Growth IQ

by Tiffani Bova

  While pursuing a Customer and Product Diversification growth strategy, Sears was masterful in establishing product brands such as Kenmore, Craftsman, DieHard, Silverstone, and Toughskins, to name a few. It was a conglomerate during the mid-twentieth century, adding Dean Witter and Coldwell Banker Real Estate and introducing the Discover Card.

  Ironically, given what came later, it might surprise you to know that Sears even started Prodigy as a joint venture with CBS and IBM in 1984. The company claimed to be the first consumer online service, offering its subscribers access to a broad range of networked services, including news, weather, shopping, bulletin boards, games, polls, expert columns, banking, stocks, travel, and a variety of other features. By 1990, Sears, via Prodigy, was the second-largest online service provider, trailing only CompuServe. And that wasn’t their only venture into the Internet—Sears purchased the social search engine Delver in 2009.

  ON LIFE SUPPORT

  In a few decades, Sears has gone from being unstoppable to publicly admitting that it may not survive. Sears, at one time the nation’s largest retailer, has lost money every single year in the decade leading up to 2018, bleeding more than $10 billion over that span. The once-iconic brand has been forced to pull the plug on countless stores (the company operated 1,002 stores in total at the end of fiscal 2017, compared with 1,430 in the year prior. In 2018 (January–April), Sears announced it would be closing one hundred additional stores, and will open more “smaller concept” stores later in 2018). Meanwhile, its stock price had fallen more than 72 percent since early 2017.

  Having played the role of upstart retail juggernaut in the 1890s, Sears now found itself in the same position as the rural general stores it used to drive out of business en masse. What happened? The customer changed, and Sears failed to change with it. In May 2017, Eddie Lampert, Sears CEO, blamed shifting consumer behaviors that “changed the game.” In the past, it was the retailer who determined what a customer should want to buy and how they should shop. Today, it’s the customer who is defining the shopping experience—and Sears has been unable to respond quickly enough to the changing market context.

  Skate to where the puck is going, not where it has been.

  —WAYNE GRETZKY, NHL hockey player and Hall of Famer

  In 1989, Sears was surpassed, after a century, by Walmart—a retailer that actually “adopted” the Sears model. They say imitation is the greatest form of flattery, but not when they do it and then supercharge it with technology and processes that streamlined its supply chain channels and allowed for unprecedented price discounting. Other retailers, all using innovative technology solutions and more sophisticated marketing and sales techniques—Target, Best Buy, Home Depot, Costco—soon passed Sears, as well. Meanwhile, Sears decided to get rid of its “beachhead” and ended its mail-order business in 1993, just before e-commerce companies applied their very own “catalog” model to the Internet.

  Unfortunately, Sears hung on to its Customer Base Penetration strategy for too long—and found it difficult to keep up with changing buyer preferences. So, instead, it chose to merge with Kmart, another struggling retailer, as a way to reinvigorate growth.

  While Growth IQ is not about using mergers and acquisitions (M&A) to grow top-line revenue, the reason this deal happened highlights the fact that Sears missed the shift in market context altogether. It was not anticipating “where the puck was going to be”—it was solving for “where the puck had already been.” The combined company wanted to make both brands more competitive by up-selling and cross-selling each other’s flagship products, and gain access to each other’s customers via new locations, in a classic Customer Base Penetration + Market Acceleration play.

  Remember to consider the market context when planning for growth. Exposing Craftsman Tools, Lands’ End, or Martha Stewart’s home products at a Sears or Kmart brick-and-mortar storefront wasn’t going to cut it against the rest of the industry and customer demands, which had already moved on. The terrible irony of the Sears story is that many of the solutions to its problems have looked the company in the face now for nearly thirty years.

  “IF ONLY . . .”

  The inventor of the mail-order catalog failed to see that the Internet was just a modern version of its original business model. It also failed to see the value in its still-healthy business of appliance installation, which gave the company unique access to American homes. It also failed to see the successful template for Product Expansion with its Kenmore, Craftsman, and DieHard brands and in its own Sears Canada store, one of the biggest e-commerce companies in that country, one that was more successful than competitors like Walmart. Sears had over one hundred years of customer data and buying preferences “in theory,” and unfortunately . . . did nothing with it.

  If only it had leveraged its access to America’s kitchens and laundry rooms with its Kenmore and Whirlpool brands in 2012 to become the showroom for the Smart House of the future (and then buy the likes of Nest or Philips Hue Light Bulbs); had it used the Discover card to create a gigantic social network to move discounts and loyalty programs to its then millions of steady customers (or purchase start-up Square and integrate mobile payments and credit cards); or tied together its fitness equipment with its own FitStudio.com; or recast its Shop Your Way loyalty program to be less about discounts and create its own Gilt.com.

  Instead, when Sears found itself in a significant growth stall, it made several significant decisions that validated the fact that it wasn’t thinking about the twenty-first-century buyer, the customer base it already had, and how it could (1) penetrate them further and (2) keep them shopping at Sears—ultimately helping it get back to some level of growth. First, it began to sell off a few of its big-name brands. The most stunning was the sale of the Craftsman brand (after ninety years!) to Stanley Black & Decker in 2017 for $900 million (and a portion of future sales for fifteen years after the deal closed).

  Sears lost more than a household brand—it sold an entry point to the next generation of smart homes, the Internet of Things (IoT)—which brings with it an entirely new customer base and category for growth. Furthermore, along with selling the brand, one of the most important and lucrative assets it got rid of was—its customers. Sears didn’t lose them, it just sold them. Yet again, what a shame! Its loyal customer base had been unmatched in the industry for decades, so much so that other companies were willing to pay hundreds of millions of dollars to get their hands on them. A good question is: Was Black & Decker only interested in the products, or was it actually interested in the customer base? I’d argue the latter was a big part of its interest and valuation.

  Let’s put that into perspective: Why were those customers so valuable? Remember, acquiring a customer the first time is far more expensive than selling to them once they are in your brand’s “orbit.” Sears had them, by the tens of thousands, generations of them—and it completely ignored their intrinsic value to the business when it sold off these iconic brands. As many consumers continue to look elsewhere to shop, department stores have built robust and (customer) value-driven loyalty strategies. This is one area where some retailers, like Sephora, have used loyalty programs to reward their best customers and increase purchasing frequency. Will these decisions (negatively) impact the Sears Shop Your Way loyalty program membership? According to Sears, member sales penetration for the Sears Shop Your Way loyalty program has grown from 58 percent to 75 percent since 2011. Why are loyal customers important? Well . . . Nordstrom’s ten million active loyalty program customers represent more than 50 percent of its total customer base.

  The decision to sell off some of its major brands may have delivered a final blow to the once dominant seller of appliances that it may never be able to recover from. Shoppers will no longer be able to buy Whirlpool, KitchenAid, Jenn-Air, or Maytag appliances at Sears, following a pricing dispute that has ended a 101-year relationship between the department store chain and the country’s largest appliance
maker. The only part of their century-old partnership remaining intact is that Whirlpool will continue to manufacture appliances for Sears’s private-label Kenmore brand. Sears characterized the decision as “an effort to support its customers.” Seems a bit counterintuitive since the appliance business is one of Sears’s last remaining strengths. One of Sears’s big selling points has been that it is the only retailer to carry all of the top ten major appliance brands. Despite years of market share losses, the company is still #3 in the U.S. major appliance market. Sears may be a bit overconfident in its ability to continue to sell its historic volume of appliances with a much more limited brand selection. In July 2017, Sears struck a deal with Amazon (Partnership) to test-run selling Kenmore appliances on Amazon. This was followed in December 2017 with deals for Amazon to sell DieHard car batteries, tires, and other related items.

  Let’s reflect on the changing customer context. If you were to look backward (where the puck has been), then increasing the price of appliances may in fact disenfranchise even the most loyal of customers. But if you are looking forward (where the puck is going), to the twenty-first-century customer, and you are able to increase the value and the experience of a product, raising the prices doesn’t seem as unrealistic.

  Fast-forward to 2018:

  Whirlpool announced at CES (the official name of what had been called the Consumer Electronics Show) that Apple Watch wearers will soon be able to remotely control twenty connected home appliances. It would mean smart watch owners could change temperature settings on ovens, delay cycles on washers, or check how long is left to run on a dryer.

  Whirlpool has also announced that families will be able to control its 2018 range of appliances with voice commands to both Amazon’s Alexa and Google’s home assistant.

  If only Sears had chosen to do these things prior to shedding all those well-known brands, the modern-day Sears story might look more different. Instead, the company chose to continue to milk its cash cow and leverage its massive real estate portfolio rather than fix what was wrong with its core business. Sears failed to see that the context of the retailing world was fundamentally changing with the Internet—and its customers were changing as well—so it stayed its course without deviating too far from what made it great for over one hundred years.

  Sears wasn’t on the wrong growth path by pursuing Customer Base Penetration—quite the opposite, Sears was right to try to sell more to its base, especially considering its sheer size. The mistake it made was not understanding that its customers wanted more, not less. They wanted cross-channel capabilities between brick-and-mortar stores and online commerce. They wanted a better (shopping) experience. They wanted more relevant and appealing products. They wanted a vast selection of products at the right price. Unfortunately, what had made Sears so successful in the past was now holding it back. It was, and continues to be, unwilling to make the necessary adjustments, especially when it came to Customer and Product Diversification, Optimizing Sales, and Customer Experience.

  We can’t afford to lose a customer.

  —RICHARD SEARS, cofounder of Sears, Roebuck and Company

  Sears had at its disposal all the right pieces for a strong showing against its competitors, but it lacked the willingness to look beyond the status quo. What Sears needed were more Partnerships (like Walmart and Uber or Kohl’s and Amazon) not fewer, greater focus on Customer Experience (like Sephora, Ulta, Apple, and even Best Buy), and the key: keeping the customers it has by reducing customer defection (Churn). This isn’t an either-or zero-sum decision. This is about how companies that are struggling to find growth can take the strengths they have, including large and loyal customer bases, and modernize them—with the right combination of technical advancements—and growth paths to further extend the lifetime value (LTV) of its customers—while at the same time allowing the company time to absorb the changes.

  SEARS

  KEY TAKEAWAYS

  Rather than leverage its assets that were tied to its customer base in order to strategically shift its business model, Sears sold off extremely valuable assets to double down on a deteriorating strategy.

  Sears wasn’t on the wrong growth path by pursuing Customer Base Penetration—quite the opposite, Sears was right to try to penetrate its loyal and tenured base, especially considering its sheer size. The mistake it made was that its customers were beginning to leave (Churn) for retailers who were embracing the new economy—digital, social, and smart home technologies to name a few—and they weren’t willing to make the necessary changes to keep them coming back . . . maybe until now.

  Just because it was “invented here” doesn’t mean competitors won’t use what made you great against you in the future. This is where market context becomes so important. If you get too internally focused, or believe that the only way out of a growth stall is to reduce expenses, or buy another company, then you have forgotten the most important reason to do anything: the customers you serve. Always keep them as your true north and allow them to guide you on when and why you would consider pulling back or accelerating on a particular growth path.

  As consumers are spending a larger percentage of their dollars online, retailers such as Sears will need to flip their value proposition to entice shoppers back into the store. Case in point: Target has been able to increase its digital growth by 25 percent in 2017 by arming in-store employees with mobile devices to help them facilitate orders placed online and picked up in the store, as well as facilitate online orders shipped to customers’ homes from the store. Target claims as much as 70 percent of all purchases were shipped out of stores during the 2017 holiday shopping season.

  Even JCPenney has implemented a flexible fulfillment program with the rollout of “buy online, pick up in store”—same day to all stores. JCPenney has said that more than 40 percent of online orders are now picked up in the store, and more than 33 percent of those customers make an additional in-store purchase of $50. That is how you leverage Customer Base Penetration with a cross-channel sales and marketing effort.

  PUTTING IT ALL TOGETHER

  THE REASONS YOUR CUSTOMERS BECAME your customers in the first place will also impact the success of whichever growth path you choose. If customers joined you because you were offering the lowest price, it is highly likely that they will quickly move to another supplier who can offer an even lower price than you. But if customers joined you because of your amazing customer service (added value), then those customers are more likely to remain loyal and be positive recipients of cross- and up-sell propositions. Penetrating further into the existing base of customers means you must “find your niche”—and know what your most valuable customers look like, and why they buy from you. What trips up many companies that pursue a Customer Base Penetration path? They do not place as much emphasis on selling to the existing base as they do on acquiring new customers.

  WHAT WORKS—AND POTENTIAL PITFALLS

  The sequence in which you pursue this path is critical. Even if you have a large base of current customers who are disposed to buy more from you, it will backfire if you don’t ensure that you Optimized Sales, plus allocate resources and dollars to make the marketing and sales efforts you pursue be more effective. The Customer Base Penetration growth path relies on detailed knowledge of the market and competitor activities. It relies on your having successful products in a market that you already know well. Remember, this is about not only acquiring customers once but ensuring that you keep your brand top of mind when they “shop” again.

  You need to be talking regularly not just to your current customers but to your competitors’ customers as well. Big data analytics can help you to bore down into the fine details of your customers’ attitudes, behaviors, and interests—and, in the process, build a clear VOC profile. In the best of all scenarios, you know more about your customers and their relationship to your products than they do th
emselves. This will enable you not only to shift your pricing and marketing strategies at a moment’s notice but to anticipate what your customers will want next and welcome them when they show up (i.e., “where the puck is going”).

  How can you apply the Customer Base Penetration growth path to your own company? This strategy will most likely succeed if the market you are targeting is still growing—or there are more “similar” customers to be found, or you have the ability to sell more to the existing base. A declining market, or one in which you have already scooped up 80 percent of potential users, is not likely to reward this path exclusively.

  PATH 3

  MARKET ACCELERATION

  MARKET ACCELERATION

  China is going to be the world’s largest consumption place and that engine is going to drive the world economy.

  —JACK MA, founder and executive chairman of Alibaba Group

  WHY MARKET ACCELERATION MATTERS

  Global growth is projected to edge up to 3.1 percent in 2018 and ease slightly in 2019–20.

  Information-technology firms and construction-related companies dominate the fastest-growing industries in the United States.

  All twenty-three economies of “Emerging Europe” are set to record positive growth in 2018.

  China now accounts for 42 percent of global commerce as of 2018—more than France, Japan, the U.K., and the United States combined.