Looking at Sears from the Inside Out, Part One
Transcripts from the Mark Cohen Interview.
If you have been following the Church and Main podcast over the last year or read my articles on Medium and Substack, you know that I have done a lot, both written and in the podcast about the fall of Sears and Kmart.
This time around I wanted to talk to someone who actually saw some of what was happening on the inside. And so today's guest is Mark Cohen. He is currently the Director of Retail Studies at Columbia University where he graduated, receiving an MBA in 1971. He was President of Soft Lines at Sears and Roebuck in the late 1990s and then became the Chairman and CEO of Sears, Canada. It was in those positions that he saw some of the missteps that happened and also what started to happen under the leadership of Eddie Lampert, who is the current CEO of Sears. Lampert is the one many blame for the downfall of these two iconic brands
In this interview, we get a behind-the-scenes view of the downfall of Sears and Kmart, but we will also see what has been lost because of the demise of these two brands. Below is a transcript of the June 2022 interview. Because of its length, it is split into two parts. As you read and/or listen, I want to leave you with this thought: the loss of Sears and Kmart is more than just the loss of another retailer that didn’t make it, it is the loss of a way of doing business that reflects how much the business world has changed over the years and not for the better.
The transcript has been edited for clarity.
Dennis Sanders
When did you start with Sears?
Mark Cohen
So I joined Sears Roebuck in Chicago in early 1998.
Dennis Sanders
Okay.
Mark Cohen
The company had been, at one point in the late eighty s, the largest retailer in the world. It had fallen flat on its face, having suffered from an enormous amount of inbred management. It had also gone off on a tangent, having invested billions of dollars in financial services, the Discover Card, DeanWitter Investment Services, Coldwell Banker Real Estate, and Allstate insurance. And it had taken its eye off its core business, which was retail. An early on activist ran an ad in the Wall Street Journal in which over a picture of the board of directors, he had a headline written which was something like Unproductive Assets. He was calling the board out for basically not doing their duty to ensure that the business be managed successfully. The board got the message. They were embarrassed by that. This is before they were activists every day of the week clamoring for someone's head. And they went outside and hired Arthur Martinez to become the only CEO who would ever join Sears from the outside. The only senior executive, frankly, who would ever join Sears from the outside. He turned the company around. The company took off like a rocket ship from 92 to 96-97.
Dennis Sanders
The turnaround kind of got stuck. Too many people celebrating, too much success. I joined in 98. The mandate that I had was, you know, get us back on, help get us back on track, both as the chief marketer and as one of the two lead merchants. And I did that. I mean, I contributed toward that. So 99-2000 were the best years in the company's history. Martin unfortunately, at the end of 2000 retired. He'd been at the company since 92. He was turning 60. His dad had died at the age of 60. He didn't want to die in this chair. And unfortunately the board appointed someone from the company who turned out to be a ringer. His name was Allan Lacey. He had been the chief financial officer and then the head of Sears Robucks Credit. He was a financial guy masquerading as someone who reportedly had merchandising skills, which he did not. He got into a fight with the Sears, Canada CEO. Sears Canada was an independent company in Toronto whose 51% shareholder was Sears Robuck. So it was a public company in Canada, but its principal shareholder was its US. Parent. Lacey got into a fight with the Sears Canada CEO who promptly quit.
Mark Cohen
And he asked me if I would take the job up there. I was fine with that because I was never going to stick around in Chicago, having worked with Allen and having come to the realization that he was not going to be successful. So that's how I joined Sears, Roebuck. And that's how I wound up as the CEO of Sears, Canada.
Dennis Sanders
What was Sears Canada like at that point around 20th century. I know that they had around that time, basically taken over Eaton's, which was a well-known Canadian company.
Mark Cohen
That's right. Sears Canada was founded in the early 1950s as a joint venture between Sears Roebuck in the US and Simpsons, a Canadian department store. Sears Canada, in 2001, which is when I joined them, was doing a little less than $7 billion profitable running business that was a lot like Sears Robuck on the hardline side and a lot like Macy's on the soft line side. So it was much more fashionable and upscale on the apparel and accessories side. But just like Sears with regard to appliances, hardware, tools, things of that sort, Sears Canada was one of the largest retailers in Canada. It had a credit business which was extraordinarily powerful and intrusive. It was in businesses far broader than the US business. It was in the long distance telephone business, the travel business, it was in the home improvement business. And of course, like it's US parent, it serviced all the appliances it sold and it was really an icon in the Canadian retail marketplace. It had, as you pointed out, made an investment in a bankrupt Eatons, which was a moderate to upscale department store that had fallen on hard times and it had almost train wrecked itself in trying to make sense of that acquisition.
Mark Cohen
My predecessor, who either was fired or quit, had indulged in an extraordinary strategy of renovation across Canada. He took seven over large Eaton stores, mostly in downtowns, and renovated them. He spent $150,000,000 more than he had a budget for. And unfortunately, there was no there. There was lots of flash, lots of PR, lots of expectation, but there was no differentiation by way of strategy between Sears Canada and New England. That's the pond that I jumped into my role upon arrival because I had quite a bit of involvement with the Canadians, as I had been responsible for all of Sears Roebuck worldwide private label, including the merchandise that Sears Canada used, and was also being lobbyed by them to give them support for their Eaton's launch. So I had a fair amount of insight into the train wreck that they were about to encounter. And when I went up there, I more or less said to the team, which had been very successful for six, seven years until this interlude, we know how to run a successful business. Let's get back to our knitting. Let's set this distraction and disruption aside because it's killing the core business.
Mark Cohen
And of course, a year later, I turned those seven Eaton stores into Sears because there was no viable pathway to make sense of seven stores coast to coast across Canada, operating a separate strategy unto itself. It's a shame it could have worked, but too much money had been spent and there would have been too much ongoing disruption. So Sears, Canada was a captive of Sears, Roebuck. It benefited from its ability to use the Sears Roebuck brands Kenmore, Craftsman, Diehard. It didn't need the financial backing of Sears Roebuck. It was cash flow positive. It had no debt. It didn't require any financial or operational support from the US. It had long ago learned how to successfully and profitably stand on its own. The conundrum is that it was tethered to Sears Roebuck because Roebuck owns 51% of its stock. So Lacy was in the job for five years. I knew he had no idea what to do. I was just as happy as I could be to be away from Chicago, frankly, and watched with no surprise that he started to make decisions that were certain decisions I never would have made. And then he started to make decisions in which he started to demand that I follow suit.
Mark Cohen
So, for example, Sears Robuck had a 30 plus billion dollar credit card portfolio. It created a Sears credit card in the early 50s following World War II. Which was an extraordinarily smart move because it empowered millions of young families. Forming households. Moving out into newly formed suburbs from the cities and from rural communities who otherwise never would have been able to come up with enough cash to buy a refrigerator or a washing machine or furniture or apparel for their kids. That sort of thing. The portfolio was over $30 billion, and Lacey saw to it to create a Sears Mastercard, which was a smart move because customers no longer were in love with having a wallet full of store cards. They were starting to support multipurpose cards. In other words, a Sears Mastercard or Bloomingdales Visa, that sort of thing. And so Sears Roebuck formed a US bank, which they had to do to satisfy the Feds to be a credit card issuer. But then they did something. And by the way, in Canada, we started to do the same thing for the same reason we created a Sears Canada Mastercard product. We had to spend a year creating a national bank in Canada.
Mark Cohen
The requirements in Canada were actually more stringent than they were in the US. But having said that, I had a very experienced, very successful credit card team and they were very careful about how we launched that new card, unlike Lacey, who got careless, reckless, and if not, downright stupid. So for example, he had hundreds of thousands of newly minted Sears Mastercards mailed to Sears credit card holders with a letter which informed them that this was now their new Sears card and that their original Sears card account was being transferred over and therefore canceled. An enormous number of customers were infuriated by that. They were not given a choice, they were not given advanced notice. They were just basically told by virtue of credit card in their mailbox, that this is your new Sears card. When Lacey was challenged by this, this is just before I went up to Canada, he said, well, these are not active customers, so why should they care? And I may have the one who pointed out that in their minds, they were absolutely active customers because they were customers who bought appliances from Sears, and because Lacey had no idea what he was doing.
Mark Cohen
He didn't realize that customers buy appliances every eight plus years. Customers buy appliances when they move, when they move into a new apartment, they move into a new house. They think of themselves as active customers because they're putting a big ticket item on their card. They were infuriated by this change in status, which gave them lots more features and benefits and convenience, but they weren't apprised of that in that way. And then he did something that he did while I was in Canada, which was the lynch pin of the Sears robot credit business. The credit operation began to issue cash advance privileges to these newly minted Sears Mastercard holders. My Canadian credit executives, when we created the strategy in Canada, presented to me the view that we would wait several years before we issued out cash advance privileges. We would want to see what Sears Canada credit customers with this newly minted Mastercard. We wanted to see what their behavior would be to ensure that we wouldn't encounter any kind of undue bad debt or slow pay delinquency experiences. They were very schooled in the risk profile you get into when you're running large credit operations.
Mark Cohen
The Sears Canada portfolio was over 6 billion, so it was proportionately bigger than the US. Well, those hundreds of thousands of new customers in the US. Who got immediate cash advanced privileges of $1,500, many of them raced to their ATM, pulled the cash out, and that's it. They didn't pay any other bills. In many cases, they were new Sears Roebuck credit card customers. And Lacey had a crisis on his hands because his credit division had not provided appropriate risk provisions for this emerging no pay, slow pay experience that they were encountering. To make a very long story short, he had a fire sale the portfolio to City to City Corp. Because the banking community in the US. Was no longer willing to securitize his portfolios. Securitization is when approximately every year, a credit card issuer sells the receivables to banks who take on some of the risk, if not all the risk, and pay the host more or less a fee for that. It's a way of managing your balance sheet. And whereas in Canada, we had banks who are mad at us because we wouldn't give them a big enough crunch of securitization, they didn't want to be part of the US portfolio because of its emerging bad debt experience.
Mark Cohen
So Lacey was forced to fire sale his portfolio to city card. And he tried to do a deal where he tried to combine the deal with the Canadian portfolio. Which would have given him a better outcome since the Canadian portfolio was held in much higher esteemed by the banking community it was viewed as much more profitable I'm the CEO of a public company in Canada I have a major shareholder but I'm also responsible for all shareholders and I refuse to play because it's not in the best interest of the company at large lots of fighting about that I stuck to my guns he couldn't do anything about it because the case that I made to my board which included him which I made to my board was it makes no sense for us to separate our very profitable. Very successful. Very large credit portfolio which has created over 50 years this extraordinarily intimate connection with customers so that was one big fight the second one centered around his creation of a new strategy in the US called Sears Grand which was to be a Sears Roebuck located in a power center rather than anchored to a mall which would carry food and which would look to be competitive with a Walmart Superstore or Super Center and Target both of which were heavily and are now as you know heavily invested in food and so he opened up two prototypes one in Salt Lake City.
Mark Cohen
A suburb of Salt Lake City and one in the suburbs of Chicago it was in I think. Walkegan and he wanted me to open one in Canada because that would enable him to validate his view the success of the strategy? Well there was almost complete transparency between the US and Canada with regard to data we had stand alone systems but complete commonalities and so we could examine the performance of these two prototypes as if we were based in Chicago and they were not successful despite the fact that he was touting their success to his board what do I mean by that? Well. One of these stores was going to annualize it $13 million a year but was 200,000 sqft which is something that doesn't compute now prototypes often are real studying patients they rarely are successful right out of the gate but in investigating these two prototypes and in visiting them and in studying them I became completely convinced that this was going to be a catastrophe and I'll give you some examples but while this was going on lacey bought from newly emerging from bankruptcy Kmart 51 stores across the United States with which to roll out Sears brands and he paid $605,000,000 in cash for those stores so my merchant team is studying Sears Grand very carefully we're visiting the stores and my real estate team in Canada is studying this real estate deal and they come back to me with the view that half of these 51 stores are dogs and 605,000,000 is a ridiculous amount of money to spend on them.
Mark Cohen
Well, fast forward and I'll go back to Sears Grand. Eddie Lampert who took control of Kmart took them out of bankruptcy because he bought enough of the company's debt to be able to do that had been a 14% investor in Sears Roebuck stock and behind the scenes did a deal with Lacey on this real estate. And when the investment community got wind of it or discovered it, they did the math. 51 stores, 605,000,000. That means 2200 stores are worth gazillions of dollars. And the Kmart stock went right up into the sky because the real estate valuation appeared to be incredible. And what did Lampert do? He turned around with that cash and that inflated stock price, and he basically bought Sears Roebuck back to Sears Grand. I'll give you an example of why I knew this was stupidity personified. The store in Salt Lake City was in a power center anchored by Walmart. The store you would have thought would have been a showcase for the brand equities that Sears held that differentiated it from everyone else, notably Kenmore, Craftsman and Diehard. The Kenmore and Craftsman presentation was just simply in the normal course. There was nothing special about it.
Mark Cohen
….And as for food, when I asked the store manager how's food going, what's happening? He pointed out that every week they have to basically trash most of the food because nobody's buying the food. It wasn't fresh food. It was mostly refrigerated and packaged stuff. But they weren't selling food because they were doing business in the shadow of a Walmart super center.
Mark Cohen
Okay, why would you buy food at a Sears? Okay. So I said to Lacey, look, there's no way we're opening up a Sears brand in Canada. And, oh, by the way, are you crazy? I wasn't an adversary of his in Chicago. I pointed out that he did something stupid with his credit rollout, but he didn't rub his nose in it. I stayed away from him in Canada for as long as I could. But in the summer of 2004, a business writer, a journalist for the Chicago Trib named, I think, Jim Kirk, who I'd never met and I never talked to, wrote a column in which he said, Sears is failing. Sears, Canada is doing well. Lacey has no idea what he's doing. Maybe the board should get Cohen to come down and take over the US operation. Lacey went crazy, called an emergency board meeting. Canada basically threatened my board with dismissal, which is something he could do theoretically. And so that's how he left Sears Canada. He stayed on for another six to eight months as Lampert took over the entire business. Lampert installed the guy from Kentucky Fried Chicken to run the thing and put a former Sears Roebucks CFO, Julian Day, in charge of Kmart.
Mark Cohen
Someone who, by the way, Lacy had fired. Okay, this is a bad soap opera. Julian Day set aside, set to work cutting the heart out of Kmart, which was pretty much more abundant at best, having been on its last legs long before it went into Chapter Eleven. Lampert had all sorts of fanciful notions about how he was going to run Sears. Robuck none of which, by the way, made any sense. But he knew better because he was the smartest guy in the room. And of course, after a year or two of the streets proclaiming him to be the next Warren Buffett because of the extraordinary ramp up and profitability of Sears Roebuck, the streets realized that it all came from expense cuts. So you look like a genius when you cut all your capex out and you kill your operating expenses for a little while. And then he started to essentially liquidate the business by selling off its best real estate, creating these cockamamie deals where he would lend the company money collateralized against real estate. He sold off an enormous tranche of really prime real estate into a rate called Seartige. Remember that?
Mark Cohen
Which gave Sears cash, which basically enabled Sears to stay upright. But now Sears had to pay rent into Seartage. And who's the principal shareholder? Eddie Lampert.
Dennis Sanders
So this is something that I've always had a question. Was this intent basically just to liquidate the business? Was that the plan?
Mark Cohen
I think the plan was to liquidate Kmart. I think the Lampert's very outset was to run Sears Roebuck. I think that plan didn't make it past the first year, year and a half, if it was even that well rooted. Because I think Lampert realized almost at the very outset, if not at the very outset, that he had no idea how to do this. And he didn't want to try because he never installed anybody in the business who had any idea how to run the business. Lacey certainly had no clue. The Kentucky Fried Chicken guy was well regarded in the food business. He had no idea what to do. There were never any executives, either at the top or senior level in the company who had any standing. They were all puppets who basically did Lampert's bidding.
Dennis Sanders
Was that the same people on the board as well?
Mark Cohen
Yeah. Well, the boards were all puppets. The boards were all people who were either too stupid to know better or were installed by Lampard and did exactly what he more or less told him to do, one of whom, by the way, from the very outset, was his college roommate from Yale. None other than Steve Mnuchin, who became the Treasury Secretary, whose integrity is now under an emerging cloud. As if he ever had any to begin with, because he basically, along with his other board members, rubber stamped everything that Lampert was doing. So the board, which theoretically is in charge of managing the fiduciary behavior of the company on behalf of all its stakeholders, not only its shareholders, but its associates and customers, pandered to Lampard's every whim. And by the way, he did exactly that in Canada. He put inexperienced and incompetent people in the corner suite and installed board members who worked for him, or were Canadians who had no idea what they were doing and did what he told them to do. And so he ran both businesses into the ground. And that's something I started publicly speaking about many years ago and was written off by some as sour grapes. "He's just disappointed and unhappy and angry." Yeah, I was all of that, but I was speaking from the belief that I had that this was going to be an apocryphal collapse. And I don't want to sound like I told you so, but I told you so. And it's not because I'm not smart. It's because I have a tremendous amount of time and experience in the business, and I'm not afraid of Eddie Lampert. A lot of people had the same view that I had, but didn't see fit to speak up because of their view of the risk it might engender. And I should point out that when I left Canada, Lampert had taken over the entire company. He attempted to reneg on my employment contract, which was written in explicit terms by a world class attorney who pointed out to me when I went up to Canada that I was going to be conflicted out at some point, very likely because I would have complete responsibility to the Canadian shareholder while I would have to deal with my 51% US shareholder. And he knew enough about Lacey to stay. It's not going to be a marriage made in heaven.
Mark Cohen
You're going to want to kill him, he's going to want to kill you. If you follow his lead, you're going to wind up getting into terrible trouble. Because he's troubled. He knew a little more about Lacey than I did. In any event, I had a contract which was bulletproof and after a year of ditching around, a lot of which, by the way, was centered around tax liabilities. Because when you work in Canada at a certain income level, you're liable to pay Canadian taxes, while at the same time, you're liable for US. Taxes. And any reasonable employment arrangement protects you from indemnifies you from double jeopardy, meaning the parent has to make you whole. Well, after a year of ditching around and by dealing with the Canadian tax authorities who don't care what the deal is. They just want their money. I had to sue Sears Holdings and in Illinois state court. And I'm not afraid of Lampert, and I know what the contract says, and I know that I'm dealing with someone with an infinite legal budget. But after a year, a state judge in Illinois grants me a summary judgment which basically says to Sears Holdings his contract is written in English.
Mark Cohen
The arithmetic is third grade. It's absolutely clear what you're required to do. Just do it. And she orders the company to do it. Rather than do it, they appeal. They take it into an appellate court in Illinois, and a year later, this is year two, the appellate court throws their appeal out because these actions take forever. The appellate court, a tripart tied appellate court rules to say the appeal is bullshit and sends it back to the original trial judge for adjudication. And she tells them to honor her original judgment. And in the 364th day of the third year, when I'm now about to not only seek redress for what is owed me, but now I'm looking for damages, because in a civil proceeding, you can't reach for damages until a certain amount of proceedings have taken place. Now I'm looking to create a nuclear war, looking for a gazillion dollars worth of damages. And I'm hardened because I've got the Canadians looking for money and the US feds looking for money. Anyway, make a long story short, this 364th day, when I'm about to go back into court, sears caves in and settles. This is how Eddie Lampert rolls.