Opinion

Felix Salmon

A tale of two retailers

By Felix Salmon
December 28, 2011

The two biggest expectations-defying retailers of the past decade were Sears Holdings and the Apple Store. Expectations could hardly have been higher when the former was created: it was one of those rare deals where the stock of the acquiring company went up on the news, and in an article headlined “Eddie’s Master Stroke“, Businessweek waxed positively rhapsodic about the prospects for the company becoming the next Berkshire Hathaway. Three years earlier, of course, it had published a column headlined “Sorry, Steve: Here’s Why Apple Stores Won’t Work“.

There are lots of reasons why Apple Stores succeeded while Sears stores have failed, not least the fact that people really want what Apple is selling. But the biggest and most obvious difference, I think, is in the two companies’ approach to spending money. Apple Stores are the most expensive on the planet: whatever it costs to make them insanely great, it will get spent. Meanwhile Eddie Lampert seems to have exactly the same attitude — only instead of spending money on his stores, he spends it on stock buybacks.

While retailers generally spend $6 to $8 per square foot a year on updating their stores, Sear’s spends only about $1.50 to $2, notes ISI analyst Greg Melich. That is not even enough to keep up with depreciation and amortization.

Amazingly, Sears has spent $5.2 billion over the past five years buying back its stock, more than twice as much as on capital investment.

Steve Jobs was never very good at financial engineering; Eddie Lampert has never been very good at anything else. Lampert likes to buy things which already exist; Jobs liked to spend money building things the likes of which the world had never seen.

One of my favorite new toys is the Apple Store app for the iPhone. You walk into an Apple Store, find any product selling for less than $100, and scan the barcode with your phone’s camera. The app then asks you if you want to buy the product; if you do, you just type in your iTunes password, and you’re done. The purchase is charged to your iTunes account, and you can waltz out of the store without interacting with a single salesperson.

It’s just another small way in which Apple is revolutionizing the retail experience. And it seems to me that if you’re an ambitious retailer, then if you don’t want to revolutionize the retail experience, at least somewhere, somehow, you’re doing something wrong. Which does contrast, rather, with the way that Eddie Lampert extolled Sears when he bought it, saying the store was “every bit as good as any of the competition”.

Well, it wasn’t for long.

Update: Jeff Matthews reminds us that Eddie Lampert actually compared Sears to Apple in last year’s letter to shareholders. “Like Apple,” writes Lampert, Sears tries to “create long-term value” by “improving our operating performance, innovating, and delighting customers”. Matthews also notes:

An investor with access to a Bloomberg machine can spot one difference between Sears and Apple that would make a Sears shareholder throw up: even at current prices, Apple shares are cheaper than Sears, at 8.3X EBITDA versus 10.2X for Sears.
Oh, and we used EBITDA to compare the valuation, since Sears doesn’t have any earnings to speak of.

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Comments
22 comments so far | RSS Comments RSS

While there was ample logic for why Apple would fail in retail, but obviously hit it out of the park, anyone with serious retail chops had to know that Sears + Kmart would fail.

It was never clear why you would shop at either store versus Wal-Mart or Target, and Kmart especially was a dated concept 25 years ago, so other than the financial engineering aspect, there was no “there” there from a retail perspective.

The bottom line there is that lazy M&A strategy of merging two failed businesses to create one winning one has worked, like…never, right?

Posted by hypermark | Report as abusive
 

Sears also cut back on its service capabilities. They used to be noted for providing a complete package, the appliance and its maintenance. Now, it’s worth shopping elsewhere as that’s where you’ll have to go to get repairs done.

Basically, finance is about disinvestment.

Posted by spiffy76 | Report as abusive
 

Apple’s success has surprised retail analysts more than it has anyone familiar with Apple. The analysts thought “computers” and compared them with PC retailers which sell on tiny margins, have very pushy but generally appallingly badly technically trained staff, poor service, and little of interest to consumers other than price and a spec sheet.

Apple realised nobody was selling an experience, and that’s what the Stores represent to people – a taste of the Apple Experience in the way a theme park does. And they do it without making visitors feel guilty for having trespassed into a one make store such as Panasonic or Sony have had in the past.

Sears I know nothing about, but I do know that if you don’t reinvest in your business your business will not be there to invest in you.

Posted by FifthDecade | Report as abusive
 

On the day after xmas I had to go to the mall to get a bag for an upcoming trip; Macy’s was having a sale on luggage. The _only_ store in the mall that was really busy was the Apple store. One of the anchor stores is a Sears, it was pretty dead. Sears is a shadow of its former self; I’m old enough to remember when Kenmore and Craftsman brand goods actually provided decent value. I’ve got a 14-yr-old Kenmore washing machine here in the house that still works pretty well. But I wouldn’t buy them now. More recent experience is lousy. And yes, buying KMart was stupid.

Posted by MacCruiskeen | Report as abusive
 

Felix said: “One of my favorite new toys is the Apple Store app for the iPhone…”

Geez, how can you be in awe over a rather silly techno-trinket? I don’t get why such a feature is a world-shaking game changer. Apple sells bling and little else. The fad will die on its own accord at some point.

Sears obviously has been in trouble for a long, long time. I think they lost their way by commoditizing and cheapening products. Craftsman tools are only a slight cut above Harbor Freight. Likewise for their appliances. There is no reason to go to Sears for such things anymore.

Only a 0.0001-percenter like Lampert, who has his house staff do his shopping, would not understand why the 99% wouldn’t be enthused about his degrading product and service quality at Sears.

Posted by upstater | Report as abusive
 

Look at Autozone another company Lampert basically controls. Same playbook as Sears with the opposite result… it’s outperformed AAPL over the last 2 years… pretty impressive.

The compelling thing ESL did with Sears was to seperate the real estate from the business. In strong local economies Kohls, Target, Home Depot and Lowes were simply killing Sears. No department store can match the big boxes on price… and Sears softlines can’t compete with a store like Kohls on fashion or selection.

Solution… don’t fight the battles you can’t win. ESL closed stores in the best areas because he could sublet his leases and sell his owned real estate. He kept the rust belt stores in the areas where Target, HD, and Kohls did not agressively expand. For a while it worked great. He took mud and crap mixed them togeather and sold it as chocolate pudding.

I think craftsmen is a great brand, pretty well made in most cases too. I managed to break a wrench and they gave me a new one no questions asked… lifetime warrenty on all their handtools they said. I didn’t need a receipt because Craftsmen is stamped right into the wrench. Hard to beat that.

Posted by y2kurtus | Report as abusive
 

@upstater In your first paragraph you accuse Apple of being bling and little else. In your second paragraph you then go on to say that Sears lost their way by commoditizing and cheapening products. I realise someone without any class wouldn’t recognise it when they see it, but at least you could be consistent.

Posted by FifthDecade | Report as abusive
 

@upstater wrote: “Geez, how can you be in awe over a rather silly techno-trinket? I don’t get why such a feature is a world-shaking game changer. ”

Given how crowded the stores can get, especially the stores like the 5th Avenue cube that get a lot of tourist traffic at all times, being able to dash in and buy something minor without having to wait for assistance at all, let alone in any kind of line, is a huge advantage.

Posted by jonhendry3 | Report as abusive
 

At the time, Kmart’s stock going up by buying Sears made sense, since Kmart was coming out of bankruptcy and almost any news was good news.

The problem has been that they haven’t done anything since then except sell off real estate, buy back stock, and let their stores wither on the vine. So, really, there’s a reason why they’re dropping, and it has nothing to do with overwrought pieces by Businessweek.

Posted by FraudGuy | Report as abusive
 

@jonhendry3: Most people don’t shop at such locations. From a practical standpoint how does the Apple Store ap apply to most retail transactions? I suppose it is possible to see such things at places like Safeway, HD or Wal Mart, but I kind of doubt it.

@FifthDecade: Apple product differentiation is much more in software and marketing, not intrinsic product quality or reliability. It surely is mostly bling and buzz.

I think Craftsman and Kenmore intrinsically had product quality and reliability in the past (in addition to customer service in store and aftermarket), but that differentiation no longer exists for the most part.

Posted by upstater | Report as abusive
 

My Dad worked at Sears for over thirty years. When he started, the sales staff was mostly full-time. He had a pension, stock options, health insurance, and a bond program. When he retired he was a dinosaur. Most of the sales staff were part-time when he retired. A part-time sales staff does not deliver the level of customer service that a full-time staff is capable of doing. To me, that has been the undoing of Sears. I also agree that the inventory of Sears is ordinary. They might as well get rid of everything but Craftsman. The store at my local mall is looking a bit worn and dumpy. (As is the local K-Mart BTW.) There is no money being put into facilities. It will be a sad day when Sears and K-Mart, once two powerhouses in retail, go bankrupt.

Posted by tmccoo1 | Report as abusive
 

I was in an electronics store yesterday and happened to glance at the PCs on the way to the accessories section. First off they were all made of plastic, except one, and on that one the metal was clearly a veneer as it moved when your finger pushed it. Apple laptops on the other hand are solidly built and the aluminium Unibody doesn’t budge a millimeter when you press on it. The internal engineering on a Mac is far more robust and logically laid out than in most PCs too.

As for reliability, our Macs have outlasted our last PC purchases which were prone to all sorts of reliability issues. When a Mac needed attention (once in six years over five Macs) I didn’t have hardware people saying it was a software fault, and software people saying it was a hardware fault – I just went to an Apple store and got great service and a free repair three and a quarter years after purchase – outside both the normal warranty and the extended warranty.

With PCs, my last one had total disk failure after 9 months, my co-Director’s HP lost all the letters off the keys within 12 months and bent every time she typed on it, all the PCs were noisy, and used excessive amounts of power. Every one of them had at least two parts fail on them within two years, while the amount of maintenance they required cost us a fortune, averaging 11 hours per week. The Macs have needed less than a tenth of that.

As for bling, let’s see:
- See through side cabinet? PCs yes, Macs no.
- Meaningless stickers all over the case? PCs yes, Macs no.
- Festoons of different coloured LEDs? PCs yes, Macs no.
- Illuminated key letters in poor light? PCs no, Macs yes.

If it has a function, is useful and helps the user Macs generally have it; if it’s glitzy and added for reasons of differentiation or to stand out, it’s on a PC.

Posted by FifthDecade | Report as abusive
 

The comparison between Apple and Sears is so incongruent it’s laughable. Nobody should be surprised about Sears as I wrote yesterday – http://wp.me/pJX7l-y6

Posted by markkolier | Report as abusive
 

Sears still has a strangle-hold on being the store you walk-through to get to the stores you shop in.

Posted by JGorman | Report as abusive
 

“…if it has a function, is useful and helps the user Macs generally have it; if it’s glitzy and added for reasons of differentiation or to stand out, it’s on a PC.”

Well, whatever gets you through the night. But I’d be eager to hear about the usefulness of the translucent “bondi blue ice” iMac case, or the functionality of the white iPhone 4. (A white phone! Can you believe it?)

Apple spends a _lot_ of time on non-functional design. Haven’t you noticed how the fanboys drool over sixteen color choices one year, then swoon over the minimalist purity of a simple block of aluminum the next? It’s like a runway show in Milan: the hemlines are up! The hemlines are down!

Posted by ckbryant | Report as abusive
 

Apple I-Mac that I purchased in mid-2006 is still going along nicely. Whenever it may die, I’d gladly buy another. And I wasn’t forced into a software upgrade.

Maybe a PC notebook will be a less-expensive replacement today, but negating all PC-related troubles was well worth the expense 5+ years ago. Thanks AAPL !

Posted by McGriffen | Report as abusive
 

My goodness ckbryant, you’re MILES behind the times – the Bondi Blue iMac was TWELVE years ago! lol! And much to the chagrin of PC advocates, most of them are still working. The PowerMac introduced in 2003 introduced a case design that is still in use today by the MacPro, EIGHT years later. Hardly an example of rapid design change dictated by fashion.

Posted by FifthDecade | Report as abusive
 

Saying Apple Stores are the most expensive on the planet is a 100% lie. Apple Flagships Stores might be the most expensive of all Apple Stores. Apple Stores are setting records for total retail sales and have the highest dollars per square foot in the history of the retail industry! Considering Apple Stores cost a fraction of what the Anchor stores like JC Penny, Macy’s, Nordstrom’s, Dillars, and such – Apple Stores are doing retail unlike anyone else on the planet!

Posted by RevoDiamo | Report as abusive
 

Apple Stores might be the most expensive per square foot of any large chain? I wouldn’t know… But as you say, RevoD, their revenue per square foot is more than sufficient to justify the cost.

Dunno if a comparison of Apple and Sears makes any sense, though. The product lines are simply too different. Perhaps Best Buy would be a little closer?

Sears might be reasonably compared against Walmart or Target?

Posted by TFF | Report as abusive
 

Felix, this is you playing journalist, creating an “angle” where none existed. At the time of the Eddie-led Sears Merger, the excitement was not about the retail. It was about the theory that in a booming real estate market, the Sears and KMart franchises controlled a huge amount of re-developable real estate and Eddie was just the guy to unlock the value. It had nothing – zero, zip, nada – to do with retailing. The results with Sears are exactly what retail analysts predicted. Lampert did nothing to revive and reposition the stores, and they languished.

Apple, on the other hand – but why are we talking about Apple stores? There is no point to the comparison.

Posted by Dollared | Report as abusive
 

I think a more interesting comparison would be Sears vs. Ron Johnson’s JC Penney, to see whether the Apple retail magic will work in the same category as Sears.

Posted by resinaus | Report as abusive
 

I agree with what you say, Felix. But here’s what everyone seems to miss.

Steve Jobs got one thing horribly WRONG! When he repackaged NeXT as OSX and customers did not flock to adopt it, he began a series of moves to FORCE migration. Gradually Macs could no longer boot in earlier systems.

The “Classic” OS 9 emulator preserved, for a time, one’s ability to run earlier owned and adequate software. Then he changed from the PPC chip to an Intel chip, and Classic didn’t work any more. Some older applications could run on Classic’s replacement “Rosetta” but, with Lion, that has been dropped.

Since developers always make new applications for the “latest and greatest” Apple system, with each “new” system owners of older Macs are left in the dust. I don’t WANT nor can I afford to live my computer life on the bleeding edge of technology.

I want no less than ten years out of an application I take the money to buy and the time to learn, and I want a “patch” when a new Mac comes out that will allow me to use the old software STILL if it continues to meet my needs. I’ll pay a nominal amount for that patch.

So my 2010 (Thanksgiving) Intel Mini will be the last Mac I buy. I was one of the first Mac customers, a 512K E with a 20MB HD in 1985, and I’ve been a customer ever since. But I didn’t like it when MacWrite was replaced with MacWrite II. I didn’t like it when I then had to transition to WriteNow.

In my transition to OSX, kicking and screaming, I left WriteNow for Word for six months…NOTHING would have tempted me to continue wrestling with Word. I still modify OSX to look and work as OS 9 did because much of the visual IN YOUR FACE difference was not technically necessary and yet not made optional.

I bought Pages when it came out and was again happy, but it does not run on my Intel Mac, so I bought a later version. None of this irritation and learning time has resulted in a meaningful increase of utility to my word processing efforts.

I guess everyone else in the world does not mind being exploited in this manner, or maybe they’re just used to it. This is the “down side” of some so-called genius convinced he knows what I “need”, both now and in the future. NO MORE!

I don’t have an iPhone, I don’t NEED an iPhone. The iPad may eventually get my attention since it’s handy in the cockpit of a private aircraft and could replace a laptop, but I don’t want my familiar computer interface constantly tweaked so functions can be the same as on devices I don’t use.

Obviously Apple wants frequent purchasers more than loyal customers, and this is more profitable. So be it.

Posted by OneOfTheSheep | Report as abusive
 

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