What Wesfarmers can learn from Sears

US-based billionaire Mr Eddie Lampert is famous for a number of reasons. These include his renowned success as a hedge fund manager, which saw him make billions of dollars for his investors and himself by the age of 41. His fame also includes the awful experience of being kidnapped for two days!

Most recently however Lampert’s fame has been centred on his controlling interest in the 120-year-old retailer Sears Holdings (NASDAQ: SHLD). He acquired Sears through a $12 billion ‘reverse takeover’ by Kmart, which Lampert already controlled. Lampert had previously bought Kmart out of bankruptcy in the early 2000s.

A recent in-depth feature article by Mina Kimes from Business Week provides many telling insights into the struggles this high profile investor and Sears’ CEO, who at times has been compared to Warren Buffett, is having at Kmart and Sears. Lampert’s experience also allows for a comparison with the different approach Wesfarmers (ASX: WES) which purchased Coles, Target and Kmart in 2007. (Note that there is no corporate connection between Kmart in the USA and Wesfarmers-owned Kmart. The namesake and target market are the same though.)

Since Lampert gained control of Sears in 2005, sales have fallen from around $49 billion to $40 billion. The stock price is down 64%. Arguable much of the poor performance can be blamed squarely on Lampert’s radical approach of altering the business processes within the retailer.

Lampert decided to divide Sears up into 40 operating divisions that would all effectively run their own businesses, with their own profit and loss accounts. This has worked well at certain firms such as General Electric, so there was a precedent, however, it has not necessarily worked at a retailer before. The major complaint from staff regarding the model is that it has led to each department competing rather than co-operating with one another. The results of Lampert’s experiment appear to speak for themselves — the internal competition has harmed not helped.

The takeover of Coles, Kmart and Target by Wesfarmers’ has been mixed. While management at Wesfarmers has certainly not sent Kmart and Target down the same path as Sears, Wesfarmers has done a much better job at turning Coles supermarkets around than it has turning Kmart and Target stores around. Earnings at Target fell from $280 million to $244 million between 2011 and 2012, while earnings at Kmart improved after undergoing a major overhaul of suppliers and a significant increase in home brand penetration.

It has of course not been an easy few years for any of the discount department stores. Woolworths (ASX: WOW), which owns the Big W chain. has in the past two years worked hard to just tread water, managing to squeeze out less than one per cent gains in sales and earnings.

Foolish takeaway

While the approaches to improving sales and earnings are different, the difficulty involved with retailing even when ‘smart’ people are involved is similar and also immense. Investors evaluating the retailing sector in Australia can use overseas examples such as Sears to help them test potential scenario outcomes here.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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