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The Everlasting Problem for Sears Holdings

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Sears Holdings (NASDAQ: SHLD  ) has a problem with demographics. Like some other brick and mortar retailers, it is losing customers to online retailers like Amazon  (NASDAQ: AMZN  ) . The biggest issue for Sears Holdings moving forward is that its loss of customers is not a problem that can be easily solved without substantial changes.

Part one of the problem
During the holiday shopping season, I walked through the Sears store on my way into the mall (since it self-admittedly always has parking) and overheard a conversation between a cashier and a customer that summed up the reasons why Sears is struggling. After ringing up a snowblower belt, the cashier asked for the customer's email, to which the response was: "I don't got one of those."

Sears' customer base is aging, and the more affordable marketing methods that work to attract a younger consumer base cannot be utilized to reach a generation of consumers without regular Internet access. The access to Internet, unfortunately for Sears Holdings, is not the only obstacle that they face, as the larger problem seems to go beyond the more tangible reasons like lower prices and convenience that give insight as to why consumers shop online. What Sears is lacking is broader support from a younger and more active population.

Part two of the problem
The first part of solving a problem is admitting that there is a problem to start with. Marketing research is continually being evaluated and applied to make Amazon even more appealing to its customers. Examples like innovative ways to get purchases delivered more quickly, such as drone deliveries and 'anticipatory' shipping, demonstrate that the company is responsive to the desires of the consumer base. Amazon is continually adapting to better its business, and customers notice these efforts.

Sears Holdings is not making the changes to address consumer concerns, and in turn the company is further wearing away at its already diminishing customer base. Instead of recognizing the need to significantly expand outreach to younger consumers through both directed marketing and expanded online sales, it proudly admits its own perseverance in traveling down a losing path. Sears Holdings recently provided a quarter-to-date performance review in which it reported a 9.2% decline in total domestic store sales at domestic Sears stores. This big result was noted only after touting successes in its Shop Your Way membership program.

The company's Shop Your Way members accounted for 69% of sales in a period at the end of 2013 as compared with 58% of sales from the same period of the year before. When the two results are considered simultaneously, the simplest interpretation is that if total sales are declining but sales from Shop Your Way members are increasing, then sales from non-members must be dramatically decreasing. In other words, non-members are not shopping at Sears, meaning that their consumer reach is shrinking. Demographically for Sears, the consumers who are not showing up are the younger ones.

Is there a fix?
Resolving the underlying issue will not be easy, and will be nearly impossible if Sears Holdings is not willing to fully acknowledge the problem. Current solutions proposed by the company for its financial woes include spinning off the Lands' End and Sears Auto Center businesses, along with closing unprofitable stores.

The other big move that many companies make in light of consistently bad results is to make big changes to those in charge of running the organization. Unfortunately, a change in the head of the organization does not necessarily equate to a change in philosophy. Even more discouraging for struggling brick and mortar retailers is that fact that changes in philosophy do not guarantee success either, as seen in the J.C. Penney experiment of making former Apple retail executive Ron Johnson CEO. His short bid as CEO was met with an initial excitement, followed by a quick release after extremely poor fiscal year results. Sears Holdings has a tough task of balancing a needed change in marketing and operations without driving away the dwindling number of consumers who still shop there.

The takeaway
Sears Holdings is in trouble with a shrinking customer base that is leading to decreased sales. Even if it decides to redirect from the current path, it will take time to realize the impact of operational and marketing changes. Though investors may choose to be patient with Sears Holdings, time alone will not be able to fix the company's bigger problems.

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  • Report this Comment On January 23, 2014, at 3:12 PM, CapHoya wrote:

    To expand on this very accurate assessment of some of SHC's problems, ShopYourWay Rewards is really an Achilles heel. They eliminated the option of signing up with a phone number, which showed them as completely tone deaf to who their customers are. There is such a maniacal pursuit of SYWR that cashiers get fired if their numbers aren't high enough. This creates cases of fraud where an otherwise great employee gets fired and sometimes arrested; it creates a hostile checkout environment where customers who couldn't care less about 1% back in points that never work simply stop shopping there; and it dramatically slows down the already painful checkout process.

    Case in point, I was studying a store located directly across the street from a major government facility with over 20K employees. Over the course of a few months, I witnessed most all of the regulars from across the street stop shopping there primarily because of this ridiculous program.

    And their stores are awful! High priced, run down, hard to get to, and poor service because they treat their staff so deplorably. None of this is the sign of a company that wants to succeed.

  • Report this Comment On March 17, 2014, at 3:19 PM, kejaa wrote:

    I saw first hand ,as a customer, why SEARS can't keep customers. I tried to buy a $ 30 pair of jeans, the cashier was too busy with her family members, who were shopping in the store, to ring up my sale. I met a gentleman who, at first, told me he was a manager, but then recanted, when I told him about my concerns, and he then told me he was only a "Sort of Manager". I told him that a "sort of Manager" was a strange job title to have. He told me that he was unable to help me and suggested that I shop in another store if I was not happy with the service that I received. ..very poor customer service and if I were a Sears manager, I think I would get on a register and ring up the sale myself, then check on my staff to make sure customers were not getting frustrated and leaving. ...This store had part of the game won already because there were plenty of customers inside this store. They just needed to supply some customer service to help things along.

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Shamus Funk

Shamus is a freelance writer for the Motley Fool focusing on energy, agriculture, and materials. He has his Ph.D. in Chemistry from North Dakota State University. After graduation, Shamus worked at a small biotechnology firm before becoming a professor of chemistry.

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8/27/2015 4:00 PM
AMZN $518.37 Up +17.60 +3.51% CAPS Rating: ***
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