Creative destruction. The term was coined by economist Joseph Schumpeter to name the process of businesses eliminating one another as they evolve. Today, no company better represents this evolution than Sears Holdings (NASDAQOTH:SHLDQ), the parent of Sears and Kmart.
Now a retail dinosaur and officially bankrupt, Sears was the largest American retailer as recently as the 1980s, and it dominated over the postwar era and much of the 20th century. Many of the innovations and strategies the company pioneered were borrowed by Walmart (NYSE:WMT), the biggest American retailer of the last generation, and later Amazon (NASDAQ:AMZN), the defining retailer of the e-commerce era -- and there are more than a few similarities among them.
Like Amazon, which began as just a bookseller, Sears also started out small in the 1880s, focused on a single product line: watches. Also like Amazon, Sears embraced what was the e-commerce of its day, the mail-order catalog, taking advantage of the U.S. Post Office's decision in 1896 to bring door-to-door delivery in rural communities. By using mail-order, Sears was able to capitalize on another emerging, internet-like technology of its day: railroads. The connectivity brought about by the railroads made rural communities more accessible, and much like Walmart did nearly 100 years later, Sears built the foundation of its retail empire on rural America.
After a new partner, Julius Rosenwald, joined Sears in 1895, the company ramped up its product selection to things like bicycles, sewing machines, and buggies, and it appealed to customers with low prices and a wide selection, two strategies that served as a template for Walmart and Amazon. Sears' catalog had titles like Book of Bargains and The Great Price Maker, and the company valued customer satisfaction above all else. In an echo of Amazon's mission to be "Earth's most customer-centric company," Sears told its customers in its catalog, "We solicit honest criticism more than orders."
By 1906, the company had a giant, three-million-square-foot distribution center in Chicago, and it put an illustration of it at the back of every catalog, essentially advertising its dominance. More than a quarter of Americans received Sears' catalog then, which was sometimes titled Wish Book, a forerunner of Amazon's Wish List.
As the country urbanized and automobiles began to replace the railroads, the company adapted, opening its first department store in Chicago in 1925. It expanded rapidly from there, with more than 300 stores by 1929. Amazon has followed suit today with its acquisition of Whole Foods and opening of small stores like AmazonBooks and concepts like Amazon 4-star and AmazonBooks.
Sears managed to grow even through the Great Depression as bargain prices were a big part of its brand, a likely influence on Sam Walton, who promised Everyday Low Prices, and when it came to apparel, Sears focused on basics like socks and underwear, leaving fashion items for competitors, much like Walmart and Amazon have done.
Sears' store count doubled through the 1930s, and it had 700 stores by the 1950s, expanding to Mexico and Canada as it became a standard mall anchor and a staple of postwar prosperity.
Signs of trouble
By the 1970s, the American retail industry was beginning to shift. Strip malls began emerging to compete with traditional malls and department stores, and discounters like Walmart, Target, and Kmart expanded, chipping away at Sears' low-price advantage. Like much of the department-store sector, Sears began to lose market share to the more nimble discounters as Walmart exploited the niche that Sears once dominated: rural America. By 1991, Walmart topped Sears as the biggest U.S. retailer by sales.
Sears further did itself in by closing its catalog business and supporting warehouses in 1993, right before the dawn of the internet, and moving away from its traditional strength in retail, pivoting to financial products like insurance and credit cards. Sears sold that business in 2003 to Citigroup for $32 billion and returned its focus to retail under the guidance of Chairman Eddie Lampert, who merged Sears with Kmart. However, Lampert was overly focused on extracting cash from the two chains rather than investing in the business, and performance at both chains eroded significantly under his watch, leading to this week's bankruptcy filing.
Lessons for Amazon and Walmart
The story of Sears is another reminder that everything changes, and retail dominance today is no guarantee of leadership tomorrow.
Amazon CEO Jeff Bezos seems to intuitively understand this, and a fear of losing his company's competitive edge underscores his "Day One" mantra. Bezos tells Amazon employees that it's always Day One at the company, meaning the company must always think like an innovative start-up rather than a staid incumbent, even as Amazon has become one of the biggest in the world. As a reminder of what happens to companies that move past the Day One approach, Bezos said, "Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death." That sounds an awful lot like what happened to Sears.
Bezos's philosophy is clear. Even the most successful companies can't afford to rest or relax, lest a competitor come along and take their business, and even today, nearly 25 years after its founding, Amazon continues to embody that philosophy. Amazon is pushing new boundaries in areas like voice-activated technology, cloud computing, and even brick-and-mortar retail, with innovations like its cashier-less Amazon Go store.
Walmart, on the other hand, resembles Sears in the 1980s in some ways. Though it's still the largest retailer in the world, it has been rapidly losing market share to Amazon as it ignored the threat from e-commerce, aggressively opening new supercenters as recently as 2014. However, that strategy has changed as CEO Doug McMillon has made e-commerce a focus, acquiring a number of online retailers including Jet.com, and rapidly expanding Walmart's online grocery pickup service, among other initiatives. Whether Walmart can continue to be retail's top dog remains to be seen, but its recent earnings reports have shown solid growth, indicating that the company's strategic shifts are paying off.
It's worth remembering that Sears was at the forefront of American retail for about a century, so Amazon and Walmart could continue to dominate for decades to come. Still, businesses, even dominant ones, need to always be evolving. That's why Bezos has ingrained upon his employees that "It must be always Day One."
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.