Take Home Lessons from the Death of Sears, a 125 Year Old Company
Last I checked, stocks of Sears is trading at 31 cents a share.
11 years ago, they were worth $131 a share.
How crazy is that?
Well known brands and companies are going extinct
Does the story of Sears sound familiar?
Think about all the big names that have gone bye-bye in recent times.
- Toys R Us
- Radio Shack
- Circuit City
- Tower Records
So what happened to Sears? They became too comfortable
Compare Sears to a company like Amazon. Today, everyone buys from Amazon, and no one buys from Sears. But why?
Sears had far more capabilities than Amazon. There was no comparison.
They had the cash, the name recognition and brand power, the supply chain, the scale sourcing, the real estate, they had everything that Amazon did not.
But they died a slow death due to becoming too comfortable, and not constantly improving themselves and what they offer to the consumer.
Sears started as a mail-order catalog. Doesn’t that sound very familiar to what Amazon would’ve been in the past?
Globalization and the internet happened; they’re missing the trends
In mass-market business, it’s all about the supply chain infrastructure. This is why companies like Coca Cola dominate and it’s so difficult for a small brand like Jones Soda to compete. The economies of scale, the manufacturing, and the supply chain are all owned by Coca Cola.
The same goes for a company like Sears. They used to be the dominant company with everything going for them. But over the past 10-20 years, too much changed and they reacted too slowly; to the point where household appliances and tools were pretty much all Sears had left in their product portfolio in recent times.
The internet especially, destroyed the physical location requirement for stores and brands. Now a business can sell to anyone in the world without physically having to be there, with far better customer experience.
Shopping malls are dying; all businesses with physical retail locations are losing margin
Margin is the most important thing for a company. It will make or break the business.
When all is said and done, profit margins (basically what’s left over after you subtract out the expenses) are spiraling down and that ends up becoming the death of the business.
All big box stores, shopping malls and brick and mortar stores have one thing in common, and that’s a high overhead.
What does this mean?
Higher overhead (fixed expenses) lower the profit you make.
Not only has the global market completely opened up because of the internet, but it’s become just too expensive to maintain a physical location with all the expenses that come along with it and they’re not turning enough of a profit to sustain and justify having physical locations.
When it comes to shopping malls, I think the only way they can survive is if they can successfully transform themselves into some sort of entertainment spot, where people can go and have fun, relax, and meet up with friends.
Big companies are resorting to “financial engineering” this is the death rattle
If you look at some of these big companies, you notice that they have a huge product portfolio.
Using Sears, as an example, Craftsman was one of their most well-known brands (tools). But they sold it off in 2017 for $900,000,000.
This is what financial engineering is, basically selling off the rights to a product or literally the whole brand, for streams of cash flow to different holders).
So as companies start losing their mojo, they try to turn a profit with things like creative accounting and financial engineering to appear profitable.
This is how you know they’ve started their decline. But it can take decades for them to die off.
The value-add is more important than being product-centric
I’m a big believe in the value-add.
What does that even mean you ask?
Basically what I mean by this is, what is the value you bring to your audience/customers. For example, Amazon offers a super customer experience. The ease of buying, the up-sells (when they offer other similar or add-on type products that go with what you’ve already purchased), the speed of delivery, etc.
This is the value that Amazon brings. It’s not the product.
Does this make sense?
All the stuff you buy from Amazon, you can buy at other places. But many people buy from Amaze the value-add from Amazon can’t be beat. Again, Amazon is going for the customer experience, the value-add, rather than being product-focused.
From an investing standpoint, you need to diversify
There’s no company that is completely safe.
I don’t care how big the company is, or how dominant they are, how much money they have, or any of that.
If they lose their mojo, they will die. It might take 10-20 years if it’s a massive company, but it’s inevitable.
So if you’re investing in individual stocks, you need to make sure you remember this lesson: that no company lasts forever. Even Amazon, Apple, or Tesla, as much as I like them. If they lose their competitive advantage, and lose their ability to continue adding value for their customers, and continue to reinvent the customer experience, they will eventually die.
The goal isn’t just to become rich, it’s to not become poor
What does it matter if you have a ton of money if you end up losing it all?
So as you buy assets and increase your income streams, it’s important to not forget to protect yourself and to shore up your investments. This means not going all in on one investment. This also means looking for assets all over the world, and not having a home country bias (where you prefer buying stocks of companies only in your home country).
It also means diversifying across asset categories. I don’t care how bullish you are for stocks, for example. You need to diversify with real estate, businesses, precious metals, commodities, and even cryptocurrency (using myself as an example, even though I lost a lot of money in bitcoin and other altcoins, I still have a six figure sum invested in cryptocurrency, as a hedge).
This is why when you see billionaires, they’re usually more focused on defensive plays that offensive plays. They’re already rich, so they’re always looking for ways to preserve their wealth.
Conclusion and Take-aways
I advise you take the time to read through everything I’ve mentioned above; but if you’re short on time…here are some bite-sized take-aways:
- Whether it’s in your job/career, business, investments, or self-improvement…don’t ever get too comfortable. It leads to laziness and overconfidence. And pride comes before the fall.
- Times change, so you need to catch the trends. You don’t have to be the first person. Just don’t be the last. Don’t have horse blinders on and look around you.
- If you own a business, keep an eye on your margins because declining margins usually ends up with the death of the business. I don’t care if your revenue is $100 million a month. If your expenses are $100 million a month as well; guess what, you’re dead.
- Cutting expenses and “financial engineering” can only get you so far. You need to always reinvent yourself and/or your business.
- It’s far more important for an entrepreneur or business to be focused on the value-add than being product-centric. Because products are easy to copy and replace, but customer experience is harder to replicate if done properly and consistently.
- The goal isn’t just to become rich. It’s to not become poor! So make sure you’re diversifying your investments (you’ve heard the saying: don’t put all your eggs in one basket).
CNN Business – Sears, the stores that changed America, declares bankruptcy
The New York Times – Sears, the original everything store, files for bankruptcy
NBC News – 15 most memorable companies that vanished