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Why Sears failed

|Includes: M, Sears Holdings Corporation (SHLD), WMT

Just want to have a closer look at why Sears is closing stores. Analysts have blamed Eddie Lampert (profiled here) for doing massive share buybacks, instead of capital expenditures i.e. to improve store location/shopping experience/a better pricing strategy/etc. It seems quite ironic given Sears' history of actually being an innovative retailer: it introduced mail order shopping and also has some online presence.

Yet Sears' metrics have been far behind those of its competitors (gross margin/return on assets/profit margin/EBITDA growth/etc.). Revenues have been decreasing for the last couple of years. Its stores are boring. It's not like every other retailer faces the same problem (WMT still has increasing revenues).

Based on the Forbes articles, I guess someone like Eddie Lampert probably figured out that certain stores are a lot less profitable than others. We don't have more granular information on why these stores are less profitable. Certain analysts have pointed to increasing competition from e-retailers (But wait, shouldn't this affect every location and every land-based retailer though? Or is it just more fashionable to digress the conversation to the decline of physical stores?). Anyhow in this case you face two responsibilities:

1. Shut down the less profitable stores to free up resources to focus on the rest
2. Try to do the traditional retail strategy stuff (location/shopping experience/pricing - there's a bunch of Apple analogy as a matter of fact) 

If the Forbes article were true, Eddie is a profitability guy. He probably would have thought that okay addresing the cost side is a good idea, he already did that with Kmart. By shutting down the unprofitable stores and selling their inventory they'll recoup a little cash and save some costs associated with operating bad stores. Indeed that's probably what they're aiming for: reduce fixed costs by $100 mil to $200 mil. 

I guess you can throw a ton of reasons why cutting costs looks like a lame solution versus turning bad stores into good stores. But Eddie probably has looked at this problem from another angle. If you believed in the experts who believe that the US has excessive retail space per person compared to other countries, perhaps Eddie has made a not so bad decision. If he shut down some offline stores to create a better online experience combined with focusing on solid physical stores with appropriate product selection, it might actually be great. But the current public evidence we have isn't enough to confirm this.

Is this going to shadow the end for the physical retailer? Who knows but it might make a permanent change. With almost everything now available online, it's hard to think how a physical store will compete a couple of years into the future. There will be loyal customers but there will be switchers as well. The key is to figure out what makes someone go to a store versus an online website. If you don't like the physical store to become a showroom for the website, create unique benefits for shopping offline and increase the switching costs.