Driving up Sears Parkway is a nostalgic journey. One can't help but recall the glory days when this was the headquarters of the most dominant retailer, in the world's largest economy. When I finally turned into the complex and peered past the guards, I spied a modern day, mirrored castle. It came armed with a moat, playing fields and the ultimate trapping of success, the heli-pad. It's as if the designer was given instructions to make this place so impressive that all vendors who entered would bow down to the mercy of the omnipresent Sears.
Unfortunately, success gave way to arrogance and complacency. Sears fell victim to the trappings of its own excesses. This large, bureaucratic organization got too big, too fat and too far removed from their customers. Sears' moat was vulnerable to a sneak attack from enemies like Walmart, Target, and a host of specialty retailers.
But there's a new King in town and his name is Eddie Lampert. Lampert runs a tight ship and he's got little patience for status quo. At this year's annual meeting he sounded like a tech czar from Silicon Valley. He praised the mass communication benefits (not business models) of twitter and facebook. He noted how the Internet and social networks require transparent pricing from retailers. He also described how Sears is trying to create an open dialog and feedback loop with their customers. In the new world, "engagement" replaces "marketing." In Eddie's words, marketers talk to someone. Engagement requires you to talk with them. He stressed how the conversation must be authentic. He applauded both Amazon and Zappos for their customer responsiveness.
So, what's the plan for Sears? Could they be the next Amazon? The short answer is no. Turning around two behemoth retailers like Kmart and Sears is tough work in normal times. The difficulty factor has ratcheted up tenfold due to the dire economic conditions that struck the world's economies in 2008. Completely remaking their bureaucratic culture and the way they solve problems and conduct business is a monumental undertaking.
Sears does possess some good brands like Lands' End, Kenmore, Craftsman, and Die Hard. They also have a broad reach, with over 200 million square feet of retail space. But they have operational challenges. They aren't nearly as efficient as many of their competitors. They also face a problem of perception. During the press Q & A period, Lampert said, "some might think we (Sears) are caught between Target and Macy's." Unfortunately, I think many consumers perceive them to be below both Target and Macy's. And often perception is reality, when it comes to shopper decisions.
So, how does one bring about such drastic change? He began the meeting by introducing his management team, of which half of them are new to the company in the past year. It's a good start. You can't solve a problem with the same level of thinking that caused it. Fresh blood is essential to changing the way they do business. Bruce Johnson, still carries the uncomfortable title of "interim CEO." Lampert spoke about the SLP (Senior Leadership Program) and how they want to recruit smart, people who want to innovate and take on responsibility. They want people who are willing to question authority and challenge status quo. While he admitted he can't force a culture on such a big ecosystem, he does believe he can create circumstances to release the human potential. They ultimately want people who can both be managers and entrepreneurs. They want:
a) Lifelong learners
b) People who aren't afraid to fail (not risk the company failures, but $5 million lessons every now and again are necessary ingredients of success)
c) People who can innovate and who aren't afraid to be benchmarked against the competition
d) Individuals who can examine problems in multiple ways
It seems that interim CEO Bruce Johnson is on a short leash. He just doesn't seem like the type to embrace the quick moving, technology-focused, strategy Lampert is trying to deploy. He would love a visionary leader like Steve Jobs. The real question is whether a Jobs-esque leader is looking to work at Sears.
It's only when the tide goes out, that you find out who has been swimming naked, said Warren Buffett. Lampert switched this around and said, "when the tide comes back in, I want to be sure that we've got some good swimmers who are ready to go." Before assessing how well they'll be able to swim let's take a look at some of the challenges that lie ahead:
1) They want to infuse more innovation into their existing brands.
a. They want Land's End to produce specialty retailer type margins. They are introducing Land's End into 75 more Sears stores this year.
b. They want Craftsman and Kenmore to be known as creators of innovative products and they're challenging their manufactures to step up to the challenge.
2) The need to utilize their 200 million square feet of retail space. Typically 50% of their Sears stores are dedicated to Apparel. They need to figure out how to earn a good return on that space. It appears Land's End will be a part of that solution.
3) To date they haven't freed up their brands to competing retailers and for good reason. If you can find Die Hard in Walmart, why would you go to a Sears auto service center?
4) Credit is a big issue for larger purchases like appliances and tractors. Have these big purchases been merely deferred or are we experiencing a complete shift in consumer purchasing behavior? Lampert believes that as homes turnover, even at lower prices, it's good for Sears. Both sellers and buyers will spend on home improvements. Still, the banks behind their credit cards are pulling back on their own risks and the credit lines they extend to Sears' cardholders.
5) Can they pull off a multi-channel strategy that combines the benefits of online shopping and research with that of offline fulfillment? They are investing heavily in technology and trying to build in customer feedback loops at all points of the shopping experience. To me this seems like the biggest reach for Sears but also the biggest opportunity. It would be way too costly for them to invest heavily in their existing store base (2,300). To his credit, Lampert has refused to make those huge capital expenditures. Instead he's focused on building out their online presence and buying back their stock (over $5 billion worth in the past few years).
6) Lastly, they have legacy pension responsibilities that competitors like Lowes and Home Depot don't need to worry about. They've contributed $1 billion to shore up pensions over the past 3 years. Lampert said, they've probably lost 30% of those funds, despite directing the managers to have approximately 50% in short duration, fixed income assets. He expects they'll need to contribute approximately $170 million to pensions in 2009 and $500 million in 2010.
Over the past several years specialty retailers have ate the lunch of the lumbering one-stop-shops. Compare the electronics department of Sears or Kohls to that of Best Buy. Compare the lingerie section of any department store to that of Victoria's Secret. They also face stiff competition from online retailers like Amazon and Zappos.
When it comes down to it, investing in Sears requires a strong belief in the leadership of Eddie Lampert. Success requires that he transform the culture of a gigantic organization into a responsive, customer-focused, learning machine. When the tide comes in and the real estate market starts to rebound we'll get an idea just how many good swimmers Sears has developed. If all goes well, Mr. Lampert and Sears' balance sheet will be swimming with cash. As he stated several times during the annual meeting, he's a large shareholder and he believes the board of directors is well aligned with shareholder interests. In today's, me-first culture where executives and board members continually put their own interests ahead of shareholders, that alignment is a breath of fresh air. Despite the numerous challenges that lie ahead, I think Eddie Lampert just might have the gumption to pull it off. I wish you and your team luck as you try to restore the luster of Sears in this most difficult retail environment. Your shareholders, your employees (some 300,000 strong) and this Fool are cheering you on!