Lost in Space

How management of the world’s two largest retailers in the last century, Sears and Kmart, lost their way by acquiring non-core businesses, failing to stay ahead of technological advances, and insulating themselves from criticism.

Lost in SpaceTwo entrepreneurs, Sebastian S. Kresge and Richard W. Sears, each established storefronts and built them into the twin titans of retail during the last century. But today the merchants represent a sliver of their once immense size, having closed thousands of stores and leaving only a handful of locations scattered around the country.

In fact, what became Sears, Roebuck and Co. and The Kresge Co. could be considered the retail innovators of the late 19th century, with both Sears and Kresge seen as that era’s Elon Musk and Jeff Bezos. The lesson for today’s high-fliers is that as invincible as they appear, a lack of innovation, flawed customer insights, and arrogance can conspire to bring the greatest companies to their knees. 

Sears’ business began to decline in the late 1980s when the company went on an acquisition spree, believing it could entice its millions of customers into other revenue-bearing services by leveraging brand affinity. The retailer acquired Allstate Insurance, Dean Witter Investment Services, and Coldwell Banker Real Estate, and launched the Discover Card. 

“They poured billions of dollars into these disparate businesses, which required an enormous amount of capital,” says Mark Cohen, director of retail studies and adjunct professor at the Columbia University Business School and former chairman and CEO of Sears Canada Inc. “The money came from the cash flow that they were harvesting from the retail business. While this diversion of energy, effort, and funds took place over a period of years, the stores received less investment and became less focused.” 

Sears Entrance
Closeout – Sears, Roebuck and Co. dominated the last century, and moved fairly quickly when retail demand shifted to emerging suburbs around the country. But by the mid-1980s, Sears became insulated and failed to keep up with fashion trends, while its store layouts failed to match newcomers like Target. // Courtesy of Nick Martines

From 1984 through 1992, Kmart also caught the acquisition bug, purchasing Waldenbooks, Builder’s Square, Pace Membership Warehouse, Sports Authority, and Border’s Books and Music. Industry observers say Kmart shoppers were confused by the mixed signals: While Kmart was supposed to be a discounter, it had deals with glitzy names like designer Ralph Lauren and model Kathy Ireland. 

In addition, instead of running television spots, Kmart continued with Sunday supplements in major metropolitan newspapers despite declining circulation. Kmart was hobbled by its reluctance to invest in technology, as well. 

“Even though (Walmart founder) Sam Walton didn’t like computers, he liked what computers could do,” says Erik Gordon, clinical assistant professor at the University of Michigan’s Ross School of Business in Ann Arbor. “Walmart built this tremendous computer system that was designed to take costs out of the logistics process and to assure that stores had needed inventory. Kmart didn’t, believing a discount store couldn’t spend that kind of money on computers.” 

The benefit of Walmart’s investment in technology is borne out by the numbers.

“In the 1980s, Kmart had a 20 percent gross margin on sales and Walmart, with its policy of everyday low prices, had a 10 percent gross margin on sales,” says Ivan Feinseth, chief investment officer at Tigress Financial Partners in New York. “However, Kmart did $75 a square foot in sales while Walmart was doing $175 a square foot in sales. Do the math; 20 percent times 75 is $15, 10 percent times 175 is $17.50. Walmart could turn inventory better.” 

Aerial view of Kmart Headquarters
Design Flaws – Kmart’s now-vacant headquarters in Troy may have seemed like a good idea when built, but the layout of offices among 23 pods connected by circular elevator towers proved cumbersome. Getting from one end to the other took 10 minutes. // Courtesy of Thomas Helicopter

In 2018, when both retailers were fading into obscurity, a report from Susquehanna International Group revealed that capital spending on store remodeling and e-commerce by Sears and Kmart in 2017 totaled 91 cents per square foot, compared to $8.12 at Kohl’s and $15.36 at Best Buy.

To appreciate how far the companies fell, and why, lessons can be gleaned from their respective origins and the subsequent succession to the next generation of leadership teams.  

To supplement his income as a station agent of the Minneapolis & St. Louis Railway Co. in North Redwood, Minn., Richard Sears sold lumber and coal to his neighbors. In 1886, when Sears received a shipment of gold watches from Chicago that a nearby jeweler had refused, he purchased them, sold them to railway agents up and down the line, and ordered more. Later that year, Sears founded R.W. Sears Watch Co. in Minneapolis.  

Sears moved his business to Chicago in 1887 and bought a classified ad in the Chicago Daily News. A young man from Indiana named Alvah C. Roebuck answered the ad and was hired, and the firm’s corporate name became Sears, Roebuck and Co. in 1893. Thanks to volume buying, distribution via railroad, rural free delivery, and the post office, the new mail order company prospered by offering farmers an alternative to high-priced rural general stores.

early Kresge stores in the 1960s
Five and Dime – Early Kresge stores, located predominantly on main streets across the country, were popular among city and rural dwellers. In the 1960s, the company transformed its operations into Kmart Corp. and opened stores mostly in suburban communities. // Courtesy of Associated Press

By 1895, Sears was producing a 532-page catalog that offered hundreds of items ranging from baby carriages to firearms. To treat coughs, breathing disorders, and morphine addiction, one could order a syringe, two needles, and two vials of heroin for $1.50. From 1951 to 1954, Sears sold four- or six-cylinder Allstate Deluxe automobiles which were re-badged Kaiser Henry Js, built at Kaiser’s Willow Run plant in Ypsilanti. 

The Sears catalog not only opened new shopping horizons for rural populations, but it also played a significant role in enabling minority communities to shop without being hassled or ignored. 

“Every time a Black southerner went to the local store, they were confronted with forced deference to white customers who would be served first,” Professor Louis Hyman, of Cornell University’s Institute of Workplace Studies, tweeted in 2018. “The catalog undid the power of the storekeeper. Black families could buy without asking permission.” 

Richard Warren Sears
Richard Warren Sears – The founder of what became Sears, Roebuck and Co. sold lumber and coal in the mid-1880s. After he began selling gold watches, he established a retail giant. // Courtesy of Walter P. Reuther Library

Sears opened its first department store in Chicago in 1925, and three years later entered the Michigan market with a location on Detroit’s west side at Grand River Avenue and Oakmont Boulevard. In the 1940s and 1950s, more stores appeared in Detroit, Wyandotte, Pontiac, and Grosse Pointe Woods. The company eventually had 17 stores throughout southeast Michigan. In 1969, Sears’ sales accounted for 1 percent of the entire U.S. economy, and as recently as 2010 the company had 3,600 stores. 

Meanwhile, Sebastian S. Kresge was born in 1867 on a farm near Wilkes-Barre, Pa., the son of Pennsylvania Dutch farmers who emigrated from Switzerland in the mid-1700s. He began doing farm chores at the age of 5 but eventually chose to pursue a business career. Kresge financed his education by working as a grocery store clerk, a teacher, a salesman, a bookkeeper, and a beekeeper. 

In his 1966 obituary in The New York Times, Kresge was quoted as saying, “My bees … always reminded me that hard work, thrift, sobriety, and an earnest struggle to live an upright Christian life are the first rungs of the ladder of success.”

The seeds of today’s dollar stores were planted in 1897 when Kresge purchased a half interest in a store in Memphis, Tenn., where everything on the shelves was sold for 5 cents or 10 cents an item. Kresge and his partner opened a second store in 1898 on Woodward Avenue near Shelby Street in downtown Detroit. The business grew to eight stores in 1905 and to 85 in 1912, with annual sales of $10 million. The S.S. Kresge Co. became a publicly traded company in 1918 and was listed on the New York Stock Exchange.

Sebastian Spering Kresge
Sebastian Spering Kresge – A mass merchandising pioneer, Kresge set up stores in urban markets during the first half of the last century before focusing on suburban locations. // Courtesy of Walter P. Reuther Library

In 1962, Kresge entered the large-scale discount retail market with the first 80,000-square-foot Kmart store in Garden City. Seventeen other stores followed the same year, and the number of locations increased at an average of 85 per year over the following 20 years throughout the U.S. and Canada. 

At its peak in 1994, Kmart operated 2,486 stores worldwide. One innovation, “Blue Light Specials,” launched in 1965, were in-store “pop up” promotions that signaled special deals, often lasting no longer than 15 minutes. In 1975, the company phased out its own revolving credit program and began accepting bank credit cards. The following year, the Kresge Co., having moved its main Detroit office to a sprawling, poorly designed headquarters in Troy, became the second largest non-food retailer based in the U.S., with fiscal year sales of $8.4 billion. 

The fall from grace at Sears and Kmart involved more than operational stumbles — there were human factors, as well, including the hubris that often accompanies success. Columbia’s Cohen recalls a job interview he had with former Kmart CEO Joseph Antonini, who was fond of wearing tailored suits, French cuffed shirts with cufflinks, and Italian dress shoes — none of which were available for sale inside Kmart stores.

“I went to Troy to meet with Antonini, whom I had never met before,” Cohen says. “He was sitting in this office behind a very large desk on a raised platform. He spent about 60 minutes to 90 minutes pontificating about himself and about how wonderful Kmart was, spending very little time asking questions about me or my qualifications. He was exhibiting extraordinary incompetence in failing to acknowledge that Kmart was going to be clobbered, which is exactly what happened.” 

Gordon relays a similar experience of a retail consultant who traveled to Chicago to meet with former Sears CEO Edward Brennan. According to Gordon, Brennan told the consultant, “When you’ve been CEO of a retail company as large as Sears for as long as I have, come back and I’ll listen to you.”

Eddie Lampert
Eddie Lampert – A corporate raider, Lampert folded Sears and Kmart together to save money. Over time, he began selling coveted locations and pocketed the proceeds. // Courtesy of Wikipedia Commons

Sears’ identity crisis accelerated in the early 1990s as the company that was known for Craftsman tools and Kenmore appliances seemingly lost focus and introduced “The Softer Side of Sears” ad campaign to attract more female customers. 

Former Saks Fifth Avenue CEO Arthur Martinez was installed as Sears’ CEO and mounted what has been recognized as a “heroic” turnaround in 1992 that faltered in 1996. The company fought back from 1998 to 2000, but it was too late. “We had made embarrassing mistakes,” Martinez wrote in his 2001 book, “The Harder Road to the Softer Side.”

Kmart declared bankruptcy in 2002 and exited Chapter 11 in 2005 after hedge fund manager Eddie Lampert bought the company for $5.2 billion and took control of the bankruptcy proceedings. Lampert, who fancied himself a financial engineer and not a merchant, then began hiving off dozens of Kmart stores, including more than 50 to Sears Roebuck, then led by Alan Lacy, to support the short-lived Sears Grand concept. 

Lampert also sold 15 stores to former Home Depot and not-yet Chrysler CEO Bob Nardelli, who converted them to Home Depots. Promising smaller Sears stores and less apparel, Lampert engineered a $12-billion deal in 2005 to merge Kmart with Sears into a new entity, Sears Holdings Corp. As a consequence, Kmart moved to Chicago; its former headquarters has been empty ever since. 

“Lampert turned the business into a liquidation play, selling anything of value using the company’s assets including its real estate, brands, and credit portfolio,” Cohen says. “One hundred percent of what Lampert got in the way in which he liquidated Sears, Kmart, and Sears Canada went back to shareholders — and he, of course, has always been the principal shareholder.” 

The downturn began in 2010, when the company was no longer profitable; from 2011 to 2016, it lost $10.4 billion. In 2014, Sears’ total debt ($4.2 billion at the end of January 2017) exceeded its market capitalization ($974.1 million as of March 21, 2017). Sears Holdings Corp. entered Chapter 11 in October 2018 and is reported to still be $62 million short of being able to exit the proceedings. 

Number of Sears and Kmart Locations in the US by YearSears declined from more than 3,500 physical stores in the U.S. in 2010 to just 695 in 2017. The exact numbers today are difficult to determine, but according to Brostocks.com, as of March Sears had 20 stores in the U.S. and Kmart operated nine outlets. At the same time, former Kmart properties throughout Michigan have been reborn as U-Haul, Tractor Supply, and Kroger stores.

“It’s safe to say that founder Sebastian S. Kresge was in control of the company until just before he died in 1966, and the company was doing well,” Gordon says. “His heirs were involved with the Kresge Foundation but didn’t run the company.” 

According to an obituary in The New York Times, Stanley Kresge, Sebastian’s son who died in 1985, said “Kresge’s dissociation from Kmart management became complete earlier this year when they gave a fortune of personally held company stock to the Duke University Divinity School, the libraries of various Michigan colleges, and other worthy causes.” 

The kings of the retail hill today are Amazon, Target, Costco, and Walmart, but even these companies are facing headwinds that must be countered with innovation. Faced with higher costs, Walmart’s net income for the quarter ending in April fell 25 percent from a year ago. 

Walmart, in a sign of rising inflation and fewer people entering the workforce, recently announced that its truck drivers can now make up to $110,000 in their first year with the company. To speed distribution, the company is expanding its $3.99 delivery-by-drone service to 34 sites in six states, with the potential to reach 4 million households. 

Walmart Truck
keep on Trucking – In the early 1980s, Kmart provided Walmart founder Sam Walton with access to its operations. Dismissing Walmart as a regional player in the Southwest at the time, the retailer would surpass its rival Kmart in the 1990s. // Courtesy of Sundry Photography via Getty Images

Amazon, the world’s largest e-commerce retailer, has had its share of growing pains, as well. Most recently, the company has been seeking to sublease a minimum of 10 million square feet of warehouse space, or to end or renegotiate leases with outside warehouse owners following its first quarterly loss in seven years. 

At the same time, in addition to its 2018 acquisition of Whole Foods Market, the company has launched more touch-and-feel concepts like Amazon Fresh grocery stores and the Amazon Go concept, where no physical check-out is required. Neither of these stores have a presence in metro Detroit.

Other concepts being considered by retail developers include an omni-channel or hybrid model, where customers buy in the store and have it shipped to their homes, or they can order online and pick up their merchandise at the store. There’s also “retail flea market,” where multiple merchants fill a big box space. 

Another emerging trend is kiosk shopping at airports, hotels, convention centers, and retail stores. Customers can customize apparel and fashion accessories, pay with a credit card,  and have their items delivered within hours.  

“More than 80 percent of all retail still takes place in an actual store,” Feinseth says. “Retailers who offer a differentiated shopping experience will continue to do well. The consumer is sitting on $2.5 trillion of excess savings. More people have lost money betting against the American consumer than probably any other trend. Never bet against the American consumer. They’ll lead us to the promised land.”    

Giving Back

Aerial view of Kresge Farm
Good Earth – The Kresge Foundation has its headquarters on a former farm along W. Big Beaver Road in Troy, directly across from Kmart’s former central office. Today, the foundation has a $4.5-billion endowment and has invested in numerous projects that have benefited metro Detroit and the state. // Courtesy of Kresge Foundation

In 1924, on the 25th anniversary of the creation of S.S. Kresge Co., which at the time had opened 184 stores and posted more than $51 million in annual sales, founder Sebastian S. Kresge established The Kresge Foundation, “for the benefit of mankind,” with an initial gift of $1.3 million. 

By the time Kresge died in 1966, he had contributed $60 million. The Troy-based Kresge Foundation continues its work today with an endowment of $4.5 billion. It was and remains a separate entity from S.S. Kresge Co. and its successor, Kmart Corp.  

“The foundation found its niche in being the Good Housekeeping Seal of Approval in terms of grant-makers,” says Jennifer Kulczycki, director of external affairs and communications at the organization. “(During) much of the first 85 years, we focused largely on capital challenge grants — matching gifts to colleges, universities, hospitals, and cultural institutions. It was a way for these institutions to build up their own donor base so they would become sustainable after Kresge came and went.”

 Past grant recipients include the Kresge Library at Oakland University, the visitor center at Colonial Williamsburg, and the Shedd Aquarium in Chicago.  

In the mid-2000s, the foundation’s board of trustees shifted its mission away from matching grants and began to focus more on “strategic philanthropy” — no more waiting for institutions to approach them with requests for funding; rather, the organization decided to seek out opportunities more proactively. The initiatives include arts and culture, education, environment, health, human services, social investment practices, American cities, and Detroit. 

The Kresge Foundation has been an anchor investor in many local renovations and restorations, including Eastern Market ($4 million) and the Detroit Riverfront Conservancy ($50 million). It also contributed $50 million for the development of the QLine, hoping the Woodward Avenue light rail project can be a catalyst for a larger regional transit system in southeast Michigan. 

In 2014, The Kresge Foundation gave $100 million of the more than $800 million in state and local contributions to the “Grand Bargain,” the plan created in the wake of Detroit’s bankruptcy to protect city pension obligations, municipal assets, and the Detroit Institute of Arts from being liquidated to pay off creditors. 

“The foundation’s work has recently transitioned from the city to the neighborhoods, to address the troubling issue of ‘two Detroits,’ ” Kulczycki says. “The Woodward Avenue corridor is built up and beautiful, but there are 137 square miles in the city of Detroit that could use some investment, as well.” 

She points to the foundation’s $50 million investment in 2018 in the Marygrove Conservancy. The award is helping to stabilize, protect, preserve, and transform the 53-acre campus of the former Marygrove College in northwest Detroit into an education- and arts-based community anchor. 

Kresge worked with the Marygrove Conservancy and others to create a collection of educational institutions on the campus, including an Early Childhood Education Center that opened in 2021. A new public elementary school, middle school, and high school, operated by Detroit Public Schools Community District in partnership with the University of Michigan School of Education, are also on the site. 

The Kresge Foundation originally employed outside investment counselors, but in the early 2000s it created its own investment office. Its portfolio includes a broad range of diversified strategies such as emerging markets, public and private equity, real estate, natural resources, venture capital, and cryptocurrency. The investment strategy has resulted in annualized returns of nearly 11 percent as of a five-year span ending Dec. 31, 2021. 

In addition, The Kresge Investment Analyst Program annually offers recent college graduates two- to three-year assignments in its investment office. The goal is to introduce the recruits to philanthropic investment strategies and prepare them for graduate business schools or positions in finance.