Tears For Sears : The Indicator from Planet Money A storied American retailer has filed for bankruptcy.

Tears For Sears

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CARDIFF GARCIA, HOST:

Hey, everyone. It's Cardiff. This is THE INDICATOR from Planet Money. Stacey is still on vacation, so I'm joined in the studio by frequent guest of the show Josh Barro. He's a columnist at New York magazine. And he's just finished a piece about the demise of Sears. Josh, how are you?

JOSH BARRO: I'm doing well, Cardiff.

GARCIA: So, Josh, Sears is obviously a storied American retailer, around since the late 1800s, seemed like a semi-permanent part of the American retail landscape - like one in every single suburban shopping mall. It has now filed for bankruptcy just this week. And even if like some version of the company does emerge after the bankruptcy proceedings, it'll probably be just a tiny shell of its former self, right?

BARRO: So we will see. The claim is that Sears is going to continue to exist. But that was the claim about RadioShack, and it didn't prove true.

GARCIA: Yeah. And we should also probably note that the bankruptcy proceeding is not so much like the beginning of the end for Sears. It's more like the end of the end, right?

BARRO: Yeah, they've had a few decades of struggles but especially the last 15 years. They've not made a profit since 2010. And, you know, a lot of retailers are in trouble. But Sears, I think, had more difficulty than some of the others making clear what exactly it's proposition was to customers about why they should shop there. So it's been a long decline because of that.

GARCIA: Yeah. They're losing money, closing stores. And this has gone on even in the last few years when the economy itself had strengthened.

BARRO: Right.

GARCIA: OK. And after the break, Josh is going to tell us why we shouldn't just be sad about the end of Sears. We should actually be celebrating its legacy.

(SOUNDBITE OF SONG, "THERE'S MORE FOR YOUR LIFE AT SEARS")

UNIDENTIFIED SINGER: (Singing) There's more for your life. Save for your life. There's more for your life at Sears.

GARCIA: OK. We're back with Josh Barro talking about Sears. Josh, let me start here. How would you characterize the contribution that Sears made to the American retail landscape?

BARRO: So Sears had two really great innovations that both made it a very successful company for a long time and that changed the way that Americans shop. Now, first was that they really pioneered mail order sales a hundred years before Amazon.com came along. So that was sort of the end of the 1800s. Then in the 1920s and 1930s, Sears starts to realize, as people are starting to have automobiles in their households, that it's practical to build these drive-to stores. What they'd been doing in the catalog, they were then able to do in brick-and-mortar in a way that we take for granted now. But it was very novel at the time when Sears was building these department stores.

GARCIA: When you were looking into the history of Sears, were you surprised by how long its dominance lasted - I mean, almost a century?

BARRO: Not really because what undermines the dominance of a company like this is when there's some paradigm shift in the industry such that a different set of core competencies is required. So you had a couple of further innovations that they weren't able to lead on. One was some of the stuff that Walmart came up with in terms of greatly improving supply chains, relentlessly pushing down price, utilizing the opening up of China in order to get low-cost goods to American consumers. Walmart really pioneered a lot of that.

And then you had the second boom of mail order with Amazon.com. And it was a different set of skills. It was technological skills. Amazon has a lot of real competencies and fulfillment in terms of it - it's quite hard to get something anywhere in America within two days. They've built a network of warehouses and a set of competencies around fulfillment that Sears also wasn't able to take off the shelf. So, yeah, it makes sense to me that Sears was successful for so long until what it took to be really successful in retail changed a lot.

GARCIA: You also make the point that Sears didn't just sort of fail to develop these new competencies that Walmart and Amazon had. It also tried out new things that just didn't work.

BARRO: Yeah. Well, so first of all, Sears ended up in some surprising businesses. For example, Sears founded Allstate Insurance in the depths of the depression in the 1930s. And they owned Allstate for 60 years. So some of these tangentially related businesses were actually quite successful for them. Allstate is now one of the, you know, leading property casualty insurers in the U.S. And that seemed to work well in Sears' portfolio for a long time.

And in the 1980s, they sort of decided, well, Allstate has been working well for us. What if we bought Dean Witter and sold financial products in our stores? What if we launched the Discover card? What if we buy Coldwell Banker, the residential real estate brokerage? And in the 1980s, you had executives from Sears saying, oh, well, when we bring all this together under one roof, it's two plus two equals six. People are here because they need an oven, and then we also sell them an annuity. And that lasted for a few years.

And by the '90s, under pressure from Wall Street basically saying these companies were going to be worth more in pieces than altogether, they sold off all those pieces - including they sold Allstate. And so you could argue those consumer finance businesses look a lot better than a traditional retail business, so maybe they should have held on to them. But on the other hand, it wasn't really clear why putting stock brokerage desks inside Sears stores made sense as a way to reach customers - that that gave them a real advantage over other stockbrokers. So, yeah, I think that it ended up being a bit of a distraction. And that was at a time when Sears was falling behind competitors like Walmart in terms of being appealing to shoppers whether it was on price or value or selection or what else.

GARCIA: OK. Let's sort of fast forward now to the middle of the 2000s. By this point, I think it is clear that Sears has not kept up with its rivals Walmart and Amazon. It gets taken over by a hedge fund manager named Eddie Lampert, who at the time had been controlling Kmart. And he put those two companies together. What happens after that?

BARRO: Well, so the company sort of limped along for another 14 years. And Sears and Kmart had in common that they were sort of laggards in their own spaces. In the big-box discount stores, Kmart was less successful than Walmart or Target. Sears had less of a clear proposition than Macy's or some of the other big mall department store retailers. And so the criticism of Lampert is that instead of finding ways to revamp those brands and make them successful again, that he basically bled them dry - that he failed to invest in keeping stores up to date and appealing, that he failed to improve their product lines and instead focused on figuring out what were the other valuable assets of this company.

Did it own valuable real estate? Sears owns some brands that were considered very appealing, like Craftsmen and Kenmore, DieHard, even if the store overall was not that appealing. And so he sold off some of those things over time, including controversially sometimes he sold them to other entities that he had controlling interests in.

GARCIA: Right. Sort of accusations of self-dealing there, right?

BARRO: Right, exactly. And then also he was providing financing to Sears at the same time that he was taking these spinoffs out of Sears. So it was a very, like, octopus-like thing with all of these different Lampert-controlled businesses taking pieces of the Sears business. The question, I think, is would Sears have done any better if they had not done that. I mean, sometimes you have a declining business, like Blockbuster, where there's really no good way to save the business.

You just need to figure out how to get value out of the business while it is still valuable as a business. So, again, it's just a question of, you know, if you really invest in the store business, you may be aiming at a customer who's never going to be interested in you, and you spend a lot on capex and store rebuilds at the same time. If you let the the business bleed dry, obviously people aren't going to want to shop in Sears, but maybe they weren't going to want to shop there anyway.

GARCIA: You take a kind of philosophical view of the demise of Sears, right?

BARRO: Yeah.

GARCIA: I think a lot of people when they hear that something that's been around for a very long time is nearing its end, they're sort of taken over by sadness. You say that - no, that maybe instead we should be pouring one out for Sears and celebrating its legacy.

BARRO: Well, yeah, because retail isn't ending. And as consumers what we need is, you know, good retail opportunities. And so when the needs in the economy change for what it is to be a good retailer, sometimes those competencies to meet those needs aren't going to be housed within the same company. And that's fine. That's how capitalism works.

GARCIA: Right. I mean, it's just part of like the basic concept of creative destruction.

BARRO: Right.

GARCIA: Right.

BARRO: It's good that there is room for new companies to rise up. And sometimes that's going to have to mean that the incumbents go by the wayside. Otherwise, you wouldn't get the innovations that we want. I mean, I think people have a lot of angst about Amazon. And yet people love to use Amazon. It's very convenient. They want things sent to their door, so they don't have to go to the mall. And so I think people sometimes need to be a little bit honest with themselves.

Do you really miss the mall that much? You don't seem to go to the mall anymore. So maybe, you know, even though these changes - there's nostalgia, and there's a sense that it causes a lot of problems for a lot of people when these things have to change. It's still like the change is happening because we individually as consumers have decided that this other new thing is better. And we should think about why we think that's better. And maybe that's a reason to be OK with the change.

GARCIA: I think economists refer to something like that as a revealed preference.

BARRO: Yes.

GARCIA: So in other words, not the thing you say you want but the thing that's actually reflected by what you do.

BARRO: Yes.

GARCIA: OK. Josh Barro, thanks so much.

BARRO: Thanks, Cardiff.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

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(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

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