Inside This Issue - Opinion
Classic tale of mismanagement
January 23rd, 2012
by David Pinto, Editor
This is Kmart’s 50th anniversary. The first Kmart opened on March 1, 1962, in Garden City, Mich. That was the year, as well, that both Walmart and Target opened their initial discount stores.
While Walmart and Target remain viable, indeed exemplary, discounters, Kmart’s status is far more uncertain. In fact, it is problematical whether the discount chain that once led the nation in sales will celebrate many more birthdays — or even if the retailer, now part of Sears Holdings, will live out the year.
In the aftermath of a hugely disappointing but hardly surprising Christmas selling season, Sears Holdings announced late last month that it would shut as many as 120 stores over the next several months. This was but the most recent setback for a retailer that has been enduring difficult days for years.
Indeed, the story of Sears and Kmart is the classic tale of mismanagement on a grand scale. It is also a cautionary tale of the inevitable results when an individual whose outstanding characteristic is hubris believes he knows more about a business than those professionals who have spent their lives living, breathing and learning about that business.
Eddie Lampert has succeeded on a grand scale — as a hedge fund manager. His knowledge of retailing has likely been acquired the way most laymen learn about retailing: by shopping.
Yet, over the past several years, in rapid succession he took control of Kmart as it emerged from bankruptcy, gained control of Sears, then merged the two, proclaiming that the merger would produce synergies and savings.
In the bargain, he evolved his own retail philosophy, one that turned not on building and renovating stores but on controlling costs, one that relied not on sales growth for sustained prosperity but on an arcane formula that turned on an ability to maintain profits despite declining sales, always a neat trick in business. When he hired retail executives who disagreed with this philosophy, as they all eventually did, he fired them. Predictably, it has come to this: The retailer’s current chief executive, Lou D’Ambrosio, has no retail background or experience at all.
So it’s not surprising that, in the face of a deteriorating retail network, customers have stopped coming to Kmart and Sears andsales have declined — and the stock price has nosedived as well, from a peak of $190 a share in 2007 to its current price of less than $33.
Lampert still privately insists that his retailing philosophy is well grounded — that consumers don’t necessarily respond to stores that are new, clean, exciting, fairly priced, well stocked, well maintained or innovative. Rather, he believes, the key to success in retailing is not managing stores but managing costs; that sales are merely a by-product of success; that spending money to maintain and update a retail infrastructure is, in the main, a waste of, er, money.
Meanwhile, both Sears and Kmart are closer to extinction than they have yet been. Sears Holdings’ sales for the past two months declined by 5.2%. To remedy the situation Lampert plans to cut costs, fire employees and sell real estate. Indeed, it was the valuable real estate that attracted Lampert to Sears and Kmart in the first place, and he succeeded in boosting the stock price for a time by selling the idea that, should the stores perform poorly, the real estate could always be turned into cash.
Now, as Kmart marks its 50th anniversary, no one in Hoffman Estates, outside Chicago, or at the retailer’s 1,312 Kmart stores throughout the country, is in the mood to celebrate.
Indeed, there’s nothing much worth commemorating.
MMR will mark the occasion of Kmart’s anniversary later this year, not by recounting the retailer’s current woes but by recalling the stunning success that the discounter enjoyed during its halcyon days of the 1970s and ’80s.
And for Eddie Lampert there remains a lesson to be learned: Retailing is a serious business, led and managed by professionals who are almost always competent, often brilliant. That’s how it happens that some of the most admired companies in America are retail companies. And that’s how it happens that Walmart and Target, at 50 years of age, are two of the most successful companies on the planet.