Retail Hell

Today’s announcement that Sears will close 100 to 120 stores should come as no surprise. Anyone who has visited a Sears Canada store recently can testify to the terrible store layouts, poor merchandise presentation, and abysmal customer service. And that’s before we even get to the poor quality of much of the merchandise.

At one time, Sears was a differentiated retailer. Sears meant quality and value for money, it meant customer service, and it meant well-maintained stores. Somehow, somewhere, it all went terribly wrong.

The Sears story is indicative of much of what ails the retail sector today. Here, in Canada, it is hard to find a retailer where a focus on the customer and their needs is the norm rather than the exception. At least the big box retailers like Wal Mart don’t pretend to be anything other than what they are; the lowest prices, everyday.

Every retailer, it seems, attempts to compete on price. Except, of course, the “upscale” establishments which position themselves as differentiated retailers where superior quality and service command a premium price. The industry has succeeded in fragmenting itself into two extremes: those who compete on price and those who compete on service and quality. There appears to be little in between.

The Sears story is instructive because it shows what can happen when a firm has little sense of who it is and what it stands for. If low price is to be the basis for competing, then that had better be backed up by an industry leading cost structure in order to preserve margins. Most importantly, this low-cost structure must not be achieved by sacrificing what customers perceive as valuable.

Walk into most any Wal Mart and you will find orderly stores, customer service, and ample stock. Wal Mart achieves it low-cost through a value chain whose configuration enables efficiencies and low-cost operations without sacrificing the things its customers value. Sears, in contrast, believes that the way to lower cost is to cut out the things that customers value and their sales have suffered as a result.

A firm can offer a low price because it has designed and configured its value chain to operate at the lowest total cost. It knows who its customers are, what they value, and what capabilities it needs to offer that value. The cost advantage such a firm gains can be passed through to customers in the form of lower price. A competitive firm, like Sears, which does not have the same value chain, does not have the same cost structure; its costs must therefore be higher. For Sears to compete with Wal Mart, it must cut its prices, which decreases its revenues. To make up the profit shortfall, it must then cut back on things like customer service, merchandise quality, and store organization – the very things customers value.

If a firm chooses not to compete through achieving a cost advantage strategy, its only other option is to differentiate itself. Differentiation as a strategy implies offering unique value to customers that commands a bigher price. Being “stuck in the middle” (Michael Porter’s phrase) between the two strategic pathways is not an option, as Sears is regretfully finding out.

Sears is now at a strategic crossroads. Its strategy, whatever that was, has failed. It must remake itself and reposition itself in the marketplace. This is the purpose of strategy – the deliberate search for a plan of action which will lead to a competitive advantage and compound it. Offering cheap prices at the expense of customer value is no substitute for strategic thinking.

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