Wednesday, March 9, 2016

Sears Problems: Tesla, Uber and Amazon?

On Feb 25, Sears said that its same-store sales fell 7.1% in the fourth quarter and revenue dropped 9.8% to $7.3 billion. The company lost $580 million, or $5.44 per share, in the quarter compared with a loss of $159 million, or $1.50 a share, for the same period last year.

Then came the explanations from Sears’ CEO.

Sears blamed Tesla, Uber, and Amazon. One is hard-pressed to relate to the woes of Sears with the quotes from Sears chairman, “Some innovative companies like Tesla are heavily subsidized by government policy (either directly or through purchases made by their customers), while existing car companies are forced to comply with mandates to produce cars that people may not want at enormous cost. These companies rely heavily on continued financing (Tesla raised over $1 billion in equity and over $2.5 billion in debt over the past four years) and favorable capital market conditions and valuations, while companies viewed through a more traditional lens, like Sears Holdings, are met with skepticism even though we have an enormous asset base and a proven history of monetizing these assets and raising additional capital to fund our obligations and transformation."

I wrote about Sears’ woes as early as 2012 as it was going through the effects of merger with K-mart. At the time, Sears had problems with their operating cash flow, inventory turnover, and ROA. All of the symptoms pointed to the urgency for controlling costs. Supply chain efficiencies as evidenced through low inventory turnover should have been a key driver. Sears (and K-mart prior to that) also did not invest enough in technology. Neither did it have a clear strategy to integrate the K-mart assets and create an integrated supply chain for the combined retailing empire.

Instead of focusing on their supply chain processes to rein back costs and create process efficiencies first, Sears chose to focus on revenue-facing initiatives (such as Lands End store in store or their big investments in creating an online portal that was too generic and not focused enough on their key brands) without first rolling back the runaway costs of their supply chain operations. The cost savings were effected, but through means that are always more harmful than they are worth such as cutting on store-personnel and upkeep. The results are for all to see.

A good case-study for all other retailers who think they are not in the business of technology and keep short-changing themselves while the consumers move on. Or others who think they can get supply chain efficiencies with “experienced” merchants and planners rather than putting the power of algorithms and computing to the fore.

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Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.
© Vivek Sehgal, 2016, All Rights Reserved.

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