Creative Destruction

Joe Doakes from Como Park emails:

Sears is closing stores.  This is seen as a crisis.  It’s not, it’s a rational and inevitable response to the crappy economy and changes in urban development and business management.

The Administration has been manipulating the economic statistics and the media have been hiding the decline for seven years with no end in sight, but actual businesses can’t operate on wisps and whispers, they need cash in hand and it’s not coming in the door because the economy is crap and everybody knows it.  Empty stores generate no profit so close them and rely on internet sales.  The Sears Roebuck catalogue pioneered mail-order sales, they’re simply going back to their roots.

Urban planners want more outdoor pedestrian malls and are willing to use tax dollars to get them.  Developers stop building indoor malls in favor of outdoor pedestrian walking areas, not because consumers prefer to slog through slush but because hogs feed at the deepest trough.  When the development is complete and the developer paid in full, the stores will sit empty until filled by nail parlors, cell phone shops, e-cigarette kiosks, Subways and taxpayer-supported non-profits while customers drive to the nearest Wal-Mart or Target Super Stores.
Yes, stores are closing but other stores are opening.  Walgreens closed a store on Lexington in my neighborhood.  Is that the end of the world?  No, they opened one across the street.  Best Buy is trying the smaller store model.  It’s an industry response to the market.  Grand Avenue type shopping boutique areas, extremely expensive inner city land prices, etc. are driving them to put smaller stores in tighter spaces.  Coupled with that is the continued improvement in “just-in-time inventory” which allows smaller stores with very little backroom stock.  Smaller depth in inventory means smaller space needed to house it on the showroom floor and therefore lower prices for customers.  That’s a good thing, in my book.  That also means market opportunity for shippers, ware-housers, etc.  Except of course that Minnesota has decided to tax those businesses out of the game.

Joe Doakes

The market is adapting to, well, the market.

The notion that any business’ survival is in and of itself vital – or worse, that any business is “too big to fail” – is the most toxic idea possible in a free society.

Of course, the obvious corollary is that government is the same way.

More on that next week. Or maybe the week after.

6 thoughts on “Creative Destruction

  1. It’s worth noting that Sears started to really collapse when they were bought out by Kmart. So much like the Cadillac Cimarron set the stage for GM”s bankruptcy–“why buy a Caddy when it’s a Chevy inside?”–Sears’ collapse follows much of the same pattern. Why pay Sears prices when it’s Kmart inside?

    To me, it illustrates the limitations of finance-driven companies; they tend to skip the investments that will keep them a viable interest in the long term. “oops”

  2. The Sears-Kmart deal was driven by real estate values, not any idea the combination was going to change the path either was on. They were like two old codgers, deciding to move in together to save on expenses after one got dementia and the other fell and broke a hip.
    If you would have told me twenty years ago that the Blockbuster video store that had a line out the door would be closed today and the chain in receivership, I would have laughed in your face.
    To agree with what bikebubba said above, financial driven company’s don’t usually see the trends and therefore make the investments necessary to be viable. With the exception of General Electric (and maybe a few others) what once were ‘leaders in industry’ 50-75 years ago, have been relegated to the nostalgic past.

  3. My first real shotgun, a new single shot, came from Sears. Their tools and appliances were always a blue collar standard and deserved the reputation. Their old Christmas toy catalogue was, to me; age 9, the addictive equivalent of cocaine and pornography (age appropriate, of course). I’ve read that in the early 20th century they even sold pre-fabricated houses.

    Pardon the walk down memory lane. Perhaps Sears’ business model, like Blockbuster’s, has run it’s course. Their passing, if it comes to pass, will be quite symbolic of where our country is headed.

  4. Sears had a place in the market. It was the early 20th century equivalent of Amazon: amazing selection that you couldn’t find locally, good quality, and relatively inexpensive. You know, all that stuff that Amazon is doing these days.

    But by the 50s Sears had started to emphasize local stores and de-emphasize selection. By the 70s even the quality of their tools was slipping and their catalog disappeared. Now their tool quality is at best a slight notch above Harbor Freight and nowhere near SnapOn. Even their appliances are spotty these days and their service is horrible.

    A more nimble Sears that remembered their roots would have beat Amazon to email-ordering. But they’d “matured” to the point that they’re now being shuffled off to the retirement home and the estate sale is commencing. I find it ironic that what’s old, catalog ordering, is new again, but this time born with superior (web) pages. And that it’s “upstarts” who are rediscovering that good service, fair prices, and a wide selection can win.

  5. Re: “financial driven company’s..”

    There are three commonly accepted management techniques: setting targets, rewarding performance and measuring results. Yes, it is better to practice these three well-established good ideas than to not practice them, on average. Hardly surprising, and certainly this cherry-picks the best ideas that management schools have adopted over the years. I don’t think a management school invented any of them, and they were adopted only after it was obvious that they were good ideas. Much more challenging to measure but interesting is the question of over-management and mismanagement. Each of those three techniques is more or less effective in different contexts. Managers shifted from one context to another frequently lack the insight to adapt their solutions to the specific problems at hand. Also, because of their vague definition without specific context, these principles can be abused to justify truly stupid ideas. For instance the idea that performance-related pay increases value has been used to justify senior executive windfall bonuses, despite being rarely applied to those who produce product and deal directly with customers, i.e. the large body of employees.

    While it is true that only the CEO and his senior officers can make dramatic short term changes that move the stock price (M&A activity, for instance), those are exactly the activities that end up moving the stock down rather than up more than half the time in the long run. Companies that are successful in the long run have managers who manage, coach, and motivate their subordinates to perform better. It is those subordinates who will make the difference between long term growth and stagnation or failure, and a good manager is one who allows them to achieve success (most good managing is getting out of the way of your best people). Companies that pay big bonuses to senior executives deserve the prima–donna, over-active leadership they engender, which produces yo–yoing stock prices that inevitably end in tears.

    If offering huge bonuses to employees was in fact an efficient way of achieving success in business, these executives would offer them to all of their employees. The fact that they are offered only to senior executives shows that these pay schemes are in fact a symptom of the failure of corporate governance, and are in fact nothing more than rent-seeking by executives who know that there is no effective force to stop them from doing so.

    Why do we need to pay senior executives enormous bonuses to do their jobs? What happened to “Do it or you’re fired?”

  6. The Sears-Kmart deal was driven by real estate values, not any idea the combination was going to change the path either was on. They were like two old codgers, deciding to move in together to save on expenses after one got dementia and the other fell and broke a hip.

    Exactly, Seflores. Kmart and Sears both have primo real estate, although that might not even mean as much if Amazon stays on its current path.

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