Lessons from the Not Entirely Unexpected Sears Bankruptcy Filing

Serendipitously, I hear this is also the last season of the TV show “The Walking Dead.”  But while I expect that TV franchise to continue in some form, the same can’t be said for Sears.  I know it’s supposed to be a restructuring, but no amount of financial engineering can compensate for Sears’ lack of customers and a defendable and identifiable market position- especially after the most valuable assets have been stripped.

You might read this excellent article on Wolf Street to understand how Sears got to where it is- at least from a financial perspective- and why it’s prospects are grim.

What could have Sears have done differently?  Human behavior being what it is, probably nothing.  In a perfect world, management would have recognized 20 years ago some of the changes that were coming.  That’s expecting too much.

By the time they figured out where things were heading, it might have been too late.  And as you will recognize if you read the article linked to above, the interests of the CEO and hedge fund owner who controls some of Sears’ prime assets and is a secured creditor were not exactly aligned.

In our industry we’ve watched some public companies get into trouble, I’ve argued, specifically because they were public and simply could not do, as public companies, what they needed to do.  Neither Quiksilver or Skullcandy, to use a couple of examples, had a strategy that was consistent with building their brands in the changing retail market and meeting the requirements of being public.  They ended up in private hands- exactly what should have happened and where the brands have the best chance to succeed.

There’s no public data, of course, on how Skullcandy, Quiksilver, Roxy or DC Shoes are doing.  But at least now they can focus on branding and distribution in a way appropriate to how they need to compete.  They couldn’t (didn’t) do that when Wall Street was requiring regular, significant revenue growth.

Sears should have gone private too.  Not in the form of hundreds of big stores in malls selling everything.  That ship has probably sailed due to online/Amazon/millennial habits/demographics/etc.

What would have happened if somebody at Sears had had the vision to say, “We need to do something risky, dramatic and different if we’re going to be a viable business?

JC Penney tried that.  They brought in Ron Johnson from Apple to completely remake the brand.  As you may recall, that didn’t work.  Neither Mr. Johnson or the Board of Directors or Penney’s balance sheet had the patience or the ability to withstand the pressure his aggressive new strategy generated.  I’d argue that it would not have worked even if they’d had the patience, as JC Penney has the same problem Sears has; too many stores that are too big selling too much commodity like stuff.

Sears had some valuable brands.  These include Diehard, Lands End, Kenmore, Craftsman.  Am I forgetting any?

Anyway, most of these have been sold.  But what if, years ago, somebody way smarter than I am had the foresight to say, “In its present form, Sears doesn’t have much of a long-term future.”

Yeah, I know.  If that person is out there, you’d like to meet them, hire them, work for them.  Me too.

That visionary might have suggested that each of Diehard (a battery brand but let’s think of it as auto repair), Lands End, Kenmore, Craftsman, perhaps others each had potential to find life as companies/brands independent of the Sears name.  The challenges of the new consumer and retail market would still have existed but starting with a strong brand is a leg up.  Vans comes to mind.  It was a $400 million public company in trouble when VF bought it.

Let’s say that with the full support of the board of directors and the stock market, Sears spins off these brands and closes the rest of Sears.

Didn’t I just make that sound easy?  Here in the highly inconvenient real world there would be shareholders, a board of directors, all the real estate people who have long term leases with Sears, debtholders who have some of those assets as collateral- well, you get the picture.  The bottom line is it can only happen though a bankruptcy filing where shareholders lose everything, unsecured creditors lose most of what they are owed, store leases can be rejected, and a deal can be made with the secured creditors.  Basically, bankruptcy is a legal process for allocating losses when the assets are no longer worth what people paid for them.

You also must hope that the brands being spun off, either as separate public companies or sold to private equity, haven’t been so damaged by corporate attempts to generate cash flow at any cost that they have lost their cache.  Can you think of any brands in our industry that applies to?

The lesson here is about the dynamics of change.  You need to act sooner rather than later but the realization of the need to do something different often doesn’t happen soon enough and the resistance to doing it is extreme until outside stakeholders force action.

How Brick and Mortar Retail Has to Change

I don’t think brick and mortar is going away.  I doubt many of you think it is either.  I do believe that consolidation and transformation of the space has a way to go and I further believe it will reach its climax when (not if) the next recession hits.  I know this sounds kind of unfeeling, but I’d sort of like to get that recession going and out of the way.  The longer it’s delayed the worse it will be.

It won’t be just a recession that leads to this continuing transformation and consolidation.  The continued growth of ecommerce, retailers resisting change, and slower long-term GDP growth will also play their parts.

But you, as a retailer, don’t want to be consolidated (well, maybe at the right price) and you don’t want to go out of business.  Knowing that, I’ve been evaluating the role of a brick and mortar store these days compared to what it used to be.

What Stores Are Not Doing as Much Of

Let’s remind ourselves of the traditional functions stores helped customers perform.

  1. Finding the product
  2. Discovering the price
  3. Understanding the features
  4. Learning how it performs
  5. Figuring out if others like it and why
  6. Buying the product

That’s quite a list.  Some of your customers will continue to need (or want) your store(s) to perform some of these six functions some of the time.  But not most of your customers all of the time as used to be the case.

If that isn’t a kick in the pants alerting you to the need to change your business (and financial!) model, I don’t know what is.  What changes?

What You Have to Do More Of

In the last few months, I’ve developed in my head a model of what I think retail is evolving to.  I’m certain it’s incomplete and wrong in some way given the continuous change.  I’m laying it out here anyway because (1) Even though some of it is known, I want to draw it together, (2) writing about it helps me think deeper, (3) I’d like you to tell me where you think I’m wrong and (4) there is urgency for every retailer to have a vision and act on it regardless of the uncertainty.

I think most of this applies to brands as well, as retailers are brands and brands are retailers.  Anyway, here’s my shot at it.  There is a certain advantage to being a large retailer right now, but this all generally applies to one store or one thousand.

First, your brick and mortar and online has to be completed integrated.  You have to see your business as having one customer, no matter how they buy, and one revenue stream.  The customer has to be able to view and buy the same product at the same price in the store or online on any device.  You should be agnostic in terms of where and how a product is sold and delivered.

You do that by making your stores as responsible as they can be for handling the online, as well as the in store, customer relationship.  Which, and I hope I don’t have to point this out, is really one relationship.  Don’t argue with me about that- argue with your customer.

If you’re one store, that’s not as much of an issue.  As the number of stores grow, the opportunity to move ecommerce expenses into the stores can result in saving a bunch of money.  The more stores, the more money you can save.

The savings happen for two reasons.  First, you’re going to cut some expenses.  Maybe in labor or facilities.  You are going to use the assets you have more efficiently.  The public retailers call this “leveraging” their fixed costs- spreading the same costs over a larger revenue base.

Second, you’re going to cut off any dysfunctional competition between ecommerce and brick and mortar.  Why might that competition exist in the first place? What, for example, if you have people who receive a bonus based, in one case, on brick and mortar sales and, on the other, on ecommerce sales?  I can pretty much guarantee they won’t be focused on maximizing companywide revenue.

The next thing you have to do more of, based on the integration of brick and mortar and ecommerce, is evolve your stores.  This is an example of where we find ourselves in the uncomfortable place of needing to change, not quite knowing how, but having to start anyway.  The integration of brick and mortar and ecommerce I’m describing means the role, functionality, and layout of stores will change.  As you work to minimize your inventory (I’ll get to that) and give store personnel the overall customer relationship, how big do stores have to be?  What inventory will they carry (as you can seamlessly draw on inventory across your whole system and probably on what your non-owned brands have in inventory as well)?

If you have a lot of stores, how might the role of your district managers change?  Will the growth of ecommerce mean you can get by with fewer stores in a given region?  What will a store’s layout and space requirements look like if it’s carrying some of the inventory that was previously held in some distribution center?  Will you need less square feet as customers order t-shirts online and they are automatically printed in the back room?

Would that t-shirt sale be a store or an ecommerce sale?  Doesn’t matter does it.  That’s why you have to see your stores as having just one revenue stream.

Okay, I said something about minimizing inventory.  The quality and immediacy of your data has to get better.  There are so many reasons that’s important, but right now I want to focus on its inventory impact.

Snowboarding used to be the industry poster child for inventory disasters.  One season and snow dependent.  It used to be common to end a season with enough close out product to wipe out the profit for the whole season.  Most of you have figured that out and adjusted your buys accordingly.  Better to mourn lost sales than product you have to slash the price on.

My suggestion is that you treat all your inventory like it was snowboarding product.

You’re in (and will continue to be) a market where product life cycles and trends don’t seem to last long.  We’re an industry where product is differentiated mostly by marketing and community judgment rather than features and new brands come (and go) with the speed of light.  Time to embrace that- since your customers are.

It’s been years since I started advocating for retailers to take risks with new brands.  It’s not now just urgent- it’s unavoidable.  It’s also been years-more than 10-since I suggested being prepared to give up some revenue, or at least some revenue growth, in favor of higher margins and lower operating expenses for a better bottom line.

Both are related to the quality of data and inventory.  Your plan for identifying new brands/product may be disciplined and rigorous or, for smaller retailers and brand, just a matter of keeping your ear to the ground and developing a culture where employees are aware of products and trends.

If new brands are important (both bringing them in and knowing when to dump them), if product differentiation is tough and based to some extent on scarcity/distribution, if trends are short and dynamic,  if you think getting stuck with merchandise you have to mark down sucks, if something not selling in one place might sell in another, and if you have another use for cash besides sitting in inventory then knowing exactly what is selling where, to whom and  how quickly matters a lot.

Yeah, I know- you already have inventory reports and gross margin reports and various other reports.  How often do you get them?  Do they provide the data you need to address the issues I’ve raised in the paragraph directly above?  Is the level of detail adequate?  Set goals you can measure that improve on the issues listed above.  Some retailers are installing systems with algorithms that are parsing customer as well as inventory and sales data to gain new insights.  What new insights? They don’t quite know yet.

Over the next couple of years this software will become available to everybody at a reasonable cost.

Let’s take a short break while I point you to a couple of related articles.  I haven’t used the term “social media” yet but obviously it’s impact on the changes in retail is important.  Here’s a link to an article from my research department on a social media influencer with 1.2 million followers.  “She” is a bot.  I have no idea where to go with that.  It’s just another example of the complexity we’re dealing with.

On the subject of distribution and brand building, read this about specialty brands doing limited edition, lower priced collaborations with Target.  Is this the way to expand your sales and build your brand, or destroy it? I tend towards the later.  What do you think?

Okay, breaks over.

What Retailers are Doing More Of

  1. Customer service
  2. Community building

Neither of those sound particularly new.  But if you’ve read this far, you know I’m suggesting you have to do what you did before in the way of customer service (though less of it for some customers) plus satisfy with new brands, experiences, surprises, and engagement.  And all this for a customer who wants endless newness.  No wonder I’m trying to get you to increase efficiency, improve inventory management, and cut costs.  One issue I need to give some more thought to is how, specifically, the role of a brick and mortar sales person changes given the integration with ecommerce.

Most industry retailers would say they’ve always been community builders.  I think that’s true.  Especially for smaller retailers, that community’s reach was defined by a limited geographic space around stores.  Now your community isn’t so easily defined. Your reach, through the internet, is “everybody.”  One thing hasn’t changed- if you think everybody is your customer, probably nobody is.

The word that’s popping up a lot more in defining your target customer is “culture.” Culture, in the context we’re talking about it, refers to commonalities among your customers.  It’s easy to say, for example, “We’re a skate retailer/brand.”  That’s a fine thing to do as long as you recognize that positioning yourself that way limits your growth because you’ve defined your target market.  I don’t have to remind you of all the companies that started with their roots in an activity, tried to expand outside their solid franchise in that activity, and did themselves a lot of damage.

Trying to figure out the culture of your target customers is a lot harder than saying “We’re a skate company” and defining your universe of potential customers that way.    Fortunately, you’ve got a lot more data on customers than you used to have, and they are busily telling the world what they like and don’t like and why.  That brings us right back to the importance of systems that allow you to parse all this data to provide insights on the culture of your customers.  You can always be a “skate” retailer/brand and perhaps draw comfort with that solid, if maybe over simplified, characterization of your customer and target market.  If you’re culture focused, you have to be plugged in enough to change as that culture changes.

I wish I had the space to be more specific, but this has already run longer than I like and, in any event, generalities are inevitable when I’m discussing industry wide issues.  I’m not asking for much am I?  I just want you to change most aspects of your business, integrate the pieces in a way that didn’t used to be necessary, and do it fast and continually-as your customer is requiring-while what you need to do is changing and isn’t completely obvious in the first place.

It’s not me asking.  It’s your customer requiring.

Retailer Plans to Go Public. Wait…Now?…A Retailer?…Really?

Roots, a Canadian retailer, has filed a prospectus for a public offering.  Here’s the link to their web site.  As usual, the initial prospectus is missing a lot of key numbers, but I’ll do the best I can.

Roots has been around since 1973, so they must be doing something right.  “As of July 29, 2017, our integrated omni-channel footprint included 116 corporate retail stores in Canada, 4 corporate retail stores in the United States, 109 partner-operated stores in Taiwan, 27 partner-operated stores in China and a global e-commerce platform that shipped to 54 countries during our most recently completed fiscal year.”  They had 2,200 full time employees.

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Retailers and Landlords. Can’t Live With Each Other, Can’t Live Without

At this point, it’s common knowledge that diminishing mall traffic is leading retailers to close stores and/or renegotiate leases with landlords.  There are also some store openings going on as retailers, hopefully, find locations and configurations better suited to the fast changing brick and mortar and e-commerce world.

But relationships between retailers and landlords are not quite as cut and dried as, “Give me a lower rent or I’ll leave.”

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Retail, Technology, Consolidation, and Unintended Consequences

This morning, the Seattle Times featured this article telling us that REI wage hikes for store employee announced last summer will be costing the company $24 to $25 million.  The company’s net income for its last complete year was $38.3 million.

Meanwhile, my oldest son sent me this article from Investor’s Business Daily, telling us that fast food purveyor Wendy’s will have self-service ordering kiosks in 6,000 restaurants in the second half of this year due to rising minimum wages and tight labor conditions.

I’ve been writing about the potential impact of 3D printing and other kinds of manufacturing technology for a while.  Here’s my article on the apparel manufacturing system Intel plans to introduce.

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Some Waypoints in the Evolution of Retail

During the last couple of weeks, I’ve come across a number of articles that speak to the evolution of retail.  Here they are for your consideration in no particular order.

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The Shape of Brick and Mortar to Come?

I like to characterize a sudden good idea as getting whacked on the side of the head by a two by four.  Today, I got whacked by a lily.  My wife’s birthday is tomorrow and I walked into a convenient florist to order some flowers.  Except what I walked into was a little café.  Quite nice really, with people sitting on casual, older comfortable furniture eating, reading, drinking coffee.

For just a couple of seconds, I was a bit put off, thinking calling the place a flower shop was some kind of clever marketing I wasn’t cool enough to understand.  But the flower shop was in the same space, but towards the back.  I cannot believe I didn’t take a picture.

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Amazon, the Omnichannel, and the Impact of Retailers’ Brick and Mortar Legacy

On April 24th, the Seattle Times ran an article called “Amazon’s Imitation Game.”  It starts by describing how Amazon has knocked off an aluminum laptop stand by Rain Design that had been selling on Amazon for 10 years at a price of $43.00.  Amazon started selling a similar product last July for around half that price.

On Amazon, you can see various Rain Design products including a number of laptop stands and you can see the Amazon knock off at around half price.  Amazon Basics, the article tells us, includes low price copies of a number of an increasing number of products (900 right now including 284 added in 2015).

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Kohl’s New Retail Experiment

My family has a beach house on Long Beach Island, New Jersey.   I’ve been going there since I was a kid and still try to get back most summers. It’s where I learned to surf (I know- New Jersey surf? We work with what we’ve got).

Anyway, I was back there in September and as my wife and I headed back to the airport, Diane said, “Pull in there.” So I did. It was something called “Off Aisle” by Kohl’s and I gather this is their first store using this concept.

The store is a 30,000 square foot box with a cement floor. It’s filled mostly with racks on which apparel hangs, though they also offered some shoes, kitchen ware and bedding. Kind of like a Ross store.

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What it Takes to Succeed in Retail; Some Ideas from The Buckle’s 10-K

The Buckle’s results for the year ended January 31st are certainly not news at this point, but I do think they have a few things to tell us about retail. There are some commonalities emerging among retailers in the active outdoor/fashion retailers that I want to highlight.

The Buckle is a retailer I think does a good job. I’ve been particularly impressed with their ability to integrate owned with purchased brands and the way they merchandise them together. Just to review briefly they had, at year end, 460 stores in 44 states. For the year they had revenue of $1.153 billion, up just slightly from $1.128 billion the previous year. Their gross margin didn’t change much and gross profit was up just a bit from $499 to $507 million.

Expenses rose a similar amount with the result that both operating and net income were more or less unchanged. Net income of $162.6 million was the same as last year. They haven’t managed an increase in comparable store sales for the last two years. No balance sheet issues to discuss.

That’s the shortest financial review I’ve ever done, probably to the relief of some of you.

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