By now, institutional and individual investors are completely aware of the stresses that Sears Holding (SHLD) and
The companies that once were praised by stock analysts are now greeted with headlines like “Which is Worse: JCP or SHLD?,” “The End Might Be Near for JC Penney,” and “Sears Treats Customers Like They’re Total Idiots.”
What happened? How did things get this way?
The popular opinion is that poor management has led to the demise of both companies. For Sears, that would presumably be Eddie Lampert, while Ron Johnson would be credited for running Penney aground. There is much evidence that this indeed could be the case for both companies. One simply needs to google both names and follow the development over the past two or three years. The damning narratives are all there to review, and it’s very hard to deny that both executives may have chosen the wrong strategies to lead these companies.
The challenge was certainly there: How to propel a classic, branded company to compete among changing technologies without losing its original identity?
Quite simply, JC Penney tried to be something it isn’t: a boutique retailer. That’s a little like an astrologist trying to become an astronomer: it’s not only too unrealistic, it’s downright seeking a totally new identity. In this case the astrologist was Johnson, and it appears that he never conducted consumer surveys to validate his retail instincts. Fast forward two years later and Penney’s outcome is very doubtful.
Sears is a little different. While Penney’s now former CEO had substantial retail operating experience, Sears’ CEO is a hedge fund manager with limited retail experience. Prior to Lampert’s taking the title, there had been several other CEO’s appointed and dismissed by him. He is similar to Penney's Johnson in that he tends to make strategic decisions based on intuition rather than referencing marketing research data.
I think it is too simplistic to explain away these two companies’ current state by solely blaming their CEOs. Something more has to be working against their execution plans than just poor management.
Perhaps a systematic shift in the way consumers make purchases has exacerbated the situation. That is, could customers finally be using the Web more for their shopping needs? Total retail foot traffic, (a proxy for visiting the actual stores) for November and December has steadily decreased from 2010 through 2013. n 2010 ShopperTrak measured about 34 billion retail store visits versus about 18 billion for 2013.
And sales in stores were half of sales made by online transactions, so consumers were still buying—they were finally doing it differently. They are no longer physically going to the stores with the same predictability. The trend may surprise many because we seem to think that consumers are slow to accept Web-based retailing. Our instincts lead us to think that shoppers have to physically see and touch the merchandise before they buy. We have our reasons for this. Remember eToys? Back in the early 2000’s most optimists thought Web-based retailers would take off, but wary shoppers eventually lost interest in buying toys through the Internet, and returned to the bricks-and-mortar stores.
It looks like that finally has changed, and the data supports it. New retail space opened last year has decreased sharply from the period 2000 to 2008. True, over recent years the trends are improving, but CoStar Group reports stores opened only about 44 million new square feet in 2013 versus more than 300 million back in 2008.
What does this say about the current state of Sears and Penney? I think that both stores are suffering from poor strategic decision making as well as being at the epicenter of changing shopping habits.
While the CEO’s have been the lightning rods for the missteps, the latent new shopping habits have finally emerged and are forcing many retailers to face stressful decisions. This of course creates opportunity. Once upon a time cell phones were never going to replace rotary phones.
