Julius Rosenwald was not a one-trick pony. He largely championed the conversion of the Palace of Fine Arts from the 1893 World's Columbian Exposition into the world-class Museum of Science and Industry, putting millions of his own money into the project. His philanthropic legacy looms large in the fabric of America.
The Sears line of clothing was not impressive, but its Craftsman tools and Kenmore appliances were top-notch. Craftsman tools were American-made with a lifetime warranty. Kenmore appliances were actually manufactured by leading makers, e.g. Whirlpool and GE, but they were backed by Sears. It was difficult to find a better vacuum cleaner.
Sears has had a number of CEOs in the last decade. Edward Lampert, a billionaire hedge fund manager whose corporate philosophy is "strip and sell" because he buys companies and sells them piecemeal instead of putting money and value into them (think Richard Gere's character in Pretty Woman), acquired Kmart in 2003 and Sears in 2005. He engineered the merger between the two companies in 2005, resulting in Sears Holdings, and anointed himself chairman.
Aylwin B. Lewis, a former Yum Brands CEO, was president and CEO of Sears lasting from 2005 to January 2008. He returned to his restaurant roots after that, finding a home at Potbelly Sandwich Works.
Sears slashed its commission rates in 2007, changing a decades-old way of doing business. A second round of commission rate cuts occurred in 2009.
W. Bruce Johnson was interim president and CEO of Sears from January 2008 to February 2011. He is now president and CEO of Sears Hometown and Outlet Stores.
"He's just like a good soldier. When he's told to go left, he goes left," a Johnson acquaintance observed during his interim tenure. "He's doing everything he can to make it successful."
In other words, he was pliable, Lampert's yes-man. A better man would have bristled at Lampert's degrading treatment of him.
Eleanor Bloxham, the head of Corporate Governance Alliance, a Columbus, Ohio, consultancy, said the Sears interim-CEO situation sends "a very confused signal both internally and externally" about the company's direction and ultimately shows disrespect for Mr. Johnson.
No, that's not quite it. Lampert demands unconditional fealty from his vassals as lords, self-appointed or otherwise, always do. He believes that because he has done well in the hedge fund business, he is a genius in every field known to man. This belief is actually rather common with libertarians.
Louis D'Ambrosio, formally CEO of Avaya, was president and CEO of Sears from February 2011 until February 2013. He moved on to being chairman of the board for Sensus.
The Chicago Tribune reported in May 2011 that Sears posted a $170 million loss in the 1st quarter.
Credit Suisse analyst Gary Balter wrote at the time that the customer experience is at the heart of Sears' troubles and the main reason the company is losing market share to rival retailers. Lampert drastically reduced investment in stores and used the money he saved to buy back stock.
Lampert appears to be relishing his role as Jason, from Jason and the Argonauts, in a modern retelling of the Golden Fleece.
"The service experience at Sears domestic and Kmart is about the worst of any retailer in America today, with many stores understaffed, except in appliances at Sears, signage poor, cash registers closed, in-stock inconsistent and pricing at Kmart uncompetitive. One can see the traffic leaving on a consistent basis, and, as many extinct retailers have discovered, the customers don't come back," Balter wrote.
The Chicago Tribune believed that D'Ambrosio would revive the company by capitalizing on its marquee brands, including Kenmore appliances, Craftsman tools, DieHard car batteries, and Lands' End apparel.
The above comment was naive, given what was going on in Sears stores at the time. In autumn of 2011, I noticed that the new line of Craftsman tools was made in China. For years Sears had wisely trumpeted its Craftsman tools as being made in the U.S. This was a major attraction to American nationalists like myself who looked for the magical "Made in the USA" tag on everything they bought. Lampert thought he was going to increase his profit margin, but what he was actually doing was killing the golden goose. Chinese-made tools are a dime a dozen; why would anyone travel to Sears to buy them? Once an old, trusted name like Craftsman tools has been cheapened, there's no getting it back.
One major problem with the management of Sears is Lampert's adulation of Ayn Rand. He acquired K-Mart while it was in bankruptcy and further looted its assets. K-Mart acquired Sears only after Lampert made "a nice wad of cash from Kmart by selling off the valuable real estate sitting under dozens of stores, shutting down 600 stores and laying off tens of thousands of workers in the name of cost-cutting and thereby jacking up the stock price."
Businessweek noted that "Lampert runs Sears like a hedge fund portfolio, with dozens of autonomous businesses competing for his attention and money. An outspoken advocate of free-market economics and fan of the novelist Ayn Rand, he created the [business] model because he expected the invisible hand of the market to drive better results."
Shaunak Dave, a former executive who left in 2012 said the model created a "warring tribes" culture. "If you were in a different business unit, we were in two competing companies," he said. "Cooperation and collaboration aren't there."
Forbes Magazine opined that Lampert was the #2 on the list of Five CEOs Who Should Have Already Been Fired, second only to Steve Ballmer of Microsoft, but at least Ballmer realized the company would change faster without him and is stepping down. Forbes noted that "there is no doubt who calls the shots at Sears. And as Mr. Lampert has called the shots, he’s missed every target."
Lampert added the mantle of Sears CEO to his list of roles in January 2013 after the departure of D'Ambrosio, becoming chairman and CEO, so things will only get worse.
In the same month CNN Money reported that Sears expected a net loss of $280 million to $360 million for the quarter. Its stock price plunged more than 50% over the previous three years. Sears had been a member of the S&P 500 index since 1957, but its membership was revoked in 2012.
Also in the same month, Crain's Chicago Business noted that instead of investing in his stores, Lampert attempted to prop up the stock price by spending $6 billion on share buybacks between 2005 and 2011, but Sears stock still lost half its value over that period. Retail analyst Howard Davidowitz called what is going on at Sears a "slow-motion liquidation."
"We continue to believe that Sears will sell off or spin off assets in a controlled liquidation of its chain, monetizing the assets least tied in with Sears' U.S. stores first," New York-based Credit Suisse analyst Gary Balter wrote. However, "over time, selling off the profitable assets is unlikely to be a winning strategy."
And Lampert's non-investment in his properties has resulted in sad-looking stores which do not attract customers back for a return visit.
Julius Rosenwald would not be happy at what Lampert has done.
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Most people who have a newspaper delivered to their home do not bother to put anything in the envelope attached to their paper once or twice each year, asking for a tip. Most Americans ignorantly believe that the delivery person should be satisfied with his miserable hourly wage, regardless of how that person travels through any kind of weather to bring their daily news to them.
My father includes $25 in the annual envelope because he knows how difficult it can be to make a living in such a job.
The newspaper of almost everyone -- the non-tippers -- is simply tossed onto the driveway a short distance from the street, forcing the subscriber to trudge through any snow or rain to retrieve it.
The newspaper of my parents, in contrast, is carefully laid against their front door so all they have to do is push open the door to retrieve it.
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JCPenney was created in 1902 by James Cash Penney in Kemmerer, Wyoming as Penney's. Unlike Sears, it began life as a brick-and-mortar store, but like Sears, it grew into a major mail order business.
Like many other major department stores, at first JCPenney sold items it no longer does, e.g. firearms, tools, and automotive parts. It sold its auto repair shops to Firestone in the early 1980s. Management decided that its best direction was that of a clothing and housewares company.
Allen Questrom was CEO from 2000 to 2004 and is considered by most to be a competent retail manager. This era saw JCPenney as a successful department store.
Mike Ullman was CEO from 2004 to late 2011. His era is consider by many to have been a competent one. But not by me.
Up until about five years ago -- near the end of Ullman's era -- JCPenney stocked big, tall, and extra-tall men's clothing. The last category is rare nowadays. Eddie Bauer used to be in that business, but it drastically cheapened its business model soon after the lower-quality Spiegel bought it.
Big and tall shops offer those sizes, but they usually only do so in staid colors, i.e. black, white, red, royal blue, and gray. JCPenney offered many sumptuous colors so customers were not all going to look the same.
And it wasn't like JCPenney could not give the extra-tall clothing away. Sometimes I would buy a polo shirt at the beginning of the season and then realize near the end of that season that another one of the same color would be a good addition to my wardrobe. However, I was usually chagrined to discover that it was sold out. In other words, they sold lots of extra-tall men's clothing, no doubt for a profit.
Then their catalog came out with no extra-tall clothing. The website also offered no extra-tall clothing. I tried-on a few shirts in different sizes at the mall, but quickly realized that their tall size was just a tad bigger than their regular size. So I stopped shopping at JCPenney.
Like Odysseus, Ullman could not resist the call of the Sirens, only in this case the Sirens were replaced by cash for Ullman, his fellow board members, and shareholders. Too bad someone could not have tied Ullman to a company flagpole, just as Odysseus was tied to his ship's mast to observe the Sirens without being compelled to act on his urges.
Ullman's alternative solution was to rig Google's search results so JCPenney would appear whenever potential customers searched for just about anything. Google found out about that and took corrective action.
A spokeswoman for JCPenney, Darcie Brossart, said, "J. C. Penney did not authorize, and we were not involved with or aware of, the posting of the links ... as it is against our natural search policies."
Blame it on the retail fairy.
Ron Johnson, a former Senior Vice President of Retail Operations at Apple, was CEO from late 2011 to April 2013. JCPenney issued the new CEO about $50 million in stock as a welcome gift. JCPenney hired Johnson largely because of Bill Ackman, manager of hedge fund Pershing Square Capital Management, who bought around 18% of company stock, giving him a large say in the business. Ackman handpicked Johnson for the job.
The predictable problem was that Apple is more in the entertainment business. It has a trendy product, albeit one of good quality, for which young people are willing to pay a premium. Johnson somehow thought that JCPenney could follow the same business model.
Johnson pushed a store redesign with a central location called The Square, a place where moms practice yoga and children receive haircuts.
Yoga. In a JCPenney store. Does he really think all U.S cities are full of unwashed new-agers as in San Rafael, Boulder, and Cupertino?
Johnson rolled out a Shops strategy in stores where each store is a mall in itself. This is not necessarily a bad concept, but one must take care not to alienate the older customers.
One year ago, same-store sales fell 26.1%. "I am sure many of you are wondering how we’re going to make it through the next eight weeks," Johnson told a no-doubt incredulous audience of investors and analysts.
"Trends at J.C. Penney are obviously getting worse, not better, and we are becoming more and more convinced that sales in 2013 will also decline, which could lead to a going-concern problem next year," said Deutsche Bank analyst Charles Grom.
Johnson was removed before he could send JCPenney into bankruptcy, with Ullman returning to the CEO slot in a desperate attempt at saving the company. Some people viewed this as a positive sign, but I think he is merely less terrible than Johnson, kind of like how Brezhnev was not as bad as Stalin.
JCPenney announced "a comparable-store sales decrease of approximately 16.6% for the quarter compared to the same period last year" but neglected to mention that e-commerce sales were off well over 30% last year.
In August, Ackman quit the board and then sold his entire stake of JCPenney stock, resulting in a personal loss of around $500 million dollars. Good riddance. In the same month, JCPenney reported a loss of $586 million and its ninth consecutive drop in quarterly revenue.
"A lot of J.C. Penney's wounds are self-inflicted," noted Paul Swinand, Morningstar analyst. Swinand also compared JCPenney against Blockbuster, Borders, and Circuit City, three companies which have entered the dustbin of corporate history. JCPenney did not have the same online competitive pressures Blockbuster (Netflix, Amazon), Borders (Amazon), and Circuit City (Amazon, Newegg) had, so its failure was due to poor management.
In the first three quarters of 2013, JCPenney burned through an unprecedented (for the retail industry) $3 billion in cash. In the understatement of the decade, Ullman said, "We have a lot of work to do to regain the trust of our customers."
This is no country for old, incompetent men.
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Forbes used the example of Burberry as an example of an old company which continues to succeed via leadership and innovation.
They missed one essential attribute: knowing one's market. Burberry is not trying to be all things to all people and concentrates on its base, to use a political concept. Its base is people with good jobs, at a minimum, and taste, and has never attempted to appeal to Walmart hillbillies. The photos on its website show people with a certain amount of class.
JCPenney had a good niche. Its customer base was largely families, not children looking for the latest high-tech toys. Their service was generally good. Their big and tall department drew in a type of customer that the vast majority of stores cannot accommodate. And people were accustomed to their system of sales.
Sears had a good niche with its Craftsman tools, appealing to families and do-it-yourselfers who appreciated products made in this country. Its Kenmore appliances were as good as one could find elsewhere, with its vacuum cleaners leading the pack.
JCPenney and Sears were never going to make the returns of a hedge fund, but why does every business need to make buckets of money? Isn't it enough to merely make a good living?
JCPenney and/or Sears could have tried something different, perhaps stocking a small part of their stores with American-made toys to differentiate themselves from Walmart, the company which was responsible for 9.3% of total U.S. imports from China for the period between 2001 and 2006 and 308,100 displaced U.S. jobs in 2006.
Competing against Walmart is a loser's game. Walmart forces its suppliers to cut quality to the bone to obtain the lowest possible prices and the government never charges it with violations of anti-trust law. As a result, just to give one example, its t-shirts are about as thin as toilet paper and last for about three washings. But it has the lowest price, so its devoted bumpkins beat a path to its door.
The aforementioned Sears and JCPenney CEOs had been seduced by the Walmart effect, i.e. the process by which competitors drop their prices to meet those of Walmart. The only way they can do so is to decrease the quality and eliminate any specialty goods, thereby running in a race to the bottom. Rubbermaid was forced to outsource its production to China and then merge with Newell because of Walmart's strong-arm tactics. Now most clothes are as shoddy as those which Walmart sells.
Many years ago, Walmart advertised its goods as "Made in the USA." Then at some point, Sam Walton and/or his greedy children quietly substituted Chinese-made goods in their place, correctly realizing that their analytically-challenged customers would neither notice nor care.
Not to mention Walmart's practice of paying its employees such low wages that they are forced to collect public assistance to survive, essentially shifting the burden from Walmart customers and shareholders to the American taxpayer. One Wisconsin Walmart supercenter employing 300 workers costs taxpayers well over $900,000 each year for food stamps, state health insurance plans, and assistance in paying heating and electric bills. Walmart spokesman Kory Lundberg said that using data from a single state is overgeneralizing, but is Wisconsin really any different than the rest of the U.S.?
A 1995 article published in Economic Development Review revealed that, in thirty-four small communities studied, small businesses in towns with a Walmart suffered cumulative sales declines of 25.4% after five years, while towns lacking a Walmart lost 12.9% of their general merchandise sales in the first year a Walmart opened in a neighboring town.
This is great for the Walton family, but bad for everyone else. And Walmart has opened many more stores since 1995.
Sam Walton learned from his ruthless father who gave up farming during the Great Depression to return to something he was especially good at, repossessing farms.
Sam Walton forced his employees to repeat a mantra: "I solemnly promise and declare that every customer that comes within ten feet of me, I will smile, look them in the eye, and greet them, so help me Sam," proving that Sam Walton and Walmart were as dangerous as Jim Jones and Jonestown.
Target and Costco figured this out. They compete against Walmart and Sam's Club, respectively, and are doing well at it because they are not trying to be Walmart. Target has a much friendlier store, slightly higher quality, and slightly higher prices. Costco somehow finds a way to pay its employees substantially higher wages than Walmart / Sam's Club slaves.
And hasn't anyone realized yet that allowing avaricious hedge fund managers to dictate retail policy is corporate suicide?
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Black Friday has long proved to be a Jerry Springer episode acted out in the confines of a retail store, especially in Walmart stores. A number of people have been killed and countless others injured in the scrum of people looking for a bargain. This year did not disappoint.
In Romeoville, Illinois, police shot a suspected shoplifter in the shoulder after he used his car to drag a police officer through the parking lot of a Kohl's department store. The town just ten miles south of Romeoville is Joliet, made famous by the Blues Brothers, "Joliet" Jake and Elwood. Romeoville and Joliet -- Romeo and Juliet, get it?
Another man was stabbed in an argument over a parking space at a Walmart in Virginia. No word on whether he actually got to park his car in the space.
Merry Christmas to all and to all a good fight!
Originally posted in December 2013.