It might seem ludicrous to compare a conquering giant like Amazon (NASDAQ: AMZN) to a dying company like Sears (NASDAQ: SHLD), but the Sears of the early 20th century ruled mass merchandise retailing with its its famous Sears Catalog and direct-to-consumer model.
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After reading New and Improved by the Harvard business historian Richard Tedlow, I couldn't help but draw comparisons from where Amazon is now, and where Sears once was.
Delivery versus brick-and-mortar
Of course, there is a world of difference between 1920's America and the digitized, internet-driven world of today, but more things are similar than you may think. Sears, like Amazon, was a delivery retailer. Imagine that! The first retailing giant in America was not a brick-and-mortar store but a delivery mass merchandiser. We tend to think of brick-and-mortar as the original and traditional method of retailing and Amazon as the disruptor that is upending tradition. But Amazon represents not a departure, but a return to centralized delivery, which was the original method of mass merchandise retailing.
Julius Rosenwald, then President of Sears, was confident in the superiority of delivery retail, as detailed in Tedlow's book:
A continuous stream of customers in the shape of orders are in line to be waited on from 8am till closing time; their purchases selected in advance... The clerk has merely to take the goods from the shelf and have them wrapped. No high salaried salespeople, but ten to twenty customers can be served in the time one would be in an "over-the-counter" retail store, and with only a fraction of [the] expense for rent.
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Hands-down, the delivery model beat the store-based model when it came to economies of scale. The entire nation could be served with ten large plants. Moreover, the delivery model did not have to deal with the difficulties of picking, acquiring, and managing real estate.
Strange then, that Sears would move away from delivery and go into brick-and-mortar stores. By 1931, it had built 378 stores. Its brick-and mortar sales that year topped its mail-order sales, a trend which would continue and intensify.
Before we go into why Sears would do this, let's first recognize that here we have an example, a precedent, of a delivery retailer transitioning successfully into brick-and-mortar.
As far as I know, the opposite transition -- from brick-and-mortar to delivery -- has never been accomplished. Macy's (NYSE: M) tried. Early in its history, it made considerable efforts to compete with Sears in the mail-order business, but it was all for naught. Today efforts are being made by both parties to cross over to the other side. Amazon is building brick-and-mortar stores, and pretty much every major retailer has an online presence. As we watch this game play out, we should keep in mind that what Amazon is doing has already been done by moving to physical locations, while brick-and-mortar retailers can't lean on examples from the past in the same way.
If history had the final word, it would tell us that Amazon will transition completely into a brick-and-mortar retailer, just like Sears. But that would be a superficial reading of what happened. It's important to know exactly why Sears eventually left the business model that made its name. The reason, in a word, was technology. A mail-order company like Sears could only send out a few catalogs a year and required a lengthy lead time before deliveries went out. It would set the pricing for its spring catalog in November of the previous year. The catalog would then be sent out in January and remain in circulation until August, and during this nine-month period, Sears was stuck with whatever prices it had set in November. Pricing, according to the president of Sears, was the "most difficult problem of the business." When commodity prices swung wildly, like in the immediate post-World War I period, a mail-order house had to sit by with all its inventory in place as the nimbler brick-and-mortar stores gobbled up the sales. The depression of the 1920s almost brought Sears to its knees, and leadership decided that a move into brick-and-mortar was long-overdue.
The American demographic was also changing, becoming more and more urbanized. A catalog which would arrive twice a year by mail may have worked for the farmer out West but not for the more fickle 20th century customer. The mail-order business had basically run into a technology impasse which would only be solved with the coming of the internet.
What Sears teaches us about Amazon
Brick-and-mortar for Sears was not a strategy of choice but a strategy of last resort. Amazon, on the other hand, suffers from none of the technological deficiencies that plagued Sears in the 1920's. Indeed, technology has made it so that the same urbanized customer that Sears could only reach with physical stores can now be reached by Amazon, with greater ease and efficiency, through the power of the internet. If Sears could dominate mass merchandise retailing with a mail-order catalog that changed twice a year, how much more can Amazon do with a virtual catalog that changes by the second and delivers within days?
The past of Sears gives us a better appreciation for the future of Amazon.
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