Let Sears Go! No Subsidies, and Sell the Stock. Invest in Groupon
Sears is threatening to move its headquarters out of the Chicago area. It's been in Chicago since the 1880s. Now the company Chairman is threatening to move its headquarters to another state, in order to find lower operating costs and lower taxes.
Predictably "Officals Scrambling to Keep Sears in Illinois" is the Chicago Tribune headlined. That is stupid. Let Sears go. Giving Sears subsidies would be tantamount to putting a 95 year old alcoholic, smoking paraplegic at the top of the heart/lung transplant list! When it comes to subsidies, triage is the most important thing to keep in mind. And honestly, Sears ain't worth trying to save (even if subsidies could potentially do it!)
"Fast Eddie Lampert" was the hedge fund manager who created Sears Holdings by using his takeover of bankrupt KMart to acquire the former Sears in 2003. Although he was nothing more than a financier and arbitrager, Mr. Lampert claimed he was a retailing genius, having "turned around" Auto Zone. And he promised to turn around the ailing Sears. In his corner he had the modern "Mad Money" screaming investor advocate, Jim Cramer, who endorsed Mr. Lampert because...... the two were once in college togehter. Mr. Cramer promised investors would do well, because he was simply sure Mr. Lampert was smart. Even if he didn't have a plan for fixing the company.
Sears had once been a retailing goliath, the originator of home shopping with the famous Sears catalogue, and a pioneer in financing purchases. At one time you could obtain all your insurance, banking and brokerage needs at a Sears, while buying clothes, tools and appliances. An innovator, Sears for many years was part of the Dow Jones Industrial Average. But the world had shifted, Home Depot displaced Sears on the DJIA, and the company's profits and revenues sagged as competitors picked apart the product lines and locations.
Simultaneously KMart had been destroyed by the faster moving and more aggressive Wal-Mart. Wal-Mart's cost were lower, and its prices lower. Even though KMart had pioneered discount retailing, it could not compete with the fast growing, low cost Wal-Mart. When its bonds were worth pennies, Mr. Lampert bought them and took over the money-losing company.
By combining two losers, Mr. Lampert promised he would make a winner. How, nobody knew. There was no plan to change either chain. Just a claim that both were "great brands" that had within them other "great brands" like Martha Stewart (started before she was convicted and sent to jail), Craftsman and Kenmore. And there was a lot of real estate. Somehow, all those assets simlply had to be worth more than the market value. At least that's what Mr. Lampert said, and people were ready to believe. And if they had doubts, they could listen to Jim Cramer during his daily Howard Beale impersonation.
Only they all were wrong.
Retailing had shifted. Smarter competitors were everywhere. Wal-Mart, Target, Dollar General, Home Depot, Best Buy, Kohl's, JCPenney, Harbor Freight Tools, Amazon.com and a plethora of other compeltitors had changed the retail market forever. Likewise, manufacturers in apparel, appliances and tools had brough forward better products at better prices. And financing was now readily available from credit card companies.
Surely the real estate would be worth a fortune everyone thought. After all, there was so much of it. And there would never be too much retail space. And real estate never went down in value. At least, that's what everyone said.
But they were wrong. Real estate was at historic highs compared to income, and ability to pay. Real estate was about to crater. And hardest hit in the commercial market was retail space, as the "great recession" wiped out home values, killed personal credit lines, and wiped out disposable income. Additionally, consumers increasingly were buying on-line instead of trudging off to stores fueling growth at Amazon and its peers rather than Sears - which had no on-line presence.
Those who were optimistic for Sears were looking backward. What had once been valuable they felt surely must be valuable again. But those looking forward could see that market shifts had rendered both KMart and Sears obsolete. They were uncompetitive in an increasingly more competitive marketplace. As competitors kept working harder, doing more, better, faster and cheaper Sears was not even in the game. The merger only made the likelihood of failure greater, because it made the scale fo change even greater.
The results since 2003 have been abysmal. Sales per store, a key retail benchmark, have declined every quarter since Mr. Lampert took over. In an effort to prove his financial acumen, Mr. Lampert led the charge for lower costs. And slash his management team did - cutting jobs at stores, in merchandising and everywhere. Stores were closed every quarter in an effort to keep cutting costs. All Mr. Lampert discussed were earnings, which he kept trying to keep from disintegrating. But with every quarter Sears has become smaller, and smaller. Now, Crains Chicago Business headlined, even the (in)famous chairman has to admit his past failure "Sears Chief Lampert: We Ought to be Doing a Lot Better."
Sears once built, and owned, America's tallest structure. But long ago Sears left the Sears Tower. Now it's called the Willis Tower by the way - there is no Sears Tower any longer. Sears headquarters are offices in suburban Hoffman Estates, and are half empty. Eighty percent of the apparel merchandisers were let go in a recent move, taking that group to California where the outcome has been no better. Constant cost cutting does that. Makes you smaller, and less viable.
And now Sears is, well..... who cares? Do you even know where the closest Sears or Kmart store is to you? Do you know what they sell? Do you know the comparative prices? Do you know what products they carry? Do you know if they have any unique products, or value proposition? Do you know anyone who works at Sears? Or shops there? If the store nearest you closed, would you miss it amidst the Home Depot, Kohl's or Best Buy competitors? If all Sears stores closed - every single location - would you care?
And now Illinois is considering giving this company subsidies to keep the headquarters here?
Here's an alternative idea. Using whatever logic the state leaders can develop, using whatever dream scenario and whatever desperation economics they have in mind to save a handful of jobs, figure out what the subsidy might be. Then invest it in Groupon. Groupon is currently the most famous technology start-up in Illinois. Over the next 10 years the Groupon investment just might create a few thousand jobs, and return a nice bit of loot to the state treasury. The Sears money will be gone, and Sears is going to disappear anyway. Really, if you want to give a subsidy, if you want to "double down," why not bet on a winner?
It really doesn't have to be Groupon. The state residents will be much better off if the money goes into any business that is growing. Investing in the dying horse simply makes no sense. Beg Amazon, Google or Apple to open a center in Illinois - give them the building for free if you must. At least those will be jobs that won't disappear. Or invest the money into venture funds that can invest in the next biotech or other company that might become a Groupon. Invest in senior design projects from engineering students at the University of Illinois in Chicago or Urbana/Champaign. Invest in the fillies that have a chance of winning the race!
Sentimenatality isn't bad. We all deserve the right to "remember the good old days." But don't invest your retirement fund, or state tax receipts, in sentimentality. That's how you end up like Detroit. Instead put that money into things that will grow. So you can be more like silicon valley. Invest in businesses that take advantage of market shifts, and leverage big trends to grow. Let go of sentimentality. And let go of Sears. Before it makes you bankrupt!