The elegies to Sears, which declared bankruptcy Monday morning, are growing by the moment. Most imply or outright state that the company’s decline was inevitable, a real-life retail version of Percy Shelley’s Ozymandias. Sears, which was founded in 1893, lasted much longer than most. Once the great store supplying middle-class Americans with the everything from houses they lived in to the goods stocked within, the company declined in recent decades, and was all too often shabby, both understaffed and understocked. Don’t fall for it. Instead, think of Sears as parable for our current age of turbo-capitalism.
It’s hardly an original observation to note that where there is a retail bankruptcy, Wall Street firms are often lurking in the background. Those firms — sometimes private equity, sometimes hedge funds — suck money out of the companies via debt payments and other schemes, money that could have been used to invest in the business, to do things like sweep the aisles and keep them filled with items for sale, or beef up the online presence. It was true for Toys R Us and now it is true for Sears.
Hedge fund billionaire Eddie Lampert engineered a merger between Kmart and Sears in 2005, going on to serve as chairman of the board and, finally, taking over CEO in 2013. Lampert’s retail skills are – well, challenged is a polite way to put it. An on-the-ground presence, Lampert wasn’t. He often dictated policy via videoconference from one of his multiple homes. Under his management, Sears didn’t invest in the stores, relying instead on less-than-traditional, often dubious, fixes. One particularly bad idea: At Lampert’s behest, the company adopted a management system straight out of Ayn Rand, one that pitted sections of the store against one another. Here’s how it played out in real life: If a customer needed help in one section of the store, and no one was around to help, a clerk from another department often wouldn’t step in. That didn’t end well.
Over time, as could be predicted, things went from bad to worse for Sears. Stores were dirty, jumbled and less than well-stocked and well-organized. At one suburban New York location, the women’s nightclothes were recently spied next to the appliance section. No surprise that the remaining customers fled.
The phrase “conflict of interest” also never seems to have occurred to Lampert. According to USA Today, Lampert and his hedge fund ESL Investments loaned Sears millions upon millions of dollars as business declined. The hedge fund also bought up a few hundred million in secured Sears debt, meaning Lampert’s hedge fund will be first in line at bankruptcy court. ESL also took a majority stake in Lands’ End, a clothing line spun out from Sears several years ago. A decent percentage of Sears’s real estate holdings were sold off to an investment trust that ESL owned a significant stake of. The trust then went on to charge Sears rent for doing business out of the locations the famed retailer formerly owned.
A lesser man might express some self-doubt, but Lampert decided someone else was at fault for the company’s woes: the federal government and the company’s current and future pensioners. The Pension Benefit Guaranty Corp. had demanded the company come up with about $2 billion to over the past five years to partially fund the company’s chronically underfunded pensions. “Had the Company been able to employ those billions of dollars in its operations, we would have been in a better position to compete with other large retail companies,” Lampert wrote in a recent blog post. One detail he didn’t mention: From 2005 to 2010, Sears spent more than $5 billion on stock buybacks. That juiced the price per share in the short run, but in the long run it deprived the company of money it could have used for upgrades, not to mention bailing out its own pension fund.
Yes, it is true that many of Sears’s problems predate Lampert. Department stores have struggled more and more since the 1980s. Long before Internet shopping was a thing, everything from discount big-box retailers to working moms unwilling to spend time prowling the aisles of mall stores reduced their foot traffic. And then there was Sears’s management itself, which was feckless years before Lampert. As Joseph Nocera writing for Bloomberg and Josh Barro for Intelligencer recounted, they made every mistake a company could possibly make. Taking customers for granted? Check! Selling off booming financial service businesses? Check! Closing down the catalogue business a mere few years before buying goods online became a thing? Check!
But it didn’t need to be this way. Macy’s, which is older than Sears and was also considered a dead retailer walking less than five years ago, has seen sales rise following investment in sprucing up both its stores and Internet presence. It took Lampert to take Sears, a company that was a fading but still viable middle-class emporium, and over a decade turn it into a rich man’s play thing, his own personal great white whale. About 200,000 positions were lost as Sears cut back time and time again, but Lampert, as largest shareholder, remained on the job. That won’t change much with the bankruptcy filing. The company announced Monday that Lampert would give up his CEO title but remain as chairman of the company’s board, hardly a position of powerlessness. It also said ESL was offering Sears another $300 million in loans. If this isn’t a tale of income and wealth inequality writ large, I don’t know what is.