Let Sears Go! No Subsidies, and Sell the Stock. Invest in Groupon

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Sears is threatening to move its headquarters out of the Chicago area.  It’s been in Chicago since the 1880s.  Now the company Chairman is threatening to move its headquarters to another state, in order to find lower operating costs and lower taxes. 

Predictably “Officals Scrambling to Keep Sears in Illinois” is the Chicago Tribune headlined.  That is stupid.  Let Sears go.  Giving Sears subsidies would be tantamount to putting a 95 year old alcoholic, smoking paraplegic at the top of the heart/lung transplant list!  When it comes to subsidies, triage is the most important thing to keep in mind.  And honestly, Sears ain’t worth trying to save (even if subsidies could potentially do it!)

“Fast Eddie Lampert” was the hedge fund manager who created Sears Holdings by using his takeover of bankrupt KMart to acquire the former Sears in 2003. Although he was nothing more than a financier and arbitrager, Mr. Lampert claimed he was a retailing genius, having “turned around” Auto Zone. And he promised to turn around the ailing Sears. In his corner he had the modern “Mad Money” screaming investor advocate, Jim Cramer, who endorsed Mr. Lampert because…… the two were once in college togehter.  Mr. Cramer promised investors would do well, because he was simply sure Mr. Lampert was smart.  Even if he didn’t have a plan for fixing the company.

Sears had once been a retailing goliath, the originator of home shopping with the famous Sears catalogue, and a pioneer in financing purchases.  At one time you could obtain all your insurance, banking and brokerage needs at a Sears, while buying clothes, tools and appliances.  An innovator, Sears for many years was part of the Dow Jones Industrial Average.  But the world had shifted, Home Depot displaced Sears on the DJIA, and the company’s profits and revenues sagged as competitors picked apart the product lines and locations.

Simultaneously KMart had been destroyed by the faster moving and more aggressive Wal-Mart.  Wal-Mart’s cost were lower, and its prices lower.  Even though KMart had pioneered discount retailing, it could not compete with the fast growing, low cost Wal-Mart. When its bonds were worth pennies, Mr. Lampert bought them and took over the money-losing company.

By combining two losers, Mr. Lampert promised he would make a winner.  How, nobody knew.  There was no plan to change either chain.  Just a claim that both were “great brands” that had within them other “great brands” like Martha Stewart (started before she was convicted and sent to jail), Craftsman and Kenmore. And there was a lot of real estate.  Somehow, all those assets simlply had to be worth more than the market value.  At least that’s what Mr. Lampert said, and people were ready to believe.  And if they had doubts, they could listen to Jim Cramer during his daily Howard Beale impersonation.

Only they all were wrong.

Retailing had shifted.  Smarter competitors were everywhere.  Wal-Mart, Target, Dollar General, Home Depot, Best Buy, Kohl’s, JCPenney, Harbor Freight Tools, Amazon.com and a plethora of other compeltitors had changed the retail market forever.  Likewise, manufacturers in apparel, appliances and tools had brough forward better products at better prices.  And financing was now readily available from credit card companies. 

Surely the real estate would be worth a fortune everyone thought.  After all, there was so much of it.  And there would never be too much retail space.  And real estate never went down in value.  At least, that’s what everyone said.

But they were wrong.  Real estate was at historic highs compared to income, and ability to pay.  Real estate was about to crater.  And hardest hit in the commercial market was retail space, as the “great recession” wiped out home values, killed personal credit lines, and wiped out disposable income.  Additionally, consumers increasingly were buying on-line instead of trudging off to stores fueling growth at Amazon and its peers rather than Sears – which had no on-line presence.

Those who were optimistic for Sears were looking backward.  What had once been valuable they felt surely must be valuable again.  But those looking forward could see that market shifts had rendered both KMart and Sears obsolete.  They were uncompetitive in an increasingly more competitive marketplace.  As competitors kept working harder, doing more, better, faster and cheaper Sears was not even in the game.  The merger only made the likelihood of failure greater, because it made the scale fo change even greater. 

The results since 2003 have been abysmal.  Sales per store, a key retail benchmark, have declined every quarter since Mr. Lampert took over.  In an effort to prove his financial acumen, Mr. Lampert led the charge for lower costs.  And slash his management team did – cutting jobs at stores, in merchandising and everywhere.  Stores were closed every quarter in an effort to keep cutting costs.  All Mr. Lampert discussed were earnings, which he kept trying to keep from disintegrating.  But with every quarter Sears has become smaller, and smaller.  Now, Crains Chicago Business headlined, even the (in)famous chairman has to admit his past failure “Sears Chief Lampert: We Ought to be Doing a Lot Better.”

Sears once built, and owned, America’s tallest structure.  But long ago Sears left the Sears Tower.  Now it’s called the Willis Tower by the way – there is no Sears Tower any longer.  Sears headquarters are offices in suburban Hoffman Estates, and are half empty.  Eighty percent of the apparel merchandisers were let go in a recent move, taking that group to California where the outcome has been no better. Constant cost cutting does that.  Makes you smaller, and less viable.

And now Sears is, well….. who cares?  Do you even know where the closest Sears or Kmart store is to you?  Do you know what they sell?  Do you know the comparative prices?  Do you know what products they carry?  Do you know if they have any unique products, or value proposition?  Do you know anyone who works at Sears?  Or shops there?  If the store nearest you closed, would you miss it amidst the Home Depot, Kohl’s or Best Buy competitors?  If all Sears stores closed – every single location – would you care? 

And now Illinois is considering giving this company subsidies to keep the headquarters here?

Here’s an alternative idea. Using whatever logic the state leaders can develop, using whatever dream scenario and whatever desperation economics they have in mind to save a handful of jobs, figure out what the subsidy might be.  Then invest it in Groupon.  Groupon is currently the most famous technology start-up in Illinois.  Over the next 10 years the Groupon investment just might create a few thousand jobs, and return a nice bit of loot to the state treasury.  The Sears money will be gone, and Sears is going to disappear anyway.  Really, if you want to give a subsidy, if you want to “double down,” why not bet on a winner?

It really doesn’t have to be Groupon.  The state residents will be much better off if the money goes into any  business that is growing.  Investing in the dying horse simply makes no sense.  Beg Amazon, Google or Apple to open a center in Illinois – give them the building for free if you must.  At least those will be jobs that won’t disappear.  Or invest the money into venture funds that can invest in the next biotech or other company that might become a Groupon.  Invest in senior design projects from engineering students at the University of Illinois in Chicago or Urbana/Champaign.  Invest in the fillies that have a chance of winning the race!

Sentimenatality isn’t bad.  We all deserve the right to “remember the good old days.”  But don’t invest your retirement fund, or state tax receipts, in sentimentality.  That’s how you end up like Detroit.  Instead put that money into things that will grow.  So you can be more like silicon valley.  Invest in businesses that take advantage of market shifts, and leverage big trends to grow.  Let go of sentimentality.  And let go of Sears.  Before it makes you bankrupt!

 

Hey politicians – growth is what matters – Chicago, Illinois

I was born in 1957.  That year, a 3 bedroom track home in Wichita, KS sold for the same price as that very same track home in Palo Alto, CA – about $10,000.  Of course, things have changed hugely since then.  Agriculture value had declined markedly, and automation has allowed for dramatic productivity improvements, robbing the heartland states of hundreds of thousands of agricultural jobs.  Without people on the farms, the need for agricultural cities supporting the farms declined.  No growth, and values decline.  Today that home in Wichita is worth something like $50,000. 

The land where the track home once sat in Palo Alto is worth $500,000.  Because the explosion of technology jobs in Silicon Valley made demand for housing much greater, and as the value of technology soared those employed in the industry saw their incomes rise, allowing for higher home values.

It all comes down to growth.  Geographic areas are like businesses in that growth leads to all kinds of good things – including higher home values.  People go where the jobs are.  Especially good paying jobs.  And that comes from investing in innovation, and the companies that develop new solutions aligned with market needs.

According to Forbes magazine in "Houston: Model City" Illinois has lost 260,000 jobs in the last decade.  No wonder home values in Chicago never soared like San Jose.  But it's also no mystery why the 15-20% decline in Chicago real estate seems never to be improving.  When a city stops growing – well – look at Detroit.

Today Crain's Chicago Business reported "Chicago Economy Sees Signs of Life, But Rocky Recovery is Forecast."  Why?  Little has been done to improve job growth.  Once an agricultural center (the famous stockyards of The Jungle fame) Chicago became a powerhouse manufacturing center.  But over the last 15 years the city and state have done almost nothing to drive more jobs related to information or the coming biological growth wave.

Few realize that the University of Illinois is ranked as the 4th best engineering school in the world.  Yet, most graduates end up "going coastal" in order to find high paying jobs.  Worse, innovators who want seed money or venture capital find none from the state, as it continues struggling to support the costs of jobs and pensions related to the now-gone manufacturing economy!  Spending money trying to Defend & Extend the old manufacturing base.  And there is almost no angel or venture private financing, which has grown considerably on both coasts, because that is targeted largely in non-manufacturing industries.  And the large companies in Chicago – from Kraft to Sara Lee to Motorola to Lucent – to even Boeing – invest nearly nothing in spin-off companies and innovators in their own back yard.  Many start-ups report they have to move either west or east in order to obtain financing for their ideas and rapid growth.

For cities and states, growth is the key.  It is OK that once all the cowboys ended their cattle drives in Wichita.  And that the world's largest grain elevator is just southeast of town.  When agriculture was the center of the universe that was a good thing.  But because the leaders did not transition toward new job growth as the economy shifted, Wichita is now a backwater.  It is so hard to recruit talent to Wichita that Pepsi moved the headquarters of Pizza Hut to Dallas, and most of the decisions for Beech aircraft are made at Raytheon Headquarters in suburban Boston.  Face it, do you want to live in Wichita?

How quickly will people say the same thing about Chicago?  Already, nobody wants to live in Detroit.  If Chicago city leaders, and Illinois state leaders, can't get out of old Lock-ins to manufacturing mind sets we all may be surprised how quickly Chicago follows its sister cities into unattractive outcomes.  For politicians, and corporate leaders, a focus on growth is extremely important if they want to keep their city vibrant.

For residents of Chicago, there is ample reason to be worried about the future of their infrastructure and home values.

Call to Action – Why we have to change

"Deeper Recession Than We Thought" is the Marketwatch headline.  As government data reporters often do, today they revised the economic numbers for 2008.  We now know the start to this recession was twice as bad as reported.  The 3.9% decline was the worst economic performance since the Great Depression of the 1930s.  The consumer spending decline was the worst since 1951 (58 years – a very low percentage of those employed today were even born then.)  Business investment dropped a full 20%.  Residential investment dropped 27%.  Stark numbers.

How did business people react?  Exactly as they were trained to react.  They cut costs.  Layed people off.  Dropped new products.  Stopped R&D and product development.  They quit doing things.  What's the impact?  The decline slows, but it continues.  Just like growth begets growth, cutting begets more decline. 

Then really interesting bad things happen. 

"ComEd loses customers for first time in 56 years" is the Crain's headline.  There are 17,000 fewer locations buying electricity in the greater Chicago area than there were a year ago.  That is amazing.  When you see new homes being built, and new commercial buildings, the very notion that the number of electricity customers contracted is hard to fathom.  People aren't even keeping the lights on any more.  They've gone away.

In the old days we said "go west."  But that hasn't been the case.  Everyone remembers the dot.com bust ending the 1990s.  "Silicon Valley Unemployment Skyrockets" is the Silican Alley Insider lead.  Today unemployment in silicon valley is the highest on record – even higher than the dot bust days.  When even tech jobs are at a nadir, it's clear something is very different this time. 

The old approaches to dealing with a recession aren't working.  While optimism is always high, what we can see is that things have shifted.  The world isn't like it was before.  And applying the same approaches won't yield improved results.  "For Illinois, recession looking milder – but recovery weaker" is another Crain's headline.  Nowhere are there signs of a robust economy.

We can't expect an economic recovery on "Cars for Cash" or "Clunker" programs.  By overpaying for outdated and obsolete cars we can bring forward some purchases.  But this does not build a healthy market for ongoing purchases.  These programs aren't innovation that promotes purchase.  They are a subsidy to a lucky few so they pay significantly less for an existing product.  To recover we must have real growth.  Growth from new products that meet new customer needs in new ways.  Growth built on providing solutions that advantage the buyer.  Only by introducing innovation, and creating value, will customers (businesses or consumer) open their wallets. 

Advertising hasn't disappeared.  But it has gone on-line.  Today you don't have to spend as much to reach your target.  Instead of mass advertising to 1,000 in order to reach the 100 (or 15) you really want, today you can target that buyer through the web and deliver them an advertisement far cheaper.  I didn't learn about Cash for Clunkers from a TV ad, I learned about it on the web.  As did thousands of people that rushed out to take advantage of the program at its introduction – exceeding expectations.  It no longer takes inefficient mass advertising through newspapers or broadcast TV to reach customers – so that market shrinks.  But the market for on-line ads will grow. So Google grows – double digit growth – while the old advertising media keeps shrinking.  To get the economy growing businesses (like Tribune Corporation) have to shift into these new markets, and provide new products and services that help them grow.

I live in Chicago.  Years ago, in the days of The Jungle Chicago grew as an agricultural center. There was a time the West Side of Chicago was known for its smelly stockyards and slaughter houses.  But Chicago  watched its agricultural companies move away.  They moved closer to the farms.  They were replaced by steel mills in places like Gary, IN and Chicago's south side.  But those too shut down, moved to lower cost locations offshore.  These businesses were replaced with assembly plants, like the famous AT&T Hawthorne facility, and manufacturers such as machine tool makers.  Now, for the last decade, these too have been moving away.  With each wave, the less valuable work, the more menial work, shifted to another location where it could be done as good but cheaper and often faster. 

Historically growth continued by replacing those jobs with work tied to the shifting market – jobs that provided more value.  So now, for Chicago to grow it MUST create information jobs.  The market has moved.  Kraft won't regain its glory if it keeps trying to sell more Velveeta.  Kraft has not launched a major new product in over 9 years.  Sara Lee has been shedding businesses and cutting costs for 6 years – getting smaller and losing value.  McDonalds sold its high growth business Chipotles to raise money for defending its hamburger stores by adding new coffee machines.  Motorola has let mobile telephony move to competitors as it remained too Locked-in to old technologies and old products while new companies – like Apple and RIM – brought out innovations that attracted new customes and growth. 

Growth doesn't come from waiting for the economy to improve.  Growth comes from implementing innovation that gives us new solutions.  Every market, whether geographic or product based, requires new solutions to maintain growth.  If we want our economy to improve, we must change our approach.  We can't save our way to prosperity.  Instead we must create solutions that fit future scenarios, introduce new solutions that Disrupt old patterns and use White Space to help customers shift to these products.

If we change our approach we can regain growth.  Otherwise, we can expect to keep getting what we got in 2008.

Doing it right – and growing – in a recession — Tasty Catering

I've had the good fortune recently to meet some companies that are doing an extremely good job of practicing The Phoenix Principle.  Although no company story can be told well within the shortness of a blog, some of these stories are so powerful I want share some of the good things I'm seeing. Especially now, when it seems bad news is dominating.  That's not true everywhere – and it's worth profiling a few winners (and hoping they'll excuse the brevity of these descriptions.)

Recently I met with Tasty Catering in suburban Chicago.  Tasty is by far not the largest caterer in the U.S. (or even Chicago), nor the smallest.  Nor is it the oldest, nor youngest.  You could easily miss it as "just another company."  One of those nearly faceless businesses crowded into the business parks around America.  But this company is by no means normal, and as a result

• It's been named "Caterer of the Year" by top food magazines
• It's been The Best Company to Work For in Chicago 3 times
• It's been honored by Winning Workplaces and The Wall Street Journal as a top American business.
• There were a lot of awards, these are just the ones that come to top of mind. 

When Tasty Catering created its vision – it's BHAG (in Jim Collins venacular) – nowhere does it say "caterer".  Their ambition is to be the best.  At whatever the company does.  The 50-ish founder told me that his employees were insistent about this, because they did not think Tasty would just be a caterer.  There are too many possibilities, according to the internal teams.  The people at Tasty want to go wherever the market leads them.  Their ambition is to GROW.

Everyone in Tasty is challenged to scan the horizons for new business opportunities.  .  And create business plans.  The CEO encourages his people to work with college professors and get school credit – but if the plans are good Tasty funds them.  And the business ideas don't have to be in catering, or even food.  Whatever has the opportunity for growth.  So Tasty now has a finance company, a "green" gift business, a supplier to large-scale retailers of packaged food, and a trucking company.  Again, those are just the ones I remember.  And at least one of these was created by employees who are first-generation immigrants with little formal education – employees another company might deride as "kitchen workers" – but with a massive desire to grow the business.  At Tasty, everyone is considered capable of seeing a market opportunity that can create profitable revenue, and everyone is encouraged to bring those market-based ideas to the table.

Tasty obsesses about competition.  Everyone in the company has internet access.  And manager after manager told me stories about using the web to track competitors.  Press releases, articles, anything that's on the web – they keep track of what competitors are doing.  When they see competitors do something, they want to know why – and if it works.  Tasty uses competitors as much as test beds for ideas – what works and doesn't – while simultaneously tracking their activities in traditional areas.  They track customer reactions to competitive ideas, and use that to bring out their own ideas.  As a result, Tasty finds new customers, finds new products to sell and finds new markets to develop. 

The CEO told me that when he started he had a bunch of hot
dog/hamburger joints.  But it was an intern who told him he'd be
better off to sell those assets and change into catering.  This was an
incredible distruption, to change from a fast food operator to a
caterer, but with the growth of franchise fast food staring him in the face he made the
switch.  Now the CEO relishes the Disruptions his staff bring.  Wouldn't trucks make great rolling billboards – if painted for that purpose?  Time to change the trucks.  Wouldn't having a menu that's all healthy, and disposable products that are entirely eco-friendly, snare some accounts?  Why not try it?  If the kitchen isn't busy 24×7, couldn't we make packaged food for sale as retailer brands?  If we need financing for a new business line, can't we fund that from internal cash flow?  Why not start an internal finance company?  If restaurant and store operators want prepared food, why not start pursuing RFPs and see if we can win some retail business (even though it means we'd have to double our equipment overnight)?  Disruptions are so common at Tasty they don't even think aboout them as disruptions – they are the norm.

And as the last paragraph indicated, White Space is everywhere.  When an employee has an idea they can turn it into a business plan.  The people inside Tasty even help work on it.  Then the plan is vetted and reviewed.  If it looks good, Tasty will set up a separate company to implement the plan, and make the employee the CEO.  Now this person has the permission to go make it happen, and the money to do it.  There are goals, and report-backs.  And discussions about how to make the business grow.  And every project is visible for everyone in the company to see.  No "skunk works."  Everyone knows what's happening, and looking to see what works.  Everyone wants to learn and migrate toward a growing future so the business will succeed and they can succeed with it.

2009 started off with a sledge hammer for catering.  The recession caused companies to cancel events, big and small, and quit catering in food.  It would have been easy for Tasty to falter – because revenues went down for the very first time.  But instead, everyone met and put their heads into finding ways to get back on the growth track.  Resources were cut in the tradtiional business.  Belt tightening went around the board.  But resources were expended in new marketing – viral on-line campaigns for example – to find the customers who still have needs.  People put more energy into differentiation programs – like the non-plastic clear wrap and non-plastic disposable utensils – to make the business more appealing to those who still have events.  And new business opportunities – like the private label manufacturing – took on new urgency and more resources.  As a result, while many caterers have failed and others are in dire straits Tasty has returned to growth – and not just in catering.

Meanwhile, the employees at Tasty are some of the most gratified I've seen.  Here in this recession, they still are highly motivated and love their work.  Even though they could do other jobs, they stay.  They don't expect the CEO to find them work, or promise them a job, or guarantee their income.  But they do understand that if they keep growing, working at Tasty is great.  They tie their success to the success of the business – which they tie to identifying market opportunities and fulfilling them better than competitors.  They work at Tasty because they are connected to the market – and it is empowering.  It's not paternalism that keeps them satisfied (far from it, peer reviews assure paternalism is not allowed), it is seeing market results from the innovations they develop and implement.

If you have an event of any kind, go to the Tasty Catering web site and/or give them a call.  If you have a need for someone to supply you with muffins, cookies, baked goods or other foodstuffs private label – again, to the web site and/or give them a call.  This is one great company.  Given a little time, they just might give Sysco Foods (the country's largest supplier of food to restaurants) or another mega-company a run for their money.  This company is out to WIN – and all eyes are focused on the market, everyone pays attention to competition, Disruptions are the norm and new White Space is created every few months (regardless of the economy.)