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Kenmore Washers

Kenmore Washers

Two American retailers, Penney’s and Sears, are on the verge of collapse. They both faced the same problem: how to stand out in a crowded retail market. Both companies have plenty of competition, not just each other. They compete against such department stores as Kohl’s and Dillard’s, Macy’s and Target as well as against Bed Bath & Beyond, Famous Footwear, and other single-line retailers. So best case, you do something bold to stand out. Worst case, you slither away and die.

It’s not a surprise that both companies attracted activist investors. William Ackman of Pershing Square Capital Management made a large investment in JCPenney, then brought in a new CEO, Ron Johnson, to make changes. Johnson took a huge risk: he switched the store pricing policy from constant sales to everyday low pricing. The potential return was huge. It would make Penney’s stand out from all of its rivals, and it might attract shoppers who found the constant sales to be annoying and phoney.

That’s not how it worked. Shoppers like the idea of a sale, and the more people like the idea of a sale, they more likely they are to shop. It was a big risk, and it failed.

The path taken by Sears is very different, and odd. The company’s CEO is Edward Lampert. Lampert founded a hedge fund called ESL Holdings. His MO was to buy troubled retailers and strip out the real estate assets. He took a controlling stake in Kmart as part of that, then merged Kmart with Sears in 2005. It looked better on paper than in reality. There was never a strong attempt to rationalize the real estate (made worse by the decline in real estate prices that started in 2007), nor was there an attempt to run the stores like stores. Sears and Kmart became sad. The stores were dirty, the inventory was a mess (literally, in strange piles and cramped racks), and the service was lackadaisical. There was nothing about shopping at Sears or Kmart that made you feel good. And let’s face it, there is a therapeutic benefit to shopping, at least in our culture.

What I don’t understand is why Edward Lampert is still running Sears and why investors are still in ESL. Yes, many have started pulling out, but there seems to be a sense that he’s a genius and will turn this one around, too! Why, I don’t know.

As activists, both Ackman and Lampert identified businesses that were in serious need of change. Ackman and the JCPenney board took a big risk. It didn’t work, but let’s give them credit for trying. At Sears, the board seemed to favor neglect. They don’t seem to be willing to spend money on paint or new tile, let alone try anything new. And, very soon, both companies will be gone.

Activist investors can identify problems, but they are rarely the best people to recommend operating solutions. The irony here is that some of the solutions were easy. I would have started selling off Sears real estate tout suite (one of their many, many sad stores is near my house, in a neighborhood that has a lot of new development and that is near the commuter train, the el, the highway, and Lake Shore Drive). But you know what? I might have tried the same thing at Penney’s.