Sears, Roebuck: A Lament.

In March this year, I published a blog: “Americans Need To Go Shopping.” The article pointed out the staggering number of U.S. retail companies at potential risk of defaulting on their debts and that a host of companies in the retail sector, including many household names, are facing financial struggles.

Last week, I was saddened by the news that Sears had filed for Chapter 11 bankruptcy and that 142 stores will be closed. Sears, or Sears, Roebuck as it used to be known, was in business for 126 years. Stores were located in every American city, often as an anchor tenant in shopping malls. How did this happen? Was Sears’ decline inevitable?

Sears supplied middle-class America with all manner of household goods and clothing. Thirteen years ago, Sears merged with Kmart. The two stores weren’t a happy fit, appealing to different sectors of the market. The chairman, Eddie Lampert, is no retailer. His management methods pitted the two businesses against each other. Sears was starved of investment and its stores became dirty and badly stocked with precious little customer care. No wonder customers fled elsewhere.

According to USA Today, Lampert and his hedge fund loaned Sears millions upon millions of dollars as business declined. The hedge fund also bought up a few hundred million in secured Sears’ debt. Therefore, Lampert’s hedge fund will be first in line at bankruptcy court.

Where there is a retail bankruptcy, Wall Street firms are not far behind. Private equity and hedge funds get first bite taking money out through all manner of debt schemes. Money that could have been used to invest in the business, for example to keep it stocked with strong sale items, went elsewhere. This was what happened to Toys R Us. It looks like Sears has followed suit.

Over the past five years, The Pension Benefit Guaranty Corp. demanded the company come up with about $2 billion to help fund the company’s chronically underfunded pensions. Oddly, between 2005 and 2010, Sears paid out approximately $5 billion on share buybacks, depriving it of cash to invest in much needed upgrades for its stores, not to mention bailing out its own pension fund. So Sears has become a wreck, a tribute only to bygone days.

In 1890, America was very different. The census stated America had a population of some sixty three million, more than half of whom lived on farms and in small communities. In 1897, with the advent of railroads, Sears, Roebuck and Co. published a mail-order catalogue. Anyone living anywhere in USA could buy anything. The Sears catalogue offered everything from lingerie to tractors and agricultural equipment, from porcelain dolls to motorcars, kitchen goods and tyres. All that could be imagined was for sale and would be delivered. In its way, Sears, Roebuck was the forerunner of Amazon without the Internet.

Every year in virtually every household throughout America, the Sears, Roebuck annual catalogue would arrive. I have seen one. It was fatter than an old-style telephone directory.  Americans found nothing odd, even in the 1960s, about buying paint and neckties from the same place. Sears became the largest retailer to the great American consumer. But then shopping malls appeared, Walmart revolutionized the management of inventory and the Internet took over. Sears was left way behind. Its demise was inevitable because its top management would not keep abreast of the times.

I suppose what we see is economist Schumpeter’s “creative destruction.” A prospering economy rewards enterprises that leverage fresh ideas to meet future needs and wants. Older businesses, no matter how large and powerful, will either keep up or die. May I be permitted some schaudenfreude by reminding merchant bankers and hedge funds that no enterprise is too big to fail. Creative destruction applies to them too.

Sears was a part of American folklore. It is sad to see business America caring more for its future than its past but I suppose this is the way of modern life.