Captain Crunch

October 1 1995 by John Kador

Ask Arthur C. Martinez, the new chairman and chief executive of Sears, Roebuck and Co., any question that involves hard data-market share, projected sales, return on equity-and the engineer in him bubbles to the surface. He grins. He puts his hands flat on the table. He’s ready to crunch. But ask him about people issues-sharpening the skills of Sears’ front-line sales personnel, pushing buyers to be more aggressive in dickering with longtime suppliers, or anticipating fickle consumer tastes-and Martinez sits back. He tucks his elbows in. A veneer of weariness dulls his smile. Clearly, human beings are far less predictable than columns of digits.

The mood change is easy to decipher. In three years as chairman of Sears’ $33 billion retail division, Martinez (pronounced MARtin-ez) chalked up some impressive numbers. The unit’s profit jumped 18.4 percent last year, to $890 million, and compares with a disastrous $2.9 billion loss in 1992. Same-store sales climbed 8.3 percent on the heels of an 8.9 percent gain in 1993. But in an overstored domestic market with volatile seasonal swings and cutthroat competition-both from hungry discounters and such giants as Wal-Mart, Federated Department Stores, and J.C. Penney-observers question whether Martinez can keep up the pace.

To a large extent, the answer lies outside the areas Martinez, 56, likes to talk about most. He’s midway through a $4 billion refurbishing plan, which aims to spit-shine Sears’ older outlets, bolster customer service, and pave the way to sell increasingly upscale lines of apparel and other soft goods. He’s betting consumers will follow proprietary, hard-good brands such as the Diehard auto battery and Weather-beater paint to freestanding specialty stores outside malls. Most significant, having joined the company from tony Saks Fifth Avenue, Martinez continues to buggywhip Sears’ hidebound, insular culture. Curiously, in a North American market that craves the brand-spanking new, Sears’ 109year-old history is both a marketing draw and an obstacle to change. Nonetheless, it’s a factor Martinez plans to leverage.

“We have an extraordinary reputation for fair-dealing, quality, and value for the American customer,” he says, in an interview from Sears’ campus-like headquarters in Hoffman Estates, IL. “It’s clear that over the last three years, we have re-established a connection with the customer that works and has created some significant top-line growth for us.”

“Sears is taking gobs of market share from everyone,” says Kurt Barnard, president of Barnard’s Retail Marketing Report, a retail forecasting service in Scotch Plains, NJ. Since 60 percent of operating profits come from apparel, Barnard contends that Sears’ main challenge is to balance brands and private-label fashions as well as to intensify categories such as jewelry and shoes.

The Sears, Roebuck and Co. Martinez inherits is, for the first time in 60 years, practically a pure retailer (in a partnership with IBM, Sears retains a 50 percent stake in the Prodigy online information and entertainment service). Over the last three years, Martinez worked closely with former CEO Ed Brennan, dismantling the diversified business Brennan built and prized as a cornerstone of Sears’ success in the 1990s and beyond (see sidebar). Gone are all non-merchandising entities: the Dean Witter brokerage, financial-services giant Coldwell Banker, and real-estate concern Homan Development. Allstate Insurance, which comprised roughly 40 percent of Sears’ $54.56 billion in revenues last year, was spun off to shareholders in a tax-free dividend over the summer.

The competition in retail has never been tougher. Upscale department stores such as Marshall Field & Co. are slashing prices. Having snapped up Macy’s, Federated Department Stores remains on the prowl. In the mall-based retail market, Sears butts heads with J.C. Penney, which still has the edge in customer service and private-label apparel lines, industry observers say. Some analysts penalize Sears for its concentration in malls-sites that are apparel-driven and fading in popularity.

“The apparel market is in the toilet,” says Louis W Stern, a professor of marketing at Northwestern University‘s Kellogg School of Management. “It will change, but when it does, Sears will have a lot of competition. There are superb apparel stores out there,” Stern continues, “many of which also are making changes” and moving upmarket. “People have been sanguine about Sears, but it’s going to be difficult for them.”

How difficult perhaps was underscored last year when Robert L. Mettler, Sears’ chief of apparel and home-fashions merchandising, told Business Week that instead of promoting $29.95 dresses, Sears is more likely to sell career outfits that “go all the way up to $100.” Clearly, such price points won’t encroach upon those of Martinez‘ Saks alma mater, leaving Sears to scuffle in a newly defined middle market with the likes of Target Stores and Penney’s.

Despite the headwind, Wall Street hands Martinez a vote of confidence. If the Sears Merchandise Group had been a standalone business in 1990, according to company estimates, the price per share would have been $22. By June 1993, six months after Martinez began to restructure, the price would have been $27.12. Recently, Sears’ straight-up retail shares were trading around $34. The 50 percent gain compares with a 45 percent plunge over the period in Standard & Poor’s Composite Retail Stores Index.

It’s unlikely an insider could have turned Sears around as quickly as Martinez, who cut into the company’s bloated operations like a Craftsman chain saw. Every one of his predecessors-including Brennan, who began at Sears in 1956 as a clothing salesman-had been steeped in Sears’ stifling management hierarchy. In Martinez’ first 100 days on the job, he closed 113 underperforming stores, snuffed Sears’ 105-year-old “Big Book” catalog business (launching immediately profitable niche books), and rescinded the company’s stubborn policy of honoring only Sears and Discover charge cards.

An outsider’s most important advantage, Martinez reckons, is the absence of emotional baggage. “You’re not personally invested in the history of the company and the practices that once made the company successful,” he says. “You bring no allegiances to any particular thoughts, ideas, concepts, or propositions.”

A math and science whiz, Martinez grew up in New York, earning an engineering degree from Brooklyn Polytechnic Institute and then an MBA from Harvard. After financial or international executive positions with such companies as Exxon Chemical, RCA, and International Paper, he joined New York-based Saks in 1980, rising to vice chairman and a member of the board before Brennan lured him to the Windy City.

The move was not universally heralded. Industry observers wondered how a cost-cutting technician would fare over the long haul. Though it’s early in the game, Martinez already has learned some hard lessons. “Cost strategies ultimately have their limits,” he acknowledges. “We now know the importance of revenue growth to long-term success. We understand the absolute requirement to grow in a very highly competitive market.

“Be impatient,” Martinez says, crystallizing his management philosophy. “Don’t take comfort in what’s been achieved.” The hands are once more flat on the table; the confident, trademark grin has returned.

RETAIL EXPERIENCE

How has your background in engineering helped you?

Engineering helped me to organize a thinking process: one that is analytical, and that identifies and resolves problems. Engineering is very much “push it out, design it, build it.” Understanding the art and science of marketing took me some time.

Was it difficult to come to Sears as an outsider and make changes?

When I came to Sears in 1992, I didn’t have to invent a crisis to create a willingness to change the status quo. The hardest job of all is to take a company that’s performing well and force people to think about how to do things differently. Clearly, there was no lack of crisis at Sears.

How is the Sears of today different from the Sears when you were brought in as head of the Merchandise Group?

We are a more focused company. A lot has been written about the cost-cutting I’ve done, but Sears’ enduring success will be its ability to create marketing and merchandising strategies that allow us to grow our market share at the expense of

our competition. Today, all our core businesses have gained in market share over the last 24 months. That’s very different from what I found in 1992, when the company was losing market share and relevance for the consumer.

‘TALES OF WOE’

If we were to sit down two years from now, what would you like to point to as a clear indication of success?

First, I would look at comparable store sales increases that are clearly meeting and beating our competition. Second would be whether we have increased our operating margin while doing that. Third, have we articulated and begun to execute a growth strategy that goes beyond our 800 mall-based stores? And last, are we relevant to the customer?

The retail market is congested: There are Wal-Marts, Kmarts, Home Depots, and Staples. Where does Sears fit in?

The Sears brand has a unique bond with our target customer: a franchise built on a 109-year reputation. We also fit in as the true, traditional department store, a general merchant in a world of increasing specialization.

What do you look for when you visit your competitors?

I look for how they’re presenting new ideas and new products. I also look at pricing; the value asset is so big today. I try to get a handle on how they are pricing their goods relative to our comparable goods.

How do you get feedback from your customers? What kinds of questions do you ask?

I ask department managers or sales associates what customers are telling them. I ask, “What’s working for us? What’s not working? What do they want to see more of? What brands are they asking for? Are we priced right? Are we in stock on advertised items?”

When you’re in an airport or on an airplane, do you ask strangers about their attitudes toward Sears?

I’m not a big fan of that. [Laughs.] I won’t say I would dread it, but I wouldn’t like sit next to someone for three hours, hearing their tales of woe.

GLOBAL OUTLOOK

Sears was a big supporter of the North American Free Trade Agreement. Have your expectations been borne out?

We benefited nicely until the Mexican devaluation, because NAFTA began to open Mexican borders to U.S. goods. With the peso where it was, the Mexican consumer found those goods attractive. But it’s a temporary interruption. Every five to seven years, Mexico seems to take a step or two backward to prepare for six or seven steps forward. In the long term, NAFTA will be a great enabler for this cross-border commerce.

What are your plans for Sears globally?

 We are going to stick to the three countries in which we currently do business: Canada, Mexico, and the U.S., because we’re well-positioned. I have no short-term interest in changing where we have no store presence. When you have a $35 billion revenue base, putting two stores in Chile or Argentina doesn’t make much difference from an economic sense, and it’s a huge management distraction.

You eliminated the “Big Book” because it was not making money. Now you have about two dozen niche catalogs that are in the black. How do you account for that?

We’ve completely changed the economic model of our catalog business. We’ve effectively outsourced most of the merchandising and fulfillment, which has variablized all our catalog costs. We have no infrastructure and no investment; we transferred the risk to our partners and reaped some handsome rewards.

Are you committed to maintaining a debt-free strategy? If so, how are you financing the $4 billion capital-improvement program?

Out of our own cash flow. Our debt-free status gives us an opportunity to think about choices for the future, but it’s not a stake in the ground. Prudent use of leverage at the right time would be appropriate, whether it’s supporting growth strategies or share repurchase or ultimately changing our dividend payout situation.

MANAGEMENT MORES

Resistance is a natural human reaction to change. How has your tolerance level for people’s resistance changed over the years?

I am less tolerant of any overt or covert resistance to change than I was a few years ago. We need to get this business moving and keep it moving. Anyone who doesn’t understand that the pace of change in this business has increased will not find me very tolerant.

When Ed Brennan, 61, Sears’ chairman and CEO, announced in November 1994 that he intended to retire within a year, he didn’t go quietly. Instead, he coupled his announcement with another that effectively split Sears, Roebuck and Co.’s $33 billion core retailing business-the Merchandise Group-from its 53-year-old, $21.4 billion insurance concern, Allstate.

Coming on the heels of a successful corporate restructuring begun in 1992, which eliminated the company’s nonstrategic financial and real-estate businesses, the Allstate spin-off was a fitting denouement. Indeed, the irony was thick: As one of several architects who built Sears’ diversified portfolio of retailing and financial services in the 1980s-arguably a failed experiment-Brennan became its principal deconstructionist. “1 wasn’t sitting there in the 1980s, saying, ‘I don’t think this is the right strategy, and I’m going to take it apart some day,’ he says. “That thinking evolved over time.” In fact, Brennan initially resisted the dismantling of Sears, only to come around in the face of the conglomerate’s abysmal performance in the early 1990s.

Before his retirement last month, the gravel-voiced Brennan, a 39-year Sears veteran, sat down with CE editors to discuss the restructuring that helped Sears lift operating profits to $890 million in 1994, a significant turnaround from 1992′s losses of $2.9 billion.

What forces pushed you to spin off Allstate?

No. 1, the investment community had not recognized the value we created in the financial-services business. No. 2, building those businesses caused us to take on enormous debt-about $52 billion or $53 billion. Third, we weren’t doing well in our core merchandising business. Today, the investor base wants more of a pure play, a pure retail stock, than one that’s 50 percent insurance.

Is Sears competitive with giants such as Wal-Mart and Kmart?

Yes. But you have to look at the overall assortment; we overlap on some merchandise and price points. We also carry merchandise they don’t, and price points they don’t.

Does being price- or cost-competitive ensure success in today’s overstored retailing arena?

We have one enormous advantage in that three-quarters of the American public shops at Sears at least once a year. That means that if you do things well, those customers will purchase more often.

You are handing over the reins of a completely restructured company. How do you feel about that?

We have a relatively young, and very solid, management team in place. Arthur Martinez, who I recruited more than two years ago, is looked upon by everyone in this industry as one of the real stars. In terms of debt, our balance sheets are strong. And, finally, we’re doing well and have momentum in both businesses.