How Sears Went From The ‘Amazon Of Its Time’ To Financial Ruin – A Lesson For Investors

Americans don’t shop at Sears anymore, but the once-mighty catalog retailer has one more product to deliver – a lesson for investors.

That lesson: No company is invincible, especially those who play in the ever-changing, relentlessly competitive retail arena.

Richard Sears and Alvah Roebuck went into business to sell watches. But when the federal government launched the Rural Free Delivery service in 1896 to guarantee mail service to even the most remote areas of the country, the duo saw an opportunity.

Sears & Roebuck became the first “virtual retailer.” Their 19th-century version of a website was a massive 1500-page catalog with 100,000 items available for delivery directly to any farm or small town on the map. At the height of Sears’ success, its Christmas Wish Book catalog was hitting 25% of American mailboxes and was every child’s preferred reference when making a list for Santa.

Sears’ mastery of logistics, which centered on a three-million-square-foot distribution center in Chicago, kept delivery times acceptable and prices reasonable. Across the first half of the 20th century, America’s population became increasingly concentrated in cities and suburbs. Sears responded by opening physical department stores, the first in 1925. When the Great Depression hit, Sears again adjusted by emphasizing affordable necessities. By the mid-1960s, Sears was a symbol of American capitalism; its sales accounting for a full 1% of US GDP.

But sometime in the 1970’s Sears lost its mojo. The company failed to respond to demographic changes and new competition. It did nothing to adjust to the loss of its loyal blue-collar customers, whose jobs were shipped overseas. Sears stood still as “big box” retailers like Best Buy and up-and-coming discount chains like Walmart wooed away its customers.

Instead of working to improve its retail operations and offerings, Sears decided to use its resources to diversify into other businesses, including financial and residential real estate services. It was a terrible, and costly, mistake.

And then came Amazon.

We all know the rest of the story. Earlier this month, Sears filed for bankruptcy.

What can investors learn from this tale of a rollicking journey from incredible success to financial ruin? A lot, as it turns out.

The first lesson is that companies grow with a niche and fail without innovation. Consider Amazon as an example. This online giant started as a humble online bookstore and grew into a behemoth through constant, consistent innovation. Now, you can buy everything from books to clothing to gadgets to groceries through Amazon.

Next, no one company is promised a lifetime of exponential returns. Going back to the Amazon-Sears dichotomy, ever-innovating Amazon seemed well aware of this truism. It could be argued that Sears, on the other hand, took its market share for granted. Once pioneers who harnessed the power of the US Postal Service and the railroads, it seems that Sears perhaps felt, because of history, that it was “too big to fail.” We should all know by now that no company is truly immune from competition.

And finally, companies will experience periods of growth, but, often, competitors will steal market share and impact that company’s return. Think of the example of Sears and its brick-and-mortar stores in the suburbs. Other companies saw this move and decided to implement the same strategy for growth. In the end, Sears’ market share and its investors’ returns suffered.

In the end, investors need to remain vigilant, no matter how well a company has done historically, or how well it’s doing today. After all, who would have thought that Sears one day would be filing bankruptcy after dominating retail for 100 years?

Amazon, a “prime” example of this point, has created a following in web, retail, and technology. While they seem to have insulated themselves against absolution, no one company should be the baseline of a concentrated portfolio. Ever.

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