Do we spend too much energy trying to save dying companies?

Do we spend too much energy trying to save dying companiesThe Wall Street Journal ran an article on Sunday about department stores. Specifically, a research firm claims department stores need to close about a fifth of their US mall space to bring performance in line with 2006.

The article notes the competitive pressures eating away at department stores:

  • It’s super easy to find almost anything online.
  • Many individual brands have their own stores, which attract the most loyal, and highest value, customers.
  • Discount stores are winning on price and location (it’s often easier to get to TJ Maxx or Ross than to the mall).

Let’s back up a second. What’s the deal with 2006 performance? As far as I can tell, it’s totally arbitrary. The researchers posed a “what if”: What if department stores insisted on achieving 2006 sales on a per square foot basis, including inflation adjustments? What would they have to do?

The answer is close a ton of stores. According to the article, department store sales were $165 per square foot last year, which is a 24% drop since 2006. Presumably, if you close your most unprofitable stores, you could push the average back up to the 2006 number.

Again, that seems arbitrary. You could come up with tons of different revenue- or profit-driven metrics and try to adjust those, and you’d end up with different approaches. As Richard Rummelt says in his book Good Strategy Bad Strategy, a key step in building a good strategy is to define the challenge. And I do mean “the” challenge.

What’s holding department stores back? Is it declining sales per square foot? Is it declining same store sales? Is it declining average sale per customer transaction? Is it a profitability-driven metric?

I don’t know. I’m not in retail. But one lesson here is to hesitate before diving into, and drawing lessons from, any particular analysis. The value you’ll get depends a great deal on the quality of the question you ask at the beginning.

You have an interesting dynamic with department stores, where their performance depends on the success of their neighbors. That’s how malls work. Big name anchors pull in smaller, high quality stores that appeal to a broad base of customers. Malls rely on network effects this way.

The value of the mall traffic increases as you have a larger number of higher quality stores. As soon as tenants start leaving, a mall can face a downward spiral. One store leaves, the mall as a whole is less attractive, so another store leaves…and so on.

(Standalone retail establishments aren’t totally immune from this. The quality of their location clearly matters. And nearby businesses contribute to the quality of the location. This effect is much stronger for a mall, given that all the businesses share one building and the same foot traffic.)

That brings us back to the headline of this post: do we spend too much energy trying to save dying companies? In the case of department stores, it’s clear that the environment has drastically changed, between their heyday and now. We’ve read the obituary of the American mall over, and over, and over again.

Dillard’s 2015 sales were over 12% less than their 2005 sales ($6.8 billion versus $7.7 billion). J.C. Penney’s 2015 sales were over 32% less than their 2005 sales ($12.6 billion versus $18.8 billion). Incredible, right? Their business is disintegrating before our eyes.

So again, is it a waste? It depends on your perspective. Management, employees, and investors have an interest in making repairs. Even if it’s a desperate reach for new ideas, like J.C. Penney and Ron Johnson, it’s worth even a small chance of success, if you know doom otherwise awaits you. For these stakeholder groups, the energy isn’t wasted.

From the economy as a whole, it doesn’t appear to be worth it. A lot of dollars, a lot of people power, a lot of mental energy, is being thrown at what looks to be a lost cause. The opportunity cost is immense. What if we could direct those resources to an opportunity with a greater probability of success?

You see where that took us? Central planning versus free markets. If you’re a fan of planning, you focus on the inefficiencies of resurrecting dying department stores. If you’re a fan of free markets, you focus on everyone’s freedom to pursue their own economic interests, even if it looks like a lost cause.

I’m going to leave that broader argument alone. In the US market economy, you will absolutely see cases like this, where Herculean efforts are made to resurrect dying companies. The immediate interests of management, employees, and investors explain some of this effect. But I think there’s a story element as well.

People are loathe to let go of something that used to be consequential. Shopping malls are an identifiable piece of American culture. It’s easy to remember the days of Sears and their ilk dominating the retail market. We see a huge company, with tons of assets, and a history of success…and it’s tough to acknowledge the road to rejuvenation almost certainly doesn’t exist.

The American startup culture flourishes for a reason. It’s almost certainly easier to build the next clothing retail giant from scratch than it is to turn around a dying behemoth. That sounds strange, because the behemoth already has the balance sheet and talent you’d need to be successful.

The problem is that companies are much, much more than clever people manipulating capital like pieces on a chessboard. Companies have histories and cultures, with the stories and expectations that go with them. Companies have proven track records of success and failure, anchoring points that impede true reinvention. Companies have relationships and workflows that used to be advantageous, but now obstruct change.

I don’t have a stake in the success or failure of the dying department stores. I do find it interesting, though, to see how much energy is spent trying to save them. I can’t help but think nostalgia has an outsized impact here.

What are our lessons? We already covered one early in the post: don’t rush into an analysis before you know you’re asking the right question. Is sales per square foot a meaningful enough metric to justify your investigative energies? Or should you find a different metric?

Another lesson is to try to remove nostalgia when building or assessing a strategy. That’s one advantage of a startup over an established player. A startup can be anything its employees want it to be. An established player has a reputation and brand.

A startup can envision a world of possible successful futures. An established player may have a much more rigid view of success. Take Sears. Sears management might define success as getting their sales per square foot back to mid-2000’s levels. What if that’s all wrong? What if the mid-2000’s (or earlier) model of department stores is doomed, regardless of what we do today? What if the future of large scale retail is completely unlike the department stores of the past? If Sears focuses too narrowly, and tries to recapture its past successes, it might miss the boat completely.

To bring it back to the post title, no, I don’t think we spend too much energy trying to save dying companies. I think this is a necessary outcome of a market economy, which broadly offers a ton of benefits. Occasionally we get an outcome like this, where good dollars are thrown after bad, trying to resurrect something that is likely gone forever. But there’s always a chance, and who am I to deny anyone that chance?

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