America now avoids Sears at all costs, thanks largely to Mr. Lampert and his love of twisted economic logic.
A
bit of background: Lampert cut his teeth on Wall Street at the
risk-arbitrage desk of Goldman Sachs under Robert Rubin, who later
became U.S. Treasury Secretary and now serves as vice chairman at
Citigroup. In 1988, Lampert founded ESL Investments and joined the
billionaire’s club at age 41. He rose to fame in the early 2000s for
seizing control of Kmart during bankruptcy and then using it to take
over Sears. Along the way he was kidnapped and deposited on a motel
toilet in handcuffs for nearly 40 hours, and lived to tell the tale.
Lampert is known for his touchiness and odd habits, such as conducting
meetings from a bare bones room to Sears executives forced to tune in by
videoconference. He hates flying.
You might say that Lampert is
the distillation of the fervent market worship and wrong-headed economic
approaches that came to dominate the U.S. in the 1980s and have yet to
run their fatal course. He adores Ayn Rand, and is
during
an ESL annual dinner. Lampert is also a fan of Friedrich von Hayek, the
Austrian economist beloved by conservatives and libertarians. As a
Robert Rubin protégé, he absorbed the lessons of a man whose discredited
economic focus on budget deficits ended up starving the country’s
infrastructure, education and alternative energy.
Looking at what
Lampert has done to Sears, we can see what happens when the lessons of
his mentors are actually applied in the real world. It isn’t pretty.
1. Myth: Bigger is better
William
Lazonick, an expert on the American business corporation, has written
about the rise of the conglomerate movement of the 1960s. At the time,
shareholders were clamoring for rapid growth, so they pushed for big
mergers and acquisitions. Once-successful firms were pressured to move
away from their core businesses, often to terrible effects. In an email
to me, Lazonick noted that “the ideology was that a good manager could
manage anything, and that all the central office needed was performance
statistics so that it could ‘manage by the numbers’.” This foolishness
“imploded,” as Lazonick put it, in the 1970s
.
Evidently
Lampert didn’t get the memo. In the 1980s, as deregulation got the
casino games rolling on Wall Street, mergers and acquisition fever once
again took hold. This time around, mergers more often involved
acquisitions in the same industry, like Bristol Meyers’ acquisition of
Squibb. Two new terms entered the American vocabulary, the “hostile
takeover” and the “corporate raider.” Oliver Stone made a movie about
this episode called
Wall Street.
Some refer to Lampert as a corporate raider. He prefers the term “active investor.” It must be admitted that Lampert wasn’t
only interested
in stripping the assets of his retail giant to make a fortune off it
right away. He thought he could increase profits, too. After making a
nice wad of cash from Kmart by selling off the valuable real estate
sitting under dozens of stores, shutting down 600 stores and laying off
tens of thousands of workers in the name of cost-cutting and thereby
jacking up the stock price, he got bigger ideas. He would use Kmart to
take over another ginormous retailer, Sears.
What background did
Lampert have in retail? None at all. But never mind that. He was a Wall
Street genius, and he would make this thing work by harnessing the power
of data and numbers and letting the invisible hand of the market guide
his Franken-company to glory. He even hired Paul DePodesta, the
statistician of “Moneyball” fame, to advise him. When Kmart acquired
Sears, the new company, Sears Holdings, became one of the largest
retailers in the U.S., and Lampert became its CEO. He took on the
Herculean task of integrating two vastly complex companies. And he
brought on a guy that knew all about restaurants and nothing about
retail to help him, Aylwin Lewis, former president of YUM! Brands.
Reactions ranged from surprise to predictions of doom. Mark Tatge at
Forbes called him “
Crazy Eddie”
and decided that he must be planning to liquidate the whole shebang,
perhaps slowly, by dumping stores (Sears owns a ton of valuable real
estate) and using the money to do stock buybacks (more on that later)
that would further enrich him.
It turns out that contrary to
Lampert’s notion, you actually do need to know something about a
business in order to manage it well. There’s really no substitute for
industry-specific experience. And bigger is not always better — a
gigantic corporation can be too unwieldy and complex to thrive,
especially when your management philosophy is derived from a writer of
bad novels.
Sears and Kmart are now on well on their way to becoming vaporized as brands.
2. Myth: Self-interest is the greatest virtue
The
neoclassical economic paradigm is built upon the idea a human being is
little more than a globule of self-interest. It teaches that the market
economy is populated by rational individuals whose selfishness is
constrained only by expediency. Ayn Rand was an enthusiastic proponent
of this idea in extreme form, and her celebration of it can be found in
The Virtue of Selfishness: A New Concept of Egoism, published
in 1964, which explains, among other things, the destructiveness of
altruism and the virtue of acting solely in your own self-interest.
At
Sears, Lampert set out to create the Ayn Rand model of a giant firm.
The company got a radical restructuring. It was something that had been
tried at giant industrial conglomerates like GE, but never with a
retailer.
First, Lampert broke the company into over 30 individual
units, each with its own management, and each measured separately for
profit and loss. Acting in their individual self-interest, they would be
forced to compete with each other and thereby generate higher profits.
What
actually happened is that units began to behave something like the
cutthroat city-states of Italy around the time Machiavelli was penning
his guide to rule-by-selfishness. As Mina Kimes has
reported in
Bloomberg Businessweek, they went to war with each other.
It
got crazy. Executives started undermining other units because they knew
their bonuses were tied to individual unit performance. They began to
focus solely on the economic performance of their unit at the expense of
the overall Sears brand. One unit, Kenmore, started selling the
products of other companies and placed them more prominently that Sears’
own products. Units competed for ad space in Sears’ circulars, and
since the unit with the most money got the most ad space, one Mother’s
Day circular ended up being released featuring a mini bike for boys on
its cover. Units were no longer incentivized to make sacrifices, like
offering discounts, to get shoppers into the store.
Sears became a
miserable place to work, rife with infighting and screaming matches.
Employees focused solely on making money in their own unit ceased to
have any loyalty the company or stake in its survival. Eddie Lampert
taunted employees by
posting under a fake name on the company’s internal social network.
What
Lampert failed to see is that humans actually have a natural
inclination to work for the mutual benefit of an organization. They like
to cooperate and collaborate, and they often work more productively
when they have shared goals. Take all of that away and you create a
company that will destroy itself.
In 2012, Lampert bought a $40
million home on Indian Creek Island, near Miami, just around the time he
decided to sell 1,200 Sears stores and close an additional 173. That
same year, Sears Holding was named the
sixth worst place in America to work by AOL Jobs.
3. Myth: Greed always wins
In
the 1980s, a noxious business philosophy developed that said that
shareholders were the only true stakeholders in a company, because they
made the investments and bore the risk. Forget about the investments and
risks born by taxpayer and the people that work for a company. They
didn’t matter. A company had no responsibility to anybody but the
shareholder.
As a result, executives started using this
justification for various kinds of hustles designed to line their
pockets. They got very adept at the game of buying back their own stock
in a way designed to inflate earnings per share and hide weaknesses.
In
1977, 95 percent of distributions to shareholders came in the form of
dividend payments. Today, more than half of the cash returned to
shareholders of S&P 500 companies comes from buybacks instead of
dividends.
Fortune magazine, in a
story about
what happens when Wall Street jumps into the retail business, reports
that under Lampert, Sears has gone on a stock buyback spree. Between
2005 and 2011, he took what was once the company’s strong cash flow and
spent $6.1 billion of it on stock buybacks. During the same time period,
only $3.6 billion was spent at Sears on capital improvements. Lampert
told investors that upgrades and new stores were not an “efficient” use
of capital. Neither was paying workers decently. In fact, Sears workers
are paid so badly that they have
taken to the streets to protest.
So
when you walk into a Sears store today, you find a sad, dingy scene
with scuffed floors and chipped paint. Tense-looking workers hover over
merchandise scattered onto ugly display tables. Hardly makes you want to
buy a microwave.
A handy chart on Yahoo Finance show that
buybacks reached a high just
about the time that Sears’ sales went into the toilet. Stock buybacks
are really just an effort to manipulate stock prices, and they don’t
help a company’s long-term health. They divert money away from the
things that a company needs to have to succeed, like decent salaries for
workers and investments in new products and services. Wonder why Apple
is no longer making anything interesting? Why its retail workers get
paid squat? Check out what they’ve been doing with stock buybacks.
Lampert’s
buyback scheme has raked in a pile of money for him and his early
investors, but it’s also flushing the company down the drain. Hoovering
cash out of any firm, especially a retailer that needs appealing stores
and strong advertising, will eventually crush sales.
And so it has. Sears has
lost half its value in five years.
Conclusion: The
lessons of Crazy Eddie seem so obvious that a bunch kids running a
lemonade stand could understand them. You have to know something about
the business you’re running, especially a big one. Success requires
cooperation rather than constant competition. Greed is ultimately
destructive.
The invisible hand of the market appears to have
attempted to slap Lampert upside the head to teach him these things. But
he remains committed to his nonsense, and the real losers are all the
hard-working people who have lost their jobs, and the potential loss to
the American economy of two revered brands.
It’s probably a good thing Ayn Rand never tried to run a business.
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