The rise and fall of Sears: How America's largest retailer went bankrupt

Sears went from a startup mail-order retailer founded in 1893 in Chicago, Illinois, to the largest retailer in the world. At one point, it was 1% of the United States economy, and their headquarters in Chicago was the tallest building in the world. But just a few decades later, through a bunch of missteps and bad luck, the company declared bankruptcy. Thousands of people lost their jobs and hundreds of stores closed forever. And a beloved icon of the American economy closed for good. This video is the story of the rise and fall of Sears. And if you stick around to the end, I will tell you why I am recording the intro to this video in front of a quilting store here in San Antonio, Texas. The answer will surprise you. Hi, my name's Michael. I make videos about the rise and fall of companies. If you like stories like that, please like and subscribe and leave a comment below. Thanks. A big thanks to HighLevel for sponsoring this video and helping us pay for our editors. HighLevel is the all-in-one CRM that handles your emails, texts, funnels, and more all in one place. Think of it like the Swiss Army knife for small businesses. You could try it for free at gohighlevel.com/michaelgirdley. There's a link in the comments below. In 1886, entrepreneur Richard Sears came across a batch of unwanted watches. He bought them, sold them, and made a bit of a profit. And with the profit, he decided to go start a mail order catalog. And with partner Alva Roebuck, he started a catalog selling jewelry and watches via the mail, which was revolutionary at the time, to customers across the United States who were tired of overpaying for those things at their local general stores, which was typically the only place you could shop in those days. 7 years later, in 1893, the company had officially expanded to include things beyond jewelry to all kinds of household goods and hundreds of pages of merchandise and named itself Sears, Roebuck and Company. And this burgeoning empire of Sears was made possible by the U.S. Postal Service. You see, in 1896, they had introduced rural free delivery, meaning almost everybody in the United States was accessible via mail. And then in 1913, they created a thing called Parcel Post, which allowed burgeoning mail-order retailers like Sears to mail goods to people anywhere in the United States. And there was a financial panic in 1893, and panics happened a lot back then, even more than they do today. And Alva Roebuck, he got freaked out. And so something was really lucky about this for Sears because him freaking out caused him to sell his shares to another guy. And this guy was named Julius Rosenwood. And for $75,000, he bought out Mr. Roebuck and he joined the company as vice president and treasurer. See, Richard Sears was your typical hustling sales guy, but he wasn't a great business builder and he didn't have a lot of kind of detail-oriented sense that was required. But what Mr. Rosenwood brought in was this kind of stable hand and stable business thinking that had been lacking before. And it was going to be essential as Sears looked to its next growth trajectory to get even bigger. The combination of Rosenwood's operational genius and Sears' marketing genius together totally worked. By 1895, the company was doing $750,000 in annual sales, an astronomical sum. In 1906, Sears made history with the first IPO of a retail company. That's a going public. Basically, they raised $40 million. You're like, $40 million, not that much money. Well, when this IPO was led by Goldman Sachs and Co., they raised $40 million, which in today's money is $1.3 billion. And this was money they were going to use to grow the company and make it really big. And that $40 million was going to go to build the infrastructure required to scale. The first thing they did was build a 40-acre colossal distribution center, and they did it in Chicago. And Chicago is a magical place. In the United States. It is the one place where you can easily connect to everything in the Mississippi River Delta. So everything all the way down to New Orleans, as far west via train as all of the recently connected stuff out in California and beyond, and to the east and the factories there via water, via the Great Lakes and all the canals that way. And the perfect place for an ambitious company like Sears. Under Rosenwood and his operational acumen, growth continued basically to the stars. By 1907, they were doing $50 million a year in sales in 1907 dollars. I don't even know what the math is today. That's billions. A lot of money. In 1908, after two decades of breakneck work in the company, Richard Sears, now in poor health, he retired and left Mr. Rosenwood in charge and basically became a steady hand to lead the company through the next two decades of growth into the 1920s. Revenue kept growing year after year, and suddenly they were stocking and offering by mail virtually everything— household goods, tools, equipment, batteries, burgeoning electronics. If you wanted it, you could buy it via mail from Sears. Oh, and they even went more than that. You could actually buy a house via Sears, and they sent them out, 75,000 of them, over the next few decades. Just crazy. It was the original everything store. Then, in what was close to his final act, Rosenwood showed his genius again, knowing that the world was changing around the company. Company and he was getting older, it was time to bring in some new blood to make sure that they could deal with the changing world around them. So in 1924, Rosenwood recruited a dynamic young former military officer, a guy named Robert E. Wood, who was a general. He had been assistant quartermaster of the United States Army during World War I, giving him unprecedented kind of knowledge of supply chains and logistics. And he was the ambitious guy who had a retail background, and he was perfect to come in to make sure that Sears was ready for the world that was coming. And one of the things that Wood saw was that the automobile was coming. The day of the horse was over and people were going to change their buying habits because of this technological change. Instead of waiting for weeks for a mail order catalog to show up, you order the stuff and it maybe shows up eventually if it doesn't get stolen in the mail. People just hop in their cars and go buy it immediately. So in 1925, Wood convinced management at Sears to open the first Sears department store in Chicago. It was a radical idea for a company that had been built entirely on mail order. One of the things we talk about in business a lot is this thing called the innovator's dilemma. A lot of times if you're a business and a technological or an innovation comes out, you have a choice to make. You can either ignore it or figure out how to meet it head on, even if that technological disruption is going to end your business. And in this case, Sears saw that retail was going to be something that would hurt its mail order business. But instead of letting somebody else take that business, they became the disruptor of their own business themselves. Well, and you'll see it eventually paid off. And as I've talked about in other videos, being big helps you in retail. You have a lot of economies of scale that made things easier and it gives you protection against competitors. But the other thing that Wood innovated on and was one of the first of its kind was for them as a retailer to start to introduce their own brands of trusted products. And a lot of the things you know of today, like Kidmore, DieHard batteries, Allstate Insurance, Craftsman tools, they came out of this era when Sears was creating their own brands as a way to make their business even stronger. Sears also made itself part of the American cultural fabric. Starting in 1933, around Christmas time, they started to send out a thing each year called the Wish Book. And this was an entire super catalog of all the things you might possibly want to buy for your loved ones during the holiday season. People would eagerly anticipate receiving this because it became a thing that told everybody the holidays were starting. All of these moves proved a magical combination: trusted brands, a unique level of kind of sticking aroundness that the company had had, catalogs that showed up in the mail that people people trusted. It was a magical combination. By 1929, on the eve of the Great Depression, Sears was operating 300 stores nationally. The recession hit most retailers hard, but counterintuitively, it proved to be good for Sears. Under that time, they actually increased their sales and doubled their number of stores. And a big part of that was because they had doubled down on basic, essential, low-cost items that people could afford. In 1931, Sears retail sales exceeded their mail-order sales for the first time, a sign of how far the chain had changed during those years. Then World War II started in the '40s and ended after that. And post-World War II, we saw a massive wave of suburbanization and a baby boom happening in the United States. Car culture was in full swing. We were on our way to have over 100 million cars on the road by the 1960s. And suburbs, well, They were coming and they were coming hard. Sears was perfectly placed for this new America. By the mid-1950s, they had over 700 stores and they had been opening them in suburbs across the United States. In fact, some of the stuff I read preparing for this video was that if you wanted to open a mall during this time, you were not going to do it unless you were able to make a deal with Sears to come in and be an anchor tenant for you. They were that big of a draw. By the mid-1960s, Sears was so dominant that they by themselves accounted for 1% of the economy of the United States. That was 1% of the gross domestic product. Never before and never since has one retailer been such a dominant force in the economy of the United States. As the '60s came to close, Sears management went and built the tallest building in the world, the Sears Tower in Chicago, and it remained the tallest building in the world for nearly 25 years. And it was a physical representation of the dominance that Sears had on the American economy at that point in time. But that's when things started to go wrong for Sears. And the first of those things to go wrong was the emergence of discounters and new competition. Folks like Walmart, Target, Kmart, they came in and they competed on convenience and worse yet, even lower prices than Sears. But made it worse was the other end of the spectrum, which is starting in the '60s and '70s, we started to see the rise of category killers, people like Circuit City, Toys R Us, and folks like that. They would come in and take what was just a corner of a Sears and make it their entire store. And suddenly they competed, outcompeted Sears on selection and product knowledge because it was impossible to have a Sears where somebody knew everything of every product. But at Toys R Us or Circuit City, well, you could do that. And I can remember my grandparents taking me to Sears in the 1980s. I'd be, you know, 8 or 9 or 10 years old for a toy or something like that. And I'd ask, why didn't we go to Toys R Us? They had a better selection and felt more like home to me as a kid. And my grandparents, well, having grown up with Sears, they just kind of looked at me funny. And then we went to Sears anyway. So heading in the 1980s, Sears been kind of magical because it had two magical leaders, Rosenwood and then Wood himself, who had seen disruptions and then changed the chain to react to those. But now facing this disruption from these other retailers, both on the high and low end, well, Sears had to react. And so they did. Instead of getting better at retail and focusing on the things that were threatening their core business, they decided to become a conglomerate. They went and bought a brokerage in the form of Dean Witter. They eventually got into the credit card business. They went and bought a residential brokerage. They got into insurance business. They kind of did everything except for focus on the core of their business, which was selling goods to Americans. In practice, this didn't save the business. It just made it harder to run. And Walmart eventually passed them in 1991 as the biggest retailer in the United States. Forced to confront this reality in the 1990s that, well, they needed some money and they weren't running things very well, Sears started to finally divest some of these things so they could focus on their core retail business. And they got rid of their brokerage and insurance arms by 1995. Eventually, the majority of profits for Sears were not coming from selling goods. They were coming from financing. And as they headed into the 2000s, in fact, in 2002, 60% of their profits were coming from financing. And, you know, there's a bunch of other companies that have gone through the same pattern where they eventually stopped making money from their core business. They only make it from financing— folks like GE and stuff like that. Well, it's always a sign of bad things to come. But wait, it gets worse. In 1993, there was something about to come into the future of America and change everything. And that thing was the internet and e-commerce. And at that moment, Sears made a fateful decision. And the fateful decision was to close down the catalog business that had existed for over 90 years. And the sad thing about this story is at this moment, Sears had the DNA, the customer base, the data, the names, the platform, the logistics, everything to become the next Amazon and be the everything store. But at that moment, just as it was about to come, the future was about to start. They got out of the mail order business. And as the year 2000 came, Sears was in a place called stuck in the middle, as economists like to call it. They were in between the burgeoning world of e-commerce, discounters like Walmart and Target, and then category killers like Toys R Us and Circuit City and people like that. In other words, they weren't the best at anything. Somebody who was better than them at every part of their business. By 2003, Sears needed cash. They sold their last highly profitable asset, their credit card business, to Citigroup for $3 billion in 2003. By the early 2000s, Sears was behind the 8-ball. In the 1970s, they had missed the disruption that was coming from discounters. In the 1990s, they blew it on the internet and missed it. And it was going to take a miracle at this point to save the business. Then a guy stepped in who promised to be a white knight, a hedge fund manager named Eddie Lampert, who ran a hedge fund called ESL Holdings, stepped in and orchestrated an $11 billion merger of Kmart and Sears. The newly formed Sears Holdings had 3,500 stores, a bunch of assets of famous brands. They owned a bunch of real estate. And Eddie Lampert was hailed as the next Warren Buffett, that he could come in and use his investing prowess to turn the chain around and make miracles happen. But there's a fun line in investing by Charlie Munger, one of my favorite thinkers in the space, where he says you can mix raisins and turds, but you're still going to have turds. In this case, Kmart was kind of a turd. It turns out so was Sears. And together, well, putting two turds together wasn't going to make a great business. Lampert had actually gotten into Kmart by buying its debt when it was about to declare bankruptcy. So this wasn't a good business being slapped on top of Sears. You're putting two pretty rough businesses together. And there was a second big problem, which is Lampert was a hedge fund manager. He was an MBA type and a numbers guy and a finance guy. He knew financial engineering. He wasn't a retailer and he certainly wasn't a strategist. So this is one of those things in life when you see people who know something, they're kind of like carpenters, right? Everything to them looks like a nail and they're the hammer. And the same thing happened here. Eddie Lampert, he started to run the financial engineering play. Because that's what he knew. And remember, Lampert is a hedge fund manager. That means he's managing other people's money for them. And so the first thing he did was make a decision for Sears to take $5.8 billion from 2005 to 2010 and use that money not to improve the retail operations and modernize things and try to compete with the likes of Amazon. No, they went out on the open market and they started to buy shares of Sears. For upwards of $150 or more at some points. And you know who that benefits when you do something like that? The shareholders. And guess what? He was a shareholder, as we saw with some of the other companies like Bed Bath Beyond on this channel. When you do that, you eat up your rainy day fund and it makes you not ready for the future, especially if that's a bad future. And like many hedge fund managers, Eddie Lampert was a big believer that free market and the invisible hand and Adam Smith and all that kind of stuff was the way to make things happen. Some people described his management and business strategy as Ayn Rand running a business. And one of the first things he did was split Sears up into 30 independent silos that were supposed to use Mr. Market and dealing with each other and different P&Ls as a way to run the business much better than centralized Sears had been run before. But this free market experiment way of running a big business fundamentally didn't work. You had siloization, you had turf wars, you had bitter infighting, and you had people who weren't looking out for the best of the company. A famous example of this is one of the divisions stopped carrying Kenmore products, a Sears product, because the other division wouldn't sell it to them at a reasonable price. So you know what they did? They started stocking a third-party LG refrigerator instead. Just absolutely insane. All the while, Lampert was maniacal about cost cutting. Many stores weren't getting renovated in 10 years or more, so people would go in and see tired stores. They need to be repainted. In some cases, there were leaky roofs and the air conditioning didn't work. Man, not only did employees notice this stuff, but so did the customers. And Lampert famously rarely visited stores and rarely visited headquarters in Chicago. Instead, he preferred to run the company from his mansion in Florida. He would dial into weekly and daily meetings, preferring just to look at spreadsheets rather than see with his own two eyes what was going on in the stores. And employees and executives increasingly felt like senior management and ownership And Mr. Lampert didn't understand what was really going on with Sears. But from Florida, Lampert and ESL was really good at running financial engineering because that was what they knew how to do. In 2015, they did more of that. They spun out all of their real estate holdings into its own REIT. While that generated $2.9 billion for the company and put that on the balance sheet, well, basically it wasn't used to improve the company. And eventually it found its way both to Mr. Lampert's fund Mr. Lampert and to other shareholders. And they spun off or sold prized brands. They sold Craftsman to Stanley Black Decker in 2017. They spun off Lands' End in 2014, and even Sears Canada was split off into its own company, and that went bankrupt eventually too. The company was day by day, year by year, dismembering itself. And while it was getting short-term cash, it was selling off valuable assets that would have been nice to keep the business going. And I remember at this time in the late 2010s, around 2017, going into the stores and there'd be nobody working there. And if there was, it was somebody who was untrained or a 17-year-old kid who didn't know anything about anything. I went in there and I kind of felt sad for Sears. And I think Mr. Lampert probably would have seen that if he'd have visited some stores. Numbers told the tale of the decline. While they made $1.5 billion in 2006, from 2011 to 2016, Sears lost $10.4 billion cumulatively. They were not doing good. While revenue was $50 billion in 2008, it had shrunk to $16 billion by 2017. In 2005, Amazon sales had been just 17% of what Sears' were. But by 2016, Amazon was doing $136 billion and Sears was doing $22 billion a year in sales. Just kind of an insult and rub salt in the wound from the early '90s decision for Sears to give up on their catalog business, which should have been a platform for a future internet business. Finally, in 2018, after, well, over 100 years in business, Sears declared Chapter 11 bankruptcy. They listed over $11 billion in liabilities and things they owed to other folks and under $7 billion in assets. It essentially had to do it because they were out of cash. And it was a sad end for something in Sears that had been a dominant part both of American economy and American life. It was part of our history, down from, you know, basically having 175,000 employees at its peak, over 4,000 stores. It was gone for good. It's natural in situations like this to figure out who's to blame. And I think the first place to look is ESL, the hedge fund that came in and made all this happen. That hedge fund, through the early years, through 2006, showed 29% annual returns and also made Mr. Lampert a billionaire. By 2006, his net worth was estimated to be $3.6 billion. And the financial engineering done by ESL Well, basically had a big pattern of self-dealing. While Mr. Lampert, for example, as CEO, paid himself famously a $1 salary, he also personally gave himself millions of dollars each year in stock grants that, well, he was able to basically keep. In further examples of this kind of self-dealing, in 2016, ESL made itself the de facto lender for Sears. They famously loaned the company $500 million backed by the real estate portfolio that Sears had and charged an 8% interest rate. By the end, Sears was paying out $200 million a year in interest and fees to ESL alone. Kind of a crazy number when the chain was falling apart. And later on, people sued, people that had stakes in Sears. And when that stuff got to court, people learned that a lot of those arrangements that ESL had set up had effectively funneled money out of the company into ventures and entities controlled by or invested in by ESL. And so this was rental payments, interest, services, all that kind of stuff. Self-dealing. One onlooker quoted saying that Lampert basically ran the most protracted wind-down and liquidation of a company in history. And that's kind of true. As a hedge fund manager, he was motivated to enrich himself and his investors, not shareholders, not customers, not employees. And basically he followed his incentives and that's what he did. And after the bankruptcy, the creditors that were now in possession of Sears Holdings they actually filed suit against ESL and claimed that they had basically stripped the company of over $2 billion in assets over the years in favor of themselves rather than the other shareholders. And basically after that went to court, ESL and folks settled for $175 million and the lawsuit was settled. This really represents kind of a bitter final end to the thing with, you know, the company suing its former master in forms of ESL. And settling kind of a sad end. So one thing in business and life is that incentives really matter. And Charlie Munger, who I talked about before, has a great quote where he says, show me the incentives and I'll show you the outcome. And in this situation, ESL and Eddie Lampert were super motivated to enrich themselves, their hedge fund, and their investors, and not motivated to help the employees, customers, and business succeed. And fundamentally, there were incentives to do that. And that's the outcome it got. And I think that's important as we think about our own ventures. Like, how are we setting up incentives for other folks? Well, it turns out more often than not, when you incentivize people to do something, they do that thing. And Eddie Lampert certainly did. All right. This video is a bit longer than my usual ones, basically because this company lasted 132 years and had a lot of drama. Let me know what you think in the comments below. And, uh, I try to read them all. What would you have done to save Sears? And how does all this make you feel? We'll catch you next time. Oh, and I'd promised to tell you why I recorded the intro to this video in front of that random house in San Antonio. Well, that's house was one of the Craftsman houses sent out by Sears, one of the 75,000, and it was here in my hometown.