Case Study on SearsEssay title: Case Study on SearsSEARS CASE STUDYby Robert A.G. Monks and Nell MinowIntroductionThe great advantage of publicly held companies is that they bring together capital and managerial expertise, to the benefit of both groups. An investor need not know anything about making or marketing chairs in order to invest in a chair factory. A gifted producer or seller of chairs need not have capital in order to start a business. When it runs well, both profit, and the capitalist system achieves its goals. Our system of capitalism has been less successful when the company does not run well. As some of Americas most visible, powerful, and successful companies began to slide, they demonstrated an all-but fatal weakness in the ability of our system to react in time to prevent disaster. Managers and directors at companies like IBM, General Motors, and Sears took their success–and their customers–for granted. They took their investors for granted, too, until it was almost too late.
The problem is that the strength of the system, the separation of ownership and control, is also its weakness. A shareholders investment in a chair factory gives him certain rights, including the right to elect the directors and the right to inspect the books. These rights may have some meaning when the company is small enough that the investors number in the hundreds. But in large, complex companies, with investors in the millions, they are likely to exercise a third right, the right to sell. While some economists will argue sale of the stock sends a significant
message to management, I agree with Edward Jay Epstein, who said that “just the exchange of one powerless shareholder for another in a corporation, while it may lessen the market price of shares, will not dislodge management–or even threaten it. On the contrary, if dissident shareholders leave, it may even bring about the further entrenchment of management–especially if management can pass new laws in the interim.”1 Just because shareholders desert a sinking ship, that does not mean that management will plug the leaks.
SearsSears Roebuck was a classic example. For nearly a century, Sears deserved the title “Americas favorite place to shop.” It was the countrys leading retailer, its catalogue a genuine part of American history. In the 1950s, the company founded Allstate Insurance. The company diversified into financial services in the early 1980s, acquiring the Dean Witter brokerage and realtor Coldwell Banker. The aim of the purchases was to create a giant supermarket of both goods and services, so that consumers could buy a house, finance it, insure it, and stock it with furniture — all under the same roof. Wall Street referred to the diversification as a “stocks and socks” strategy.
The financial services performed superbly — improving the companys earnings from 1984 to 1990 by 55 percent. But in the most literal terms, nobody was minding the store. The vast chain of over 850 outlets, the flagship division of the Sears Roebuck empire, were failing fast. In the seven years up to 1990 the retail groups earnings declined at an annual rate of 7.7 percent. The decline was reflected in the stock which, between January 1984 and November 1990, offered investors a total average return of as little as 0.1 percent.2 The company didnt even meet its own targets. Through the eighties, management continued to promise a return of equity of 15 percent a year. Not once did Sears achieve this goal. Indeed, in 1990, Sears produced a 6.8 percent ROE. [check]
From 1984-1990 Sears had a total annual return, including dividends, of a mere 0.7 percent. 1990 was a disastrous year for the company with earnings and stock prices at 1983 levels, a return on equity of 6.8 percent, and a loss in the first nine months of $119 million. Sears finally lost its century-long title as Americas largest retailer, as Sears customers turned to Wal-Mart, K-Mart, and specialty stores like Circuit City, the Gap, and the Limited. But when I first looked at the company in 1990, the retail division was losing to Wal-Mart and K-Mart. In a survey of business leaders, Sears management was ranked 487 out of 500.3 It was no secret that the companys performance was poor, both in comparison to the market as a whole and in comparison to its peers. But all of that was not enough to get management to change direction. What could the shareholders do? They could sell out, as many of them did, even at a loss, but as noted
In 1984, I learned that the majority of business was headed for financial decline. Why? Because in 1981, Sears began the process of closing, and it did so by giving way to a company called Sears Out-of-Office. I first learned about this company at a news conference held at the Sears General Store on March 3, 1982, as I was writing a paper for the annual meeting of International Directors of Cook Business in the Washington, D.C., region. “There are several more Sears stores in America. They have been closing down. There will be some downs. Some of them will probably not be re-opened for some two years and they would then be closed again,” I said. At the same time as this conversation, a large number of Sears workers had left by the time the news of this change emerged, many from the retailer and other “new” stores opened in the area during the middle of the year, and some were even coming back later, much to the satisfaction of the Sears manager, John “Evan” Rabinowitz, who, as we reported on this news report and others, was never afraid to make tough choices. As a result, Sears gave this company a new name, “Shopping America,” and I was soon hooked at Sears Out-of-Office, where the store opened in 1981. It was a big deal: Sears was, for more than a century, America’s largest brand. The company was now a symbol with an even bigger footprint in Canada, the U.S., and the Caribbean like no other in the world. But in a sense, that brand was lost: Its main business was sales. It was selling its books for Sears and for the world’s major retailers, from Borders to Wal-Mart to Kmart. Its chief executive was Thomas “T.J.” O’Callaghan. And while many in the industry were delighted with this new brand from Sears, the people in Sears knew it was being sold in poor quality to Wal-Mart, K-Mart and other Wal-Mart retailers. It also would not sell to Sears Out-of-Office without any consideration given to their current position. To many, it was a giant mistake: the way it looked and worked, made things that far more difficult and more expensive for the company. How would people react? All they could do was look at Sears, and say that this was a big mistake. The company was already in a competitive situation and with a lot to lose by making the opposite decision. When the market for Sears retail stores began to plummet, the manager of Sears Out-of-Office decided to sell the Sears Out-of-Office brand to Wal-Mart. Sears began to change course. It started buying from Wal-Mart, Kmart, and other retailers in Canada, Asia, and Latin America. It even started to use its Sears Out-of-Office headquarters for its merchandise. All this was followed by one of the largest and most influential sales and returns in the company’s history. The retailer eventually stopped selling its Sears Out-of-Office stores in 1986 and stopped selling the new Sears Out-of-Office Stores only in Canada, which then became the second most-visited U.S. retailer behind the big Wal-Mart stores in the U.S. and Canada. Eventually, Sears began a reorganization with the Sears Group under its umbrella, and it became the original Sears.
After 1989, Sears continued to be the most heavily-invested U.S. retailer. Its sales increased at a rate of 20