‘Substantial Doubt Exists’ for Sears’ Ability to Continue - Sears Today, Walmart Tomorrow?
Sears Holdings finally admitted it probably can't survive as a going concern this week, Sears has lost over $10B since 2010 - when it last showed a profit - and owes over $4B to its creditors.
The eCommerce Challenge
Most of today’s retailers and their supply chain advisors understand the shift in retail sales to the online channel but, for many years, the inclusion of gasoline, groceries, and automobile sales in U.S. retail sales numbers masked the true…
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Adam Hartung has more than a 20 year track record developing and implementing strategies that take advantage of emerging trends and has shown numerous companies how to unleash business growth through change and innovation.
In a recent Bloomberg article, Hartung itendified retail stocks that are falling apart along with a list of retailers that are closing stores including Sears, KMart, Macy's, Radio Shack, JCPenney, American Apparel, Abercrombie & Fitch, The Limited, CVS, GNC, Office Depot, HHGregg, The Children's Place, and Crocs, just some of the household names that Hartung claims are slowly (or not so slowly) dying.
Hartung goes on to say that none of this should be surprising.
Anyone could build an excel spreadsheet that would demonstrate as on-line retail grew, brick-and-mortar retail would decline.
In the low margin world of retail, profits would evaporate. It would be a blood bath.
Any retailer with any weakness simply would not survive this market shift - and that clearly included outdated store concepts like Sears, KMart and Radio Shack which long ago were outflanked by on-line shopping (Amazon) and trendier storefronts.
Yet, not everyone is ready to give up on some retailers.
Walmart, for example, still trades at $70/share, which is higher than it traded in 2015 and about where it traded back in 2012.
Some investors still think that there are brick-and-mortar outfits that are either immune to the trends, or will survive the shake-out and have higher profits in the future.
And that is why we have to be very careful about business myths.
There are a lot of people that believe as markets shrink the ultimate consolidation will leave one, or a few, competitors who will be very profitable.
Capacity will go away, and profits will return. In the end, they believe if you are the last buggy whip maker you will be profitable - so investors just need to pick who will be the survivor and wait it out. And, if you believe this, then you have justified owning Walmart stock.
Only, markets don't work that way. As industries consolidate they end up with competitors who either lose money, or just barely eke out a small profit. Think about the auto industry, airlines or land-line telecom companies.
Two factors exist which effectively forces all the profits out of these businesses, and therefore make it impossible for investors to make money long-term.
First, competitive capacity always remains just a bit too much for the market need. Management, and often investors, simply don't want to give up in the face of industry consolidation. They keep hoping to reach a rainbow that will save them. So capacity lingers and lingers - always pushing prices down even as costs increase.
Even after someone fails, and that capacity theoretically goes away, someone jumps in with great hopes for the future and boosts capacity again. Therefore, excess capacity overhangs the marketplace forcing prices down to break-even, or below, and never really goes away.
Given the amount of retail real estate out there, and the bargains being offered to anyone who wants to open, or expand, stores this problem will persist for decades in retail.
Second, demand in most markets keeps declining. Hopefuls project that demand will "stabilize," thus balancing the capacity and allowing for price increases. Because demand changes aren't linear, there are often plateaus that make it appear as if demand won't go down more.
But then something changes - an innovation, regulatory change, taste change - and demand takes another hit. And all the hope goes away as profits drop, again.
It is not a successful strategy to try being the "last man standing" in any declining market. No competitor is immune to these forces when markets shift. No matter how big, when trends shift and new forms of competition start growing every old-line company will be negatively affected.
Whether fast, or slow, the value of these companies will continue declining until they eventually become worthless.
About the Author
A popular business writer, speaker and consultant, Adam Hartung helps companies innovate to achieve real growth. He began his career as an entrepreneur, selling the first general-purpose computing platform to use the 8080 microprocessor when he was an undergraduate. Today, Adam Hartung has over 20 years of practical experience in developing and implementing strategies to take advantage of emerging technologies and new business models.
Related: Retail Seeks to Redefine Itself
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