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The Slow Burn of Digital Transformation and the Downfall of Sears

How three major failures sent a one-time retail king spinning into the depths of irrelevance. This is the story of the downfall of Sears.

The story behind the evolution of Sears had been the stuff of legend for more a century, but the notion that the longtime protagonist of U.S. retail will deliver a fairy-tale ending diminishes as each new chapter unfolds. In fact, the story all but ends in tragedy with Sears going out of business.

A closer read on the rise of Sears, the former poster child for the U.S.’s buoyant retail landscape, reveals an often inspiring journey that's overshadowed by a slew of strategy flaws, missed opportunities, and costly miscalculations that eventually crippled the brand whose name was, at least in some measure, synonymous with the American Dream.

Sears is among the latest retailers filing bankruptcy, seeking Chapter 11 relief on Oct. 15 amid plunging sales and massive debt, a move many experts consider to be a Band-Aid on a business that’s been bleeding money – and customers – for decades. The filing, while not unexpected, was further proof of just how far the longtime retail darling had fallen from the good graces of consumers.

A retail staple since after the Civil War, Sears grew into the go-to brand for every consumer need, from clothing and shoes to household appliances to automobile tires and even ready-to-build houses. The company became one of the earliest retail disruptors near the end of the 19th century when it launched its mail-order catalog business. Sears’ expanded reach not only changed the way consumers shopped but connected a rapidly growing country amid the Second Industrial Revolution.

But it’s now headlining a growing list of major retailers facing bankruptcy. So how could one of the U.S.’s premiere brands, the company behind Kenmore appliances and Craftsman tools, that introduced the Discover credit card, whose World War-era Sears homes helped thousands of families achieve homeownership, and whose namesake Sears Tower once stood as the tallest building in the world, devolve into an organization that’s closing stores by the hundreds, laying off thousands of employees, and pinning any hopes of a future on Chapter 11 bankruptcy protection?

It’s not so much that the multibillion-dollar company that reigned over the U.S. retail kingdom for nearly a century failed to embrace e-commerce, cloud technologies, or other specific digital initiatives. The company certainly struggled to adapt to changing market forces, including the rise of the internet, the growth of omnichannel, and the demand for an enhanced customer experience, but those struggles were symptoms of other underlying problems.

Sears’ downfall was largely self-inflicted, and it was more than 20 years in the making.

“Put bluntly, [Sears] has failed on every facet of retailing from assortment to service to merchandise to basic shop keeping standards. Under benign conditions, this would be problematic enough but in today’s hyper-competitive retail environment it is a recipe for failure on a grand scale.”

– Neil Saunders, managing director of GlobalData Retail

‘Sears Stopped Innovating’

In a New York Times story on the Sears bankruptcy, Craig Johnson, president of retail research and consulting firm Customer Growth Partners, summed up what happened to the one-time retail powerhouse.

“There are generations of people who grew up on Sears and now it’s not relevant,” Johnson said. “When you are in the retail business, it’s all about newness. But Sears stopped innovating.”

While it’s easy to assume such a statement to mean that Sears didn’t embrace digital transformation or invest in e-commerce technology to keep pace with the likes of Amazon, that isn’t wholly true. The original retail innovator found new ways to gain customers through its popular catalog, and Sears built thousands of stores in city centers – and eventually their suburbs – to support this growing customer base and convert them into loyal Sears champions.

Additionally, as computer technology evolved and the internet was taking shape, Sears launched a cutting-edge, consumer-driven commercial online service called Prodigy in the early 1980s. It also prioritized selling some of its products online well before launching Sears.com in 1999, and former CEO Edward Lamphert was said to be more than generous with resources when it came to Sears’ online services.

In reality, Sears’ failure to innovate was its failure to innovate its psychology. Much of Sears’ woes over the past two decades can be traced to the company’s indifference toward adopting the mindset of a modern, digitally driven enterprise, one that uses its considerable brand, resources, and massive supply chain in a leveraged way, as a differentiator to win and retain yet another generation of loyal customers.

This failure to change its thinking laid the foundation for a number of other corporate blunders that ultimately led to Sears’ undoing.

A Gradual Fall from Grace

While Sears’ problems can be partially blamed on an accumulation of uncontrollable forces, including increased competition, evolving market dynamics, and changing consumer habits, three specific business failures heavily contributed to Sears’ unraveling:

1. The brand failure

For decades, Sears’ biggest differentiator was its reputation as the retail brand in America, and it blindly clung to that sentiment even as competitors flooded an increasingly crowded market space. Walmart began to challenge Sears for the U.S. retail crown as early as the late 1980s, and after hitting its peak stock price in 2007, Sears started rapidly losing market share. The company moved to shutter stores and save cash, but the plan negatively affected its public perception and took a toll on its brand.

Further, Sears might have re-invested those savings into, for instance, fulfillment centers across the U.S. to better serve customers or to create a unique shopping experience in its remaining stores. But Sears did not, choosing to continue leaning on a brand that was quickly losing appeal and credibility. In what some attributed to a reckless act of hubris or even misplaced delusions of grandeur, Sears managed to let its one major competitive advantage – its brand – slip away.

2. The brick-and-mortar failure

In a fully integrated omnichannel retail environment, brick-and-mortar stores become controllable – and hence, valuable – last-mile distribution and fulfillment outlets that differentiate traditional retailers from the online-only players. A brick-and-mortar distribution network helps minimize the costs associated with returns, delivery, and even marketing. Target, for instance, has invested billions into transforming its network of stores into strategic distribution centers. With its embrace of omnichannel – providing customers with seamless desktop, mobile, and in-person shopping experiences – Target put its brick-and-mortar locations to work as a core component of a digital strategy, where it would leverage its physical facilities to fulfill the orders of digital customers.

With a wavering brand and minimal traffic to and even awareness of Sears.com, Sears needed to leverage its stores, which numbered in the thousands during the company’s heyday (and grew to include Kmart outlets after the two companies merged in 2005), more than ever. But Sears treated its stores more as liabilities than assets, and the widespread closures reduced access to Sears goods and services. Additionally, the remaining stores suffered from decades of neglect and disrepair, consistently greeting shoppers with handwritten signs, barren shelves, and poor lighting.

Even if customers had been ordering online, fast and easy fulfillment would have been a pipe dream with a declining brand and a supply chain in disarray. Already slow to execute online sales, Sears had gone on to squander the ability to sell in its own stores.

3. The internal failure

Sears’ organizational structure became a liability around 2008 when the company was split into 30 divisions, which lived under the corporate Sears umbrella in name only. Each division – tires, appliances, apparel, etc. –  had its own executives, reported its own profits, and basically acted as a separate company. Every division was essentially competing with one another for a piece of the corporate pie to fund various marketing, brand, and supply chain projects. Besides a festering “us vs. them” company culture, the impact of the divisional approach led to further internal chasms, with IT being a pivotal one.

Instead of a consolidated, centralized IT environment, the company was supporting 30 different EDI mechanisms for 30 different supply chains, with no overarching architecture or strategy. What resulted was a competitive, disparate IT infrastructure with a mass duplication of systems and needless investments across the business. Costs and inefficiencies ran rampant with Sears’ unwillingness to adopt a consolidated IT approach or commit to consistent digital technologies.

The Slow Burn of Digital Transformation

Having surfaced these failures, it’s rare for a single decision or event to take down a retail conglomerate like Sears, and certainly no singular act led to its downfall. Disruption becomes disruption not because it happens all at once but because the combination of various missteps accumulates to become cataclysmic. With Sears, it was all these things (and more) happening over time that fueled the fire of its demise.

If disruption wasn’t such a longtail game, it might have knocked even more major brands off the retail pedestal. A number of big names with roots in brick-and-mortar retail, however, have managed to adapt and even thrive in today’s digital business landscape by committing to continuously innovating new ways for customers to shop and consume their services.

We already know how Target’s physical locations serve as the centerpiece of its omnichannel retail strategy. Walmart, once Sears’ biggest competitor, posted its best U.S. sales growth in 10 years on surging digital sales after acquiring Jet.com and expanding its online grocery service. Macy’s aligned its in-store business with e-commerce and mobile experiences to improve customer engagement and posted double-digit growth in 1Q18.

So, what’s the difference between Sears and Walmart, or between Sears and Macy’s? This quote from Howard Tiersky in a cio.com article sums it up: 

“Companies that make the shifts necessary to win in the digital age will be those that take a hard look at their assets and competitive differentiators in the current and future digital world and reshape their value proposition as a digital one.”

Digital transformation is a process, a gradual development of digital models and strategies that gain momentum over time. Organizations are allowed to make mistakes as they navigate the transformational waters and find their footing, but those who continually fail to transform, digitally or otherwise, are destined to sink, much as Sears did.

Organizations like Macy’s and Walmart are successfully adapting because they’ve embraced a digital future and what it means to be a digitally driven business. These companies, having taken long looks in the mirror, view their business models through the lens of transformation, asking questions like:

► How can I leverage emerging technologies to get ahead and reduce risk to my business?

► How will modernizing my buying, selling, and distribution cycles – which comprise interactions at the edges of our digital ecosystems – help my company better compete in the age of digital transformation?

► What role does integration technology play in supporting and improving these cycles and digital business changes?

Sears at one time or another asked itself similar questions but was unable to answer them in a timely fashion. Had it been able to do so, the organization would’ve more quickly committed to:

Embracing the digital mindset, to serve all the ways consumers want to shop. Proactively accepting the retail transformation change that was happening would have compelled Sears to more quickly embraced the flexibility, agility, and fluidity of the cloud, storage and analytics platforms for big data projects, and the digital marketplaces that support omnichannel service offerings.

Leveraging digital ecosystems and streamlined, integrated business processes. Adopting an outward-in approach to ecosystems, Sears would have been more prepared to manage trading partner relationships, enhance their supply chains, and build out efficiencies that they can pass on to the consumer.

Focusing on integration, because IT integration is the glue that connects old and new technologies, that blends on-premise and cloud solutions, and that integrates legacy and SaaS approaches. Modern integration solutions link businesses to the cloud and the edges of their digital ecosystems – in Sears’ case, its supply chain partners – and are critical for improving agility and service.

Even Amazon faced some tough questions as it transformed to keep up with Walmart and its online grocery pickup: How could it leverage physical locations to serve customers in better ways and continue its growth trajectory, and where would they come from? So, Amazon bought Whole Foods in 2017 and leverages those 460 stores to further wield its online power, which now includes its own grocery pickup service. A number of those locations also house Amazon lockers for secure package delivery.

Sears already had the physical infrastructure and logistics in place, but it couldn’t fit those pieces into the puzzle that was its digital strategy. Sears’ inability to embrace what it means to be a digitally driven business put it at such a disadvantage that the company was never a significant player in the contemporary retail game.

Conclusions

Today’s consumers are accustomed to dependable online and mobile experiences, in addition to an elevated physical experience if they so desire. Sears’ inability to execute on delivering these omnichannel experiences is just one of the many ways this former retail hero let down its once-booming customer base.

Sears ultimately failed because of its reluctance to fully believe in the consequences of a rapidly changing retail landscape. But Sears certainly was not alone. Businesses like Mattress Firm, Toys R Us, and Sports Authority have crumbled in recent years because they held on to an outdated view of the world for too long, were too focused on their traditional buying and selling cycles, and were too slow to transform.

Companies like Walmart, Target, and Macy’s, who are reshaping their businesses to engage consumers in new ways, are the ones who’ve not only embraced digital transformation to compete in the age of Amazon but have invested in integration technology to help fulfill the promises of those digital strategies.

The lesson: Retail success stems from an accumulation of many small, practical changes and meaningful evolutions that help protect against any strategic failures. Similarly, transformation can be so slight and subtle that while the results seem undetectable, they make all the difference:

► Target employees dressed in red shirts and khakis, for improved service and unified branding

► Amazon aggregating small, independent suppliers in centralized fulfillment centers, for easier distribution

► Macy’s and its retail-as-a-service approach, for enhanced offline experiences and customer engagement

As for Sears, it wouldn’t even buy lights for its stores. It's now on the brink of insolvency and limping its way into retail irrelevance, having lost nearly $6 billion over the past five years and downsizing its roster of stores to just a few hundred.

Amazon, meanwhile, just published and shipped a holiday toy catalog to millions of U.S. households.

 

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