been Sears. “Some observers,” reports Crain’s, ” interpret the strategy as another sign that Sears Chairman Edward Lampert is throwing in the towel on retail.”
Mr. Lampert and company would probably take issue with that notion, suggesting as he did in a letter sent to shareholders earlier in the year that it is profitability not sales that matter most.
“In the past, too often our predecessor companies pursued higher sales and accepted lower profits to meet objectives that, we believe, did not increase the value of the companies. We will need to focus our management, our associates and our vendors on the goals of creating value rather than solely building market share or sales.”
Sears did offer a $10 gift card to the first 200 customers that visited each of its stores. A company spokesperson called the promotion “hugely popular” with Sears’ shoppers.
Same-store-sales at Sears were down eight percent for the first 11 months of the year compared to a national average gain of 3.9 percent for all stores.
Moderator’s Comment: Is Sears right to join the discounting pack this holiday season? Are others sacrificing profitability in pursuit of sales and market
share? –
George Anderson – Moderator
I’ve got to admit that, as a pure layperson, I’m not as versed as many of these folks in the realms of retail and high finance, but it seems to me that sooner or later you have to stem the declines in sales and market share or else cease to exist as a retailer.
Sears is losing sales and market share for the very simple reason that it can no longer attract customers into its stores. How long can any retail organization exist when it bleeds the one thing that a retailer needs to justify its existence, namely people to sell its merchandise to?
These cost cuts and employee firings and service reductions are great for providing instant gratification for the hedge funders who have gained control of the company, but when the customers have, for all intents and purposes, stopped coming, largely as a direct result of the cuts and service reductions, what happens then?
Sitting out the holiday season simply indicates to me that SHC has no intention of actually being a contender in retail, all the smoke and mirrors rhetoric emanating out of Hoffman notwithstanding. Sears has missed a golden opportunity to prove that it is indeed intending to at least contend in retail. Instead, it has literally abandoned the field to Wal-Mart and Target, both of whom posted sales increases during the Black Friday weekend.
It’s now purely a matter of milking the company(s) for as much cash as can possibly be wrung out of them and then moving on to the next mass firing, store closures and asset reductions. The Sears Canada and Orchard Supply manipulations show where the priorities lie for the hedge funds involved. These deals were being made as Sears was limping away from the retail holiday battlefield with scarcely a shot being fired.
This is the season where we will really find out what the long-term strategy is for Sears. If they don’t jump into the discounting game to build traffic it will mean they’ve chosen the track many have expected them to take…downsizing to liquidate real estate.
If you offer the same products as everyone else, the shopping experience must at least be equal to everyone else’s and your price cannot be higher or you will lose customers. If you offer something different that is of value to customers, you will be able to charge more and be profitable – if customers value what you are offering. If you offer nothing that is different and of value to customers and, if they can find what they want somewhere else at a lower price, you will lose customers. If you offer the low price and customers buy from you, you may make your sales target but you will lose profits.
I agree with Camille. Abercrombie & Fitch doesn’t need to offer doorbuster loss leader discounts. They don’t need a loyalty program. They don’t need saturation advertising. They have unique merchandise at higher than average margins that broadcast to their customers’ radar. Retailers offering me-too products similar to everyone else are the ones that suffer.
It has been speculated by many that current management at Sears is more interested in opportunities with Sears’ real estate portfolio than they are in retailing opportunities. I agree with Camille that if they do not differentiate their products, then they will suffer if they do not join their competitors in the price/promotion cycle. If they were the merchants they should be (and could be if that were their focus), they would seek out special and unique products that would produce consistent levels of traffic based on the merits of those products. Not only would that reinvigorate the brand…they would be in control of their margins rather than being at the “mercy of the market.” Sounds great but….”NOT GOING TO HAPPEN”….. at least not while this group is in command.
The Sears strategy sounds like they are a victim of no strategy. As any of us with retail knowledge are acutely aware, Target, Wal-Mart and Kohl’s all have a discounting strategy that does not kill the margin.
Sears is playing with smoke and mirrors. This sounds like a concerted effort to explain a dismal 4th quarter in advance.
If Sears truly caters to its present and past loyal shoppers, profit can be made. But if it is like most of its competition and sells to the mass, it’s in trouble.
It hasn’t created any new image or line of new products like Penney’s.
I’m sure the shopper service level won’t be on par with Neiman Marcus, Bloomingdale’s, etc. Even Penney’s has lifted its greeting and service level up.
Sears is more involved in buying companies this time of the year. Makes sense! ? HmmmmmmHmmmmmmmmmm
Sears has to do something different to survive. This must be a profitable solution. They cannot win if they are just another retailer. This is why they are in this position. It is only their real estate offerings which keep driving their stock (and how they might break up their holdings) and certainly not their profits. Sears has some good name brands (Craftsman, Kenmore) which they can continue leveraging as well as offering standard brands, but they must promote these, offer them at competitive prices and differentiate themselves from the rest of the retailers. Otherwise, they will continue to decline, as more aggressive retailers (and ones which have better logistics, distribution, relationships, etc.) erode their market share. Their survival is about profits and market share.
The quest for “profitable sales” is not a new one for this management team. And based on the early Kmart experiences, one can see how they developed a “discount = loss leader” view. Perhaps a better way to view the issue is to think in terms of “profitable shoppers.” Discounting to draw traffic is just as effective as ever — perhaps more so. The merchandising art is in selling every shopper a profitable mix when they shop the store. This is one of the essential challenges of “in-store marketing” for retailers.
This is what happens when you have non-retailers in charge of retail chains. They look at economics, discuss concepts such as elasticity and brand loyalty, think in terms of trading volume for profit and breaking even on margin with lower operating costs. And when these discussions are coupled with store operating and merchandise assortment strategies that are appropriate, the results expected can be found.
Unfortunately, as has been pointed out, Sears has executed none of the strategic and tactical operational moves necessary to have the “volume for profit” equation make any sense. And any retail executive with any seasoning would be able to tell them….assuming doing so wouldn’t get you fired. Harshly put, this is myopia at it’s best.
Sure, on a short term play, Sears will sustain enough foot traffic that the bleeding will not be from an artery, just from a few less crucial veins. Sears CAN get through December, but will probably suffer high single digit to low double digit comp stores declines, which will NOT be entirely offset by higher margins. Which always assumes that the Lacey team holds the line, and doesn’t cave in the final two weeks of the year. Which is what usually happens when a “me too” retailer tries this ploy. They get hammered for two and half weeks, panic, and then miss the only two weeks they realistically COULD have expected the strategy to pay off.
The first part of the season is bargain shopping, price sensitive, informed and planning consumers – for the most part. The last part of the season are the late shoppers, the must-buy-now folks, the less price sensitive, and the fence sitters who wait for the final cut in prices and really don’t care if they get the precise thing they might be waiting for.
I’m not usually this blunt in this space, but geez, can’t Lacey understand that there is really nothing all that new in retail? That this has been tried over, and over, and over and over again….with patterns of success and failure. His operation has NONE of the requirements to be successful.
So, assuming Mr. Lacey is NOT myopic, blind or very poorly advised……this is entirely consistent with a cash-play toward a real estate liquidation. Maximize margin, manage inventories, reduce operating expenses. Package the best locations to be sold for the highest prices.
Whether or not Sears is right or wrong will be answered at the end of the holiday season when the results are complete. At that time, if they have a sales increase and a profit increase, they will be right.
But perhaps there is a bigger question that should be asked. That question is, has the American consumer been so trained that unless it is an essential purchase, they must buy at substantial discount?
Our society has become so enmeshed in instant gratification, that business also must turn on a dime and follow the lead of the competition rather than exercise patience and leadership.
While I understand the need to increase traffic and the need to increase the top line, should it or must it be at the expense of profits? Is the consumer truly served if the retailer is unprofitable?
We are all very interested and talk about the customer experience; however, we must ask ourselves…How do we define Customer Experience?
The lowest price is not always the answer. There is more to the customer experience than price.
At ICC/Decision Services, we define Customer Experience as follows:
Sales + Customer Service = Customer Experience
Thus the true answer to the question is whether this discounting of price adds to the customer experience and has long-term positive effects for Sears or any other retailer.