GUEST BLOG: The Soft-Headed Side of Sears by Aegis Frumento Esq

October 25, 2018

In 1933, a New York City homicide detective built a classic 7-room colonial on several acres in Putnam County, 75 miles north of Manhattan. Best not to ask how a cop could afford a house in the country during the Depression the year Prohibition ended. We didn't when we bought it some 20 years ago. We enlarged and modernized the house during the Great Recession -- the timing seemed appropriate. But we built around the house, not through it. We left the original almost intact because of its minor historic significance. You see, that NYPD cop built it from a kit, Model No. 3368 ("The Haverhill"), he bought from Sears, Roebuck & Co. A brick-faced version appears in Sears' 1935 Modern Homes catalog.

Starting in the 1890s, the Sears catalog revolutionized shopping. At first, Sears' only "stores" were just small storefronts that took in catalog orders from customers and sent them in bulk to Chicago for fulfillment. I remember seeing some of those in tiny Adirondack hamlets when I was a kid. But its catalogs were everywhere, and through mail order, Sears sold everything. Including, from 1908 to 1940, houses, some 70,000 of them, and everything needed to finish them, from plumbing to paint.

The Havervill sold in the 1930s for about $3,600, about $52,000 current dollars. Sears also offered 75%, 15-year mortgages to encourage buyers. As with most financed sales, we can debate whether Sears hoped to make more money from the houses or the mortgages. It ended up not doing so well on either. The Depression killed sales. Our house has a suggestive clue: One of our toilet tanks has a manufacture date stamped in it: April 20, 1929. The plumbing fixtures languished unsold for 4 years. But Sears repossessed so many houses during the Depression that unsold plumbing was the least of its inventory headaches. Sears finally abandoned the housing market in the early 1940s. Ours may be one of the last Sears houses actually built, which is why we thought it worth preserving. 

And also because it is a classic design and built far better than much that came later. Sears shipped precision pre-cut, top-grade lumber from a railyard in New Jersey, and contracted local builders to put them up. I imagine the under-worked builders in 1933 took extra time and care with ours. Seventy-five years later, it is still plumb and level; I hope our addition fares half as well. 

Sears filed for bankruptcy protection last week, something long coming. Some have pegged the start of Sears's decline to its diversion of retail cash flow to non-core businesses when it acquired Dean Witter Reynolds Securities in 1981. One author blames Sears's demise on the Faustian bargain it made with hedge fund billionaire Edward Lampert in 2004. I think those are excuses wide of the real mark. 

Sears thought it could buy and sell securities like it bought and sold everything else. The derisive moniker "socks and stocks" was applied to the venture by Dean Witter competitors. Sears' acquisition of Dean Witter book-ended another 1981 folly, Prudential Insurance Co.'s purchase of Bache Halsey Stuart Shields. The basic trouble with both was culture clash. Dry goods and insurance are commodity businesses, operating on tight margins, run by managers earning reasonable salaries. Securities, at least back then, were not. The compensation expected by and paid to those on the securities side were out-of-scale to those of their staid overlords. It was a volatile mix, breeding resentment. Clumsy management efforts to force square-pegged premium services into commoditized round holes didn't work out well for either Pru or Sears. But wait -- Sears spun off Dean Witter in June 1993. Even if Dean Witter was a mistake, it was quarter century ago! 

Lampert appears to have been keeping Sears alive the past dozen years just so he could strip away and sell off its prized properties, mostly to himself. It's true that Lampert retains interests in such premium brands as Lands' End and Craftsman tools, and in Sears's extensive real estate holdings. Now, the Kenmore appliance brand is up for sale too. But Lampert sunk more into Sears than he will recover. His hedge fund lost a fortune because of his devotion to the Sears brand. More to the point, though, Sears wouldn't have gotten in bed with Lampert in the first place if it wasn't already in trouble. 

Rather than blaming Dean Witter or Eddie Lampert for Sears' demise, let's look at something more fundamental. 

In 1994, Jeff Bezos founded Amazon. Amazon back then was a joke, losing money year after year. It didn't turn a full-year profit until 2004. That was eleven full years after Sears unloaded Dean Witter, and the same year Lampert bought his controlling interest. Those eleven years, from 1993 to 2004, were pivotal.

During those years, Amazon invested heavily in its operations. It beefed up its website; it added products; it simplified how to order and how to pay down to one single click; it ensured reliable delivery; it recruited retailing partners to drive economies of scale from its shipping and handling facilities; it drove down prices. Amazon made it too easy for shoppers to buy things online. It made the hassles of in-person shopping unnecessary. 

And who was the first to do that very same thing? A Sears catalog from the turn of the last Century is a desktop Smithsonian, an encyclopedia of consumer goods. Through the catalog, whatever could be bought could be ordered, paid for and delivered to one's door without the consumer having to travel further than the local post office. Messrs. Sears and Roebuck appear to have understood something obvious but important: That in-person shopping is a time-consuming and inconvenient chore. For early mid-Westerners, inconvenient because there were no stores close by. For African-Americans in the Jim Crow South, inconvenient because going to stores risked suffering the indignities of racial discrimination. See For everyone, something could always be bought more conveniently by mail-order than in person. 

Sears didn't open its first department stores until the roaring 20s. They proliferated in the post-war Mad Men era. For a while, we were duped into thinking that shopping was a social event and the mall a place of entertainment. But as we got busier, poorer, and more distracted, the underlying reality that in-person shopping is an inconvenient time-consuming chore reasserted itself with a vengeance. Soon enough, only bored preteens relished going to the mall. Today, even the mall-rats have jumped ship. 

And so the need for a way to avoid in-person shopping -- the need for catalog shopping -- became more important than ever. And what is Amazon if not a Sears catalog on a potent mix of steroids, amphetamines, Rogaine and Viagra? 

Steve Jobs wrote that Xerox's management were unimaginative "copier heads" when he picked from their pockets the secrets of the modern computer.  In the same vein, Sears' management were "mall heads." Sears could have out-done Amazon in its post-Dean Witter years. It had the money, it had the time -- and it had the catalog. Sears wasted money and time hitching its fortunes to the soon-to-be-unloved department store. Meanwhile, under its very nose, Amazon reinvented the Sears catalog for the modern age. The secret to Sears' future was right there in its archives, but its management did not see it. 

And so, today Amazon's market cap tops a trillion dollars and Jeff Bezos tops the Forbes list, while Sears trades for pennies and will be memorialized by houses like mine. But let's not blame Dean Witter or Eddie Lampert for this sad end. That would be to choose a coward's explanation.


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento has also represented clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.