Big box retailers have been making headlines as of late. Some of the formerly largest companies - Sears and JCPenney - have been struggling for years to make a profit. On the other hand, similar big box chains like Walmart and Best Buy, are soaring to new highs. Why the difference? The reason why some companies are struggling, and others succeeding, it not as obvious as it seems. Amazon changed the game, but not everyone was paying attention.
The real driving force was the changing demands of the consumer. Millennials have come out in full force demanding changes to the traditional brick and mortar retail offering. Speaking from my own anecdotal evidence, I have not purchased an item from a traditional big box store in the last year. However, I have spent time on the Walmart and Best Buy websites looking to buy items from their online stores. These companies have listened to what new-age consumers have asked for and responded accordingly. The importance of this should be considered even further with new entrants to the market, like Amazon, tailored directly to the next generation.
These four companies together provide a wonderful glimpse into what to do and what not do when it comes to responding to competition. Amazon changed the game, but not every company listened.
Amazon sells many of the same products as all four of these companies. But neither WMT or BBY have struggled to deal with emergence of online shopping in quite the same ways that Sears and JCPenney have. Shown below is the relative performance of all four of these companies, and the market over the past five years. What did WMT and BBY do differently than SHLD and JCP?
The divergence of these companies begins 10 years ago.
At this time Sears and JCP’s revenues were at all time highs and these revenues were trickling down to the bottom line with healthy margins. These companies were market leaders. In the highly contested retail market, companies need to consistently reinvest these profits to meet the ever-changing demands of consumers. It was at this time that Sears and JCPenney began to use their profits to buyback their own shares. In the opposite fashion Walmart and Best Buy invested their money back into their own stores and online platforms.
JCP and Sears spent billions of dollars after 2006 in their own shares. The logic given by management was that their shares were undervalued and they were doing a service to their shareholders by buying them back. However, share buybacks do nothing to enhance the value of stores. These company’s retail stores failed to change up their product line, offer brands demanded by consumers, or consider that consumers may be shopping in new ways. In 2007, Sears was buying back their shares at a price above $150 and JCP at prices above $30. Both of these companies shares now trade at prices below $10. Good use of company capital? Probably not.
All four of these companies tell their shareholders that they only have their best interest in mind - but only two of these companies really understood what that meant in this industry. Companies needed to consistently invest in service enhancing initiatives, particularly in a time with emerging competition, to make sure their investors could expect returns in the future. With the emergence of Amazon, retailers needed to go the extra mile to make customers willing to get in their car and go to the store. Share buybacks make earnings look better in the short-term, but when revenues go down they can’t hide the company’s inability to bring in consumers. Now, as Sears and JCP struggle to make ends meet; they are closing thousnds of stores and firing even more employees.
All in all, the stories of Sears, JCPenney, Walmart and Best Buy show that we’re not coming to the end of the Big Box Store. What’s happening is the emergence of players like Amazon is that the consumer can now demand a better experience from these large companies. Walmart has responded by offering a more expansive product offering and Best Buy with better service. Big Box stores will continue to be important to consumers if they can continue to offer services that online retail cannot. Sears and JCP failed to realize this and are struggling to adapt because of it. This is at the expense of the shareholders in which they were trying to appease 10 years ago.