Sears. Macy’s. Kohl’s. Traditional department store retailers have taken hard hits over the Christmas holidays, with sales lagging the generally robust performance of retailers overall. Now, these mall stalwarts are slashing thousands of jobs and hundreds of stores, trying to right-size themselves. It’s no coincidence.
Sears on Thursday became the latest retailer to announce that it was restructuring after a weak Christmas season. It’s closing 150 Sears and Kmart stores and selling its iconic Craftsman tool brand for just under a billion dollars to Stanley Black & Decker. Meanwhile, Macy’s is letting 10,000 people go. And Kohl’s warned about its decline in sales over the holidays. Analysts expect Kohl’s to announce cuts.
A few years back, it was discounter Wal-Mart, the biggest retailer on earth, announcing it was closing 100 stores.
What’s going on here? In a word, Amazon.com.
The online e-retailing giant has become a dominant force in the retailing business, removing millions of customers from the nation’s malls and letting them do their shopping online at bedrock discount prices. So-called brick-and-mortar stores are vulnerable to this technology-driven wave of “creative destruction” sweeping the industry.
It’s impossible to exaggerate how rapid and total Amazon’s vault to dominance has been. As recently as 2004, it had just $6.9 billion in sales. By 2015, that was $107 billion. For 2016, estimates put Amazon sales at over $130 billion.
In Sears’ case, its dilemma is a tad ironic, since it was the Amazon of its day.
That’s right, Sears began its existence as a mail-order catalog company in 1886. At the time, Sears’ innovative business model hurt other traditional retailers, which had to pay rent and hire clerks, with very slim profit margins. This was a time of great innovation and change. Edison’s light bulb basically put the gaslamp industry out of business. Henry Ford’s cheap automobiles killed the horse-and-buggy industry.
In short, while old industries were dying, new innovative ones were springing up. That’s the story of America’s economy.
For Sears, it wasn’t until the 1920s that it began opening its own department stores. And when it did, it became a dominant feature in downtowns and suburbs across America. For decades, it was the big dog of retailing, a middle-income paradise filled with cheap but durable tools, appliances and clothing. Sears’ motto, “There’s more for your life at Sears,” seemed almost to be a truism. And yes, it put lots of competitors, mostly smaller retailers, out of business.
But as with so many other industries, including journalism, Sears, Kohl’s, Macy’s and so many other retailers now face the online retailing revolution. Online retailers such as Amazon can store massive amounts of inventory in enormous automated warehouses and ship it to customers at extremely low cost. They focus relentlessly on customer service.
Meanwhile, old-line retailers not only have to pay for the space they inhabit in high-end downtown malls and elsewhere, but hire workers to stand on the floor and wait for customers to come in. It’s almost impossible to cut costs much when that’s your model.
Even so, while the internet has challenged the retailing industry, retailers haven’t disappeared. The National Retail Federation forecast sales of $655.8 billion, up 3.6%, for the holidays. E-commerce makes up about $117 billion of that, or almost 18%. So while e-commerce is growing at close to double-digit rates, it isn’t yet dominant.
And retailing is only one of many industries affected by changes wrought by the internet, cellphones, tablets and desktop computers and other technologies. Suffice to say, virtually all industries now have a dramatically changed relationship with their customers and suppliers from just 20 or even 10 years ago.
This is what the early 20th century economist Joseph Schumpeter called “gales of creative destruction,” in which technology or changing economic dynamics force dramatic changes on established industries, wreaking havoc before bringing renewed growth.
Yes, this creative destruction leads to layoffs, business closures, investment losses and radical shifts in business survival strategies. Sadly, those that can’t adapt go out of business or are acquired or restructure themselves beyond recognition.
But, as brutal as it sounds, this is actually a good thing, because it creates greater opportunities, cheaper and better goods, and ultimately frees up resources for other, more productive uses. New businesses will spring up to take advantage of niches. Already, a new generation of retailers is using technology to personalize the customer’s buying experience and use artificial intelligence to compete on the web.
Sears will never be the same. Nor will the rest of the industry. And economic changes such as those experienced by our venerable high-end retailers aren’t pleasant. But they usually are beneficial and even necessary, bringing new growth where there was none and offering new possibilities for workers and customers alike. So while we lament the nostalgic past, we should also embrace the possibilities of the future.