Marketing vs. Operational Excellence
Posted on Mon, Jan 09, 2012
During the past holiday season, Sears announced that it would be closing 120 of its stores across the country. This is sad news from a company that was once America's Number 1 retail business. Growing up years ago in Honolulu, Hawaii, I remember Sears as being one of the most popular store in the Islands. In the late 1980s. after decades of being at the top, Sears fell to Number 3 behind Wal-mart and Kmart At first it tried to do battle with the two "marts" by adopting what retailers call an "EDLP" (everday low price) strategy. To become a successful EDLP store, one has to have a higher asset turnover that compensates for the lower gross profit margin resulting from lower prices. This means increasing revenue relative to assets such as inventory and the actual store infrastructure. At the time Sears tried its EDLP strategy back in the late 80s and early 90s, it had a sub-par inventory control system and a lot of very expense real estate resulting from its strategy of being anchor stores in suburban shopping malls. In contrast, a main part of Wal-mart's original strategy was to be an industry cost leader by setting up stores in less expensive rural or "exurban" locations and focusing on improving what we recognize today as one of the top supply chain management systems in the world.
After failing in its "lower margin/higher asset turnover strategy," Sears next tried pursuing a higher margin strategy by building up its retail apparel business, particularly in women's clothing. Women's apparel is a general product category that is among the highest in gross profit margin for typical stores in a shopping mall today. From the advertising tagline "Sears: Where America shops!" the company switched to "Come see the softer side of Sears." In this case, the reference to the softer side is women's apparel, as opposed to tools, major household appliances and automobile batteries. But this didn't seem to work well for Sears either, particularly when compared to the success achieve by competitors such as Target and JC Penney in establishing themselves as attractive clothing stores for middle market consumers.
One of the problems with a higher margin strategy, particularly in women's apparel, is that one has to offer a shopping environment and lines of clothing (e.g. well-known designers) that attract women shoppers into the store and, more important, gets them to buy things. Sears' ongoing problem of not being able to achieve either a successful higher asset turnover or higher profit margin business has created serious cash flow problems. This in turn has forced it to close many of its stores. In a recent article in the NY Times, the current CEO of Sears was quoted as saying that these closings will enable the company to "focus our investments on serving our customers and members through integrated retail -- at the store, online, and in the home." In short, Sears is apparently basing its strategy on "operational excellence." But regardless of how integrated Sears' distribution channels are, this strategy will only work if people actually buy things, regardless of the channel. Sears had better rethink its marketing strategy as well as its operational strategy. We discuss this in Marketing Mastery: Your Key to Success.