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Is Grainger the Sears or Target of Distribution?

Is Grainger the Sears or Target of Distribution?

October 18, 2018

On Tuesday of this week, Grainger’s stock declined by nearly 13% due to concerns around sales volume. The day before that, Sears Holdings (which owns both Sears and Kmart) filed for chapter 11 bankruptcy protection. It’s tough to see two iconic American companies suffering – although of course having a bad day on the stock market is a far cry from insolvency. But is there any connection between these companies’ stories, other than their Chicago roots?

In my experience, developments in the retail sector tend to foretell similar changes in wholesale distribution, often years ahead of time. I believe that the competitive dynamics and shakeout in retail clearly illustrate the choices Grainger and other leading, traditional distributors face as they deal with the current wave of disruption Amazon Business is bringing to our industry. 

The Retail Story: Reacting to an Emerging Juggernaut

Sears was founded in 1893. Discount, warehouse-style retail didn’t emerge until 1962, the year the first Kmart, Walmart and Target stores opened. Kmart’s sales exploded; by 1977, the company rang up nearly $10B in revenues, making it 20 times larger than rival Walmart. Target was still under a billion in sales and it looked like Kmart had won the discount retail wars. Sears, meanwhile, dwarfed all of these competitors with more than $17B in retail revenues, primarily from its mall-based anchor stores. 

However, the retail landscape changed dramatically over the next dozen years. By 1989, Walmart was the third-largest retailer in the US, reporting nearly $26B in revenue. Kmart logged $27.7B and Sears’ earned retail sales of $31.6B. Impressively, Walmart grew its sales more than 25% in one year and built up enormous momentum. Target, meanwhile, was now way down the list of largest retailers with total sales in 1989 of $7.5B. 

If Sears was concerned by its narrowing lead, however, the company didn’t admit it. In 1991, a spokesman told The Chicago Tribune, ''Comparing Sears to Walmart and Kmart is a little like comparing apples and oranges. Sears is in the general merchandising business; they`re in the discount business. We compete directly against them in only about 30 percent of our product line.” 

Sears was in denial about the emerging crisis. 

Kmart, on the other hand, was not in denial and confronted Walmart directly, unveiling an everyday low-pricing strategy (“Blue-Light Always”). Walmart, of course, had for years been using slogans like, “Always low prices” and “Always the low price. Always.” The battle was on. Unfortunately for Kmart, it was doomed to lose it to a superior operator that ran a more efficient supply chain and more effectively built the scale to be the true low-price leader in retail. Over the long haul, Kmart couldn’t match prices with Walmart and its attempts helped it spiral down into a financial crisis until it filed for chapter 11 bankruptcy protection in January 2002.

When Kmart emerged from bankruptcy in May 2003, Eddie Lampert’s hedge fund (ESL) owned a majority of the stock, now listed on the NASDAQ. Lampert, as it turned out, had interned at Goldman Sachs with business television personality James Cramer (yes, that guy). In June 2004, Cramer wrote an article in New York magazine called, “Blue Light Special. Or why Kmart—the downscale, beleaguered retailer everyone loves to hate—is the next Berkshire Hathaway.” He proclaimed, “In a year’s time, Eddie has engineered a whopping turnaround.” The footnote for the article explained that Cramer owned Kmart stock. 

In November 2004, Kmart announced it planned to acquire Sears for $11B, creating a new entity called Sears Holdings. By now, Walmart was truly the retail king – more than five times larger than Sears and Kmart combined.  

Sears Holdings’ long series of mistakes since then could fill a large book (or a long Wikipedia entry: https://en.wikipedia.org/wiki/Sears_Holdings). Between selling off the legendary Craftsman brand, making its DieHard and Kenmore branded products available on Amazon, obsessing with cost-cutting while failing to find an effective niche for Sears or Kmart and other blunders, the company hemorrhaged cash until this week’s bankruptcy filing. 

Target, meanwhile, took a totally different approach to Walmart’s low-price onslaught. Rather than challenging the juggernaut directly, Target nimbly got out of the way. It moved upscale and developed a unique niche one analyst called “design-forward” or “mass prestige.” Instead of competing head-to-head with Walmart on low prices, Target became an “upscale discounter,” focused on more image-conscious consumers as it loaded up with designer merchandise across many categories. 

By 2005, Target’s sales exceeded $50B and have hovered around $70B over the last several years. The company has not enjoyed the explosive growth Walmart achieved on its way to the $500B mark it will reach soon – but it’s still a large, highly successful and profitable company. That’s a much, much better outcome than Sears Holdings’ recent bankruptcy. 

I believe Grainger and other distributors are at a similar crossroads to the one faced by their retail counterparts – except the situation is more complicated today. Here’s why: Amazon Business is certainly the same kind of disruptive juggernaut to distribution that Walmart represented in retail. But Amazon Business is inviting other distributors to collaborate with it by selling on the company’s marketplace. That’s a new wrinkle with no real precedent.

So, I believe Grainger has four fundamental choices: 

  1. Ignore the problem presented by Amazon Business and other disruptors (the Sears approach).
  2. Attempt to go head-to-head with Amazon Business (the Kmart approach).
  3. Reposition its value proposition to be clearly differentiated from Amazon Business (like Target).
  4. Collaborate with Amazon Business – probably by selling on the company’s marketplace.

Tomorrow, I’ll offer my views on how Grainger can avoid the fate of Sears and Kmart. But your company faces some of these choices, too. If you want to make sure your strategic decision-making is well informed and helps you continue to thrive in the future, I suggest you attend our upcoming forum, “How Distributors Should Respond to Amazon Business.” Leading thinkers in distribution will offer their expertise and you will have plenty of breakout time to meet with non-competing executives wrestling with the same decisions. 

Click the link to register below – and feel free to add a comment or email me at ian@mdm.com

How Should Distributors Respond to Amazon Business
Dec. 4-6
Denver, CO
 
 

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