Meet the Old Retail Boss, Same as the New Retail Boss

For the majority of observers, the collapse of department store giant Sears Holdings (SHLDQ) into bankruptcy has long appeared inevitable. Caught between Amazon (AMZN 3.43%) and the e-commerce hordes on one side, and the vampiric management of CEO Eddie Lampert on the other, the aging retailer seemed doomed to wind up here. But as the company proceeds through this last stage of its terminal decline, investors would be well advised to recognize how far it has fallen. Because Sears wasn't just knocked off by Amazon. For decades, Sears was Amazon.

In the "What's Up, Alison?" segment from this episode of Motley Fool Answers, hosts Alison Southwick and Robert Brokamp take us on a tour of some highlights from Sears' impressive life as an American retail icon.

A full transcript follows the video.

This video was recorded on Oct. 23, 2018.

Robert Brokamp: So, what's up, Alison?

Alison Southwick: Well, Bro, to paraphrase King Solomon in the Book of Ecclesiastes, there is "nothing new under the sun," and a fantastic example of this is Sears in light of the recent news that it filed for Chapter 11 bankruptcy. And you've probably seen about a million articles about the death of Sears, thanks to Amazon.

But today I'm going to share with you a few ways that Sears was the Amazon before Amazon, and I'm going to crib a large amount of this from Dylan Thompson's article [yes, Rick, from The Atlantic], titled, The History of Sears Predicts Nearly Everything Amazon is Doing, and also another one on Investopedia called Who Killed Sears? The answer is all of us. So, let's get to it!

Like Amazon, Sears began as a convenient way to shop from home and have stuff delivered to your door. As Dylan Thompson writes, "Mail was an internet before the internet," and because of it people were able to shop at home through catalogs and have things delivered to them thanks to the rise of mail, and trains, and all these wonderful things that helped us communicate.

So in 1845, Tiffany's Blue Book was the first mail order catalog in the United States and in 1872 Montgomery Ward had their first mail order catalog. So when it was founded in 1892 [Sears, that is], some 40 years after Tiffany's Blue Book, it was not the first mail order company, but it went on to become the biggest. In fact, in just the first 13 years of Sears' existence between 1892 and 1905, Sears' revenue grew by a factor of 50 from about $750,000 to about $38 million. First 13 years.

Like Amazon, Sears started off selling one thing... watches [not books]... and then went on to sell everything. Sears eventually had an unrivaled range of products. Only two years in, by 1894, the Sears catalog had grown to 322 pages, featuring sewing machines, bicycles, sporting goods, automobiles; all sold for a minuscule profit. Sounds familiar?

Brokamp: Yes.

Southwick: If Amazon thinks they can sell everything, Sears really went on to sell everything including kit houses, mortgages from Coldwell Banker, insurance through Allstate and, of course, anything you'd want to put in that house. Oh, and just charge it on your Discover card, because yes, Sears owned that, too.

Brokamp: And let's reemphasize. You could buy a house through Sears. From like the first house...

Southwick: And a car. Yeah!

Brokamp: ... like the pieces of the house would be shipped on a train and then you would hire contractors to put it up, although in the early 1900s you just got your friends and family to do it.

Southwick: Yes, your adorable little Craftsman house, which in the D.C. area now goes for like $3 million.

Brokamp: Right, and back then they were selling them for like $2,000.

Southwick: The Sears catalog eventually hit over 1,000 pages and was known as the Consumer Bible. Also according to Investopedia, it was often used as toilet paper. Like Amazon, Sears put small-town retailers out of business. Before Sears, most farmers relied on the local country store for buying everything, often at steep prices, a very small selection, and at a high rate of credit. And here comes Sears with a massive catalog of goods at an upfront, cheap price and it's delivered to your home. Good-bye, general store!

Here's a fun bonus. As The Washington Post writes, "Because Sears was a mail order company, it was also able to help African-Americans living under Jim Crow laws purchase things without having to face racism at the general store."

So in the South [and probably all over], African-Americans going into stores would have to deal with price gouging, getting really bad terms on credit, or just straight-up awfulness. Like if there was ever a white customer in the store, they would ignore the black customer until all the white customers were served. The catalog gave them anonymity. The catalog didn't care if you couldn't spell things correctly. The catalog didn't send you poorer-quality goods because of the color of your skin. Suddenly I feel a lot better about catalogs.

Like Amazon, Sears eventually moved into bricks and mortar. In the 1920s, Sears decided to start selling out of storefronts. The first ones were opened up in existing mail order warehouses. At the start of 1925, there were no Sears stores in the United States, but by 1929 there were 300. At one point of growth, they were opening a new Sears department store every three days. So what caused the move to bricks and mortar? Do you want to guess?

Brokamp: I don't know.

Southwick: The car. It made it easier for people to travel longer distances and they didn't need to rely on a catalog. The stores they opened in the 1920s outsold the catalog by 1931. Revenues totaled $180 million in 1931, by the way, which is roughly $2.8 billion [today].

Of course, Amazon went on to buy Whole Foods with its 400 grocery stores and has roughly a dozen physical bookstores and just announced a partnership with Kohl's to allow returns at their locations.

Like Amazon, Sears was the juggernaut in retail of its time. Sears went public in 1906 with a stock placement of $40 million, which is about $1.1 billion today. That same year it opened a 40-acre logistics center in Chicago. According to the Sears corporate website, Henry Ford, himself, made a pilgrimage to the "seventh wonder" of the business world to learn about the company's storied efficiency. It had an elaborate series of belts and chutes to deliver packages through the assembly line and messages in between departments were delivered via pneumatic tubes.

Fast forward to the late 1970s and 1980s. Sears' annual revenue would reach about 1% of the US gross domestic product. By comparison, Amazon's $99 billion revenue last year, excluding [Amazon] Web Services, would equal about 0.8% of the U.S. GDP.

In closing, you can read a ton of articles about the downfall of Sears, because over the years they did a number of things wrong that maybe weren't obvious at the time. If you're interested, there are a ton of articles out there Monday-morning quarterbacking that game. Go read them. You can get all the play-by-plays.

But my lesson, here, isn't about poorly managed companies that fail. It's that all companies fail eventually.

Brokamp: That sounds like it came straight from the awfulizer!

Southwick: I know! I knew you'd appreciate that. I was reading a column this week that Kara Swisher wrote. Kara Swisher is a co-founder of Recode. She's a powerhouse tech journalist. And she wrote this column about all the aggressive, horrible bosses that she had stood up to over time [not necessarily sexually aggressive, but just like real jerks], and in it she accounts how one boss was being particularly jerky and self-absorbed]. Do you remember The McLaughlin Group? Like that guy?

Brokamp: Yes.

Southwick: She worked for him. He sounds like a real treat. In it she recounts the story where, again, he was being particularly awful and she writes, "Listen, Dr. McLaughlin, I was in Greece this summer at a temple, and there was something written on it that said, 'Babylon was,' which means every major power falls. So I took that to mean that some day I'm going to be really powerful and you're going to be in a wheelchair in an old folks home being fed apricots or something."

Brokamp: Goodness gracious!

Southwick: And apparently he laughed it off and was like, "Uh-huh." Of course, what Kara Swisher meant when she said "Babylon was" was more in terms of toxic workplaces [run] by toxic leaders. But it also holds true for businesses who, or whatever is on top, will one day topple and be replaced. Where our grandparents shopped isn't where we shop and Lord knows where our grandchildren will shop. I guess Mars. Whatever that company is, I want to buy some shares. So in closing, Sears is dead. Long live Amazon! See, I can awfulize, too!