With better leadership, Sears could’ve been a contender

When I arrived in the U.S. for graduate school in the mid-1980s, I asked my host family in a Philadelphia suburb where to shop to outfit my dorm room. They didn’t skip a beat: “Sears,” they said. “It has everything you need.”

To say that I was in awe of Sears would be an understatement. Having grown up in small cities in India that were dominated by mom and pop stores, I’d never seen anything like it. I bought pillows and bed sheets; a hot pot, microwave, a mini fridge; and also rain boots, socks, and a pair of earrings. I remember thinking, “This is the American store of my dreams.” 

{mosads}So last week’s news that Sears filed for bankruptcy struck a personal chord. The company has been under pressure for years: shuttering stores, jettisoning assets and taking on ever more debt. Finally, facing a $134 million payment that it could not afford, Sears capitulated. 

The main culprit, according to media coverage, was the rise of online shopping and Amazon. Amazon, of course, has become the familiar villain in these tales — allegedly responsible for the death of many once-dominant American retailers, from Toys “R” Us to Sports Authority to Radio Shack. 

But considering e-commerce accounts for only 9 percent of all retail sales, that explanation rings hollow. The truth is, Sears’s bankruptcy is of its own making. Its management, led by Eddie Lampert — Sears’s chairman and its biggest individual creditor and shareholder, made a series of missteps that ultimately crippled the iconic chain.

These include focusing too narrowly on cutting costs at the expense of investing in the in-store experience, spinning off key brands and competing on price.

For most of its 132-year history, Sears was on the vanguard of U.S. retail. The company started out as a mail-order business. Its co-founders, Richard Warren Sears and Alvah Roebuck, took advantage of two revolutionary networks — the United States Postal Service and the railroads — to deliver its catalogs and ship its products to homes all across America.

Its “Wish Book” sold everything from wristwatches and wigs to sporting equipment and Singer sewing machines. With its reach and marketing ingenuity, Sears became what the New York Times recently dubbed, “the Amazon of its day.”

Sears had been around for four decades before it opened its first brick-and-mortar store in 1925 on Chicago’s west side. The company quickly expanded, and within 10 years, hundreds of Sears stores dotted the country.

Its merchandise ran the gamut — from tools and hardware to bicycles and baby buggies. Never flashy, its wares emphasized practicality and rugged reliability. Sears offered value: sturdy products at reasonable prices.

Over the next decades, Sears continued to thrive and move into new lines of business. It leveraged the latest and greatest technology to market and sell prefab home kits, creating an affordable avenue to homeownership. It established Allstate to provide insurance to the growing car-buying population.

It made a foray into financial services with the Discover card, which was the first ever credit card to give rewards to customers. To boot, it even had the tallest building in the world as its headquarters. Sears occupied a special place in the American imagination as a forward-thinking retailer with its finger on the pulse of customer’s needs and desires.

Sears’s fortunes began to dwindle in the 1970s and 80s. It was slow to respond to the emergence of megastores, such as Walmart, and specialist stores, such as Home Depot. Employee morale dipped, and shareholders were not happy.

When Arthur Martinez took the reins in 1992, Sears was losing about $3.4 billion a year. Martinez undertook a $4 billion store-refurbishing program with the goal to make Sears “a compelling place” to shop, work, and invest.”

Under his leadership, Sears had a dramatic turnaround. In 1999, Fortune declared it the most “innovative general merchandise retailer.”

But the honeymoon did not last long. Sears was soon again in dire financial straits. In 2003, Lampert, the billionaire hedge fund manager, purchased the bonds of Kmart, which was already in bankruptcy, taking control of the company and assuming its chairmanship. Two years later, Lampert bought Sears and merged it with Kmart.

Lampert knew little about retail — as is now painfully obvious. With his relentless focus on trimming costs, he failed to make investments that would entice and excite shoppers (and bring in new revenue.) For example, he elected not to renovate or refurbish Sears and Kmart stores. As a result, the stores look dated and ugly.

He declined to invest in inventory and product development. As a result, the stores were poorly merchandised. Lampert also decided against maintaining an interest in Sears’s prized brands and instead sold off assets like Land’s End and Craftsman tools.

He made other tactical errors, too. Early in his tenure, he went all in on Sears’s website with the goal of attracting online shoppers. But Sears’s customers proved elusive. And because he didn’t devote resources to hiring and training sales staff in his physical stores, the customers who remained received barebones service.

This was a critical mistake: Customers need a reason to want to shop. Helpful and knowledgeable salespeople are very often a key differentiating factor. After all, research shows that emphasizing human-to-human customer service is key to driving revenue and keeping customers loyal.

Perhaps most importantly, though, Lampert insisted on competing on price discounts, which research shows are least effective for driving sales in the long term.

Simply put: Physical stores, because of overhead and other costs, cannot match the price-comparing capabilities the internet offers.

What’s more, price discounts cut into the very resources needed for long-term success in brick-and-mortar retailing: merchandising to cater to customer preferences and prevent stock-outs; hiring and training store staff to provide exceptional service; and creating attractive store ambience.

Under different leadership, Sears could have been a contender. Customer experience should have been the centerpiece of Lampert’s strategy. Unfortunately, only a shell remains of the firm I thought of as the American store of my dreams. It’s no longer the store of anyone’s dreams.

Sharmila C. Chatterjee is a senior lecturer in marketing and the academic head for the Enterprise Management Track at the MIT Sloan School of Management.