Arthur Martinez wasn’t all that enthusiastic when a headhunter called in 1992 to ask whether he would be interested in the top retail job at Sears, Roebuck and Co.
It wasn’t that Martinez, then vice chairman of Saks Fifth Avenue, didn’t itch to run his own show.
Martinez simply figured Sears and its ponderous, slow-moving bureaucracy would never move fast enough to make him an offer before he signed on as chief executive of P.A. Bergner, parent of Carson, Pirie Scott.
He was wrong. Two weeks later after a whirlwind courtship, Martinez accepted the job at Sears.
Martinez, a finance whiz with a Harvard MBA, was well aware he had a big job ahead of him. Sears once had been a one-stop shop for America, selling everything from tractors to underwear. But by the late 1980s, its potpourri of appliances, mattresses and men’s suits had fallen out of favor with consumers who were shopping in trendier specialty stores.
Retail experts had labeled Sears a dinosaur.
Martinez’s new boss, Sears Chairman Edward Brennan, hadn’t ignored the problems. Brennan had tried to reorganize the company, revamp the merchandise and brighten the stores. But results had been disappointing, and Sears’ board eventually went looking for a new fix-it man.
Now, while Brennan was concentrating on unwinding the financial services conglomerate that Sears had built, it was Martinez’s task to pump new life into Sears’ retail empire.
Soon after taking the job, Martinez said, “Well, this is going to be a clear win or lose. Either I’m going to be a hero, or I’m going to be a bum. There is no middle ground … no shades of gray on this one.”
Martinez was wrong again.
As he prepares to step down as chief executive of Sears after an eight-year tenure, Martinez is neither a clear winner nor a clear loser. Sears remains firmly stuck in the middle, neither as competitive on price as its discount store rivals nor as fashionable as a host of new specialty store players.
If there is a color that describes Sears’ future today, gray is it.
The retailer’s board of directors again is searching for a new turnaround artist, the same kind of rising star that Martinez was when he joined the Sears team. A successor could be named any day now.
Whether it turns out to be Alan Lacy, a finance whiz who shares the CEO office with Martinez, or someone from the outside, they will face the same challenge Martinez defined during his tenure: making Sears a compelling place for Middle America to shop.
Eight years ago, however, what needed to be done at Sears was crystal clear.
`Tattered old lady’
First on Martinez’s “to do” list was stopping the losses from Sears’ struggling retail business.
“When I got here, the retail business was not making a dime. Sears was a tattered old lady,” Martinez reflected during a recent interview in Hoffman Estates, where Sears is based.
Within five months of his arrival, Martinez announced he was closing more than 100 money-losing stores, laying off 50,000 employees and shuttering the venerable Sears catalog, which was losing $150 million a year. Wall Street analysts, frustrated by Sears’ hidebound ways, applauded the radical actions.
Then Martinez went on the offensive, launching a $4 billion remodeling campaign to brighten the remaining Sears stores and increase the square footage for apparel by recapturing back-office space.
Back at Sears headquarters, Martinez was winning converts with his low-key management style and his ability to quickly grasp complicated topics. He asked lots of questions, sought input from subordinates and rarely got angry.
“Arthur was a great boss,” said John Costello, former head of marketing at Sears. “He empowered you to do your job and was decisive when you needed him to be.”
Martinez would have loved to bring popular brand names such as Liz Claiborne and Nike to Sears right away, but he recognized that many brands wouldn’t sell to Sears because they didn’t want to hurt their image or alienate more upscale department stores. So he made a major push into creating so-called private label brands that would be designed by Sears and produced by factories overseas.
Of course, such efforts pay off slowly. It takes several years to develop a new line from concept drawings on a sheet of paper to merchandise on the floor. But consumer research showed that what Sears already had on the racks was better than women shoppers were giving it credit for.
So in the fall of 1993, Martinez decided it was time for a bold marketing move: invite women shoppers back to Sears before all the stores were cleaned up and the new merchandise was on the shelves.
The “Softer Side” of Sears was born. With catchy puns playing on Sears’ hardline strengths, the image advertising campaign won plaudits and awards. Martinez made sure that all the clothing and accessories featured in the ads were actually for sale in all Sears stores.
Sales exploded. From the back of the retail pack, Sears moved to the front, posting monthly sales increases in 1993 and 1994 that averaged more than 8 percent.
But revving up sales at Sears mall-based department stores wouldn’t be enough to make the company’s stock a favorite on Wall Street again. Martinez needed an “off the mall” growth story to lay out before investors.
As he surveyed the Sears’ empire, most of the pieces already were there.
Sears Credit, the retailer’s credit card operation, was a sleeping giant. Martinez bought in Jane Thompson, a former McKinsey & Co. consultant and a Martinez protege, to wake it up.
Although Sears already was one of the largest credit issuers in the country, Sears Credit threw its net wider, opening 17 million new accounts between 1994 and 1996. It also raised its interest rates and late fees.
With fresh credit cards in their hands, shoppers gave a two-fold boost to Sears. They loaded up on merchandise, boosting sales at Sears’ stores, and then they paid 21 percent interest on their credit card balances, boosting revenue for Sears Credit.
But pumping up Sears credit portfolio wasn’t enough by itself. Sears still needed new retail concepts.
Martinez chose to push ahead with the rollout of HomeLife, a freestanding furniture chain that moved furniture and mattresses out of Sears’ mall-bound stores.
Hoping to capitalize on shoppers’ frustration with giant home improvement chains such as Home Depot, he created Sears Hardware to be a friendly, neighborhood alternative for busy do-it-yourselfers.
Martinez didn’t stop there. He transformed Western Auto, an auto repair chain acquired by Sears in the late 1980s, into Parts America, an auto parts store that would no longer perform repair service. Later, he added National Tire & Battery, or NTB, yet another freestanding chain that was intended to cater to more upscale clientele, the drivers of sport-utility vehicles and sports cars.
Martinez’s efforts were firing on all cylinders in the spring of 1997. He confidently predicted Sears would turn in another year of double-digit earnings growth.
Unexpected obstacles
Then the Sears engine hit an unexpected obstacle.
In April, his chief legal counsel warned Martinez that Sears was in trouble with the U.S. Bankruptcy Court in Boston for wrongly collecting payments from an unemployed Boston man.
Although most credit card debt is unsecured and wiped out during bankruptcy, Sears representatives had been cornering debtors in courtroom halls and threatening them with the prospect of having their Sears purchases repossessed if they didn’t continue to pay. Many debtors had agreed to pay Sears a reduced amount of their debt over time.
But Sears’ “reaffirmation” plans were illegal because they had not been approved by bankruptcy judges, who have oversight of such plans and who protect individual debtors without counsel.
The problem ran much deeper than one man in Boston. Martinez learned that Sears had been illegally collecting money from an unknown number of bankrupt debtors for more than a decade.
“We were going through our most successful year in retail. It was a disturbing event,” Martinez adds. “It was certainly a personal low point.”
Disturbing and costly. Sears ended up taking a $475 million pretax charge in 1997 to cover the costs of investigating the matter and paying restitution to almost 200,000 debtors.
Almost two years passed before the scandal was laid to rest. In early 1999, Sears agreed to plead guilty to one count of criminal bankruptcy fraud and pay a $60 million fine to settle the federal investigation into the matter.
FBI Special Agent in Charge Barry Mawn described the outcome as an example of “Corporate America blindly [pursuing] profitability over its obligation to treat the consuming public with fairness and honesty.”
He couldn’t have chosen words that hurt more.
Martinez had preached a simple dictum at Sears that any spiritual leader could agree with: Do the right thing.
Not long after his arrival, Martinez reissued the company’s code of conduct and required that all salaried employees verify that they had read it. He also instituted a toll-free number for employees to report unethical behavior at Sears or to receive guidance with ethical issues.
One of the things that disappointed Martinez the most about the credit scandal was that no Sears employee had called the ethics line to report the arm-twisting.
“It’s a puzzlement to me,” Martinez said. “The notion of passive acceptance was something I was trying to break down.”
The credit scandal was a watershed event in Sears’ attempted turnaround, according to former executives. The winners’ attitude that characterized Sears in the mid-1990s vanished.
“The whole organization was floored,” remembers Anthony Rucci, the former head of human resources at Sears. “We took our eye off the very simple formula that caused our success for the first five years.”
Sears’ management team had been focused on improving external measures such as customer satisfaction, Rucci explained. Now it became inwardly focused.
While Sears was still trying to sort out the credit mess, the company suffered another public relations setback of a much different kind.
Under the gun to cut costs, Martinez moved to reduce company-paid life insurance for 80,000 retirees.
Now 114 years old, Sears had 120,000 retirees. By comparison, giant Wal-Mart, only 31 years old, has a small fraction of that number. By reducing the value of life insurance to a maximum of $5,000, Sears expected to save $600 million over the next 10 years.
With that single decision in the fall of 1997, Martinez would galvanize the bad feelings against him among tens of thousands of former Sears employees. Many in the Sears family thought Martinez had taken single-handed credit for Sears’ early turnaround when many of the plans he implemented had been formulated before his arrival.
The resentment was stoked by Martinez blaming the “old Sears” culture for the company’s problems in the early 1990s. And the fact that Martinez was taking home millions of dollars in compensation as he was cutting retiree benefits didn’t help either.
With the life insurance issue as their banner, some former high-ranking executives of Sears organized the National Association of Retired Sears Employees to oppose Martinez. They wrote letters to directors and cut up their Sears credit cards. They protested inside and outside Sears’ annual meetings. They hired airplanes to fly banners over the Taste of Chicago that read “Sears Unfair to Retirees.” Their derisive nickname for Martinez became “King Arthur.”
“Welcome to the American version of the bullfighting,” Martinez said. “They stick sharp things into you and then try to kill you.”
A lawsuit filed by retirees over the life insurance reduction has been languishing in federal court since October 1997.
A downhill run
After that rough year, nothing much seemed to go right for Sears.
Sales growth at its core department store chain stalled in 1998. Apparel sales slumped again, prompting Martinez to significantly pare down the number of suppliers while he searched for more profound solutions.
And both the furniture and auto parts businesses turned out to be major losers for Sears. HomeLife, which was bleeding red ink, was scaled back with store closings and then finally sold in 1998 at a loss to Citicorp Venture Capital. Western Auto also was sold the same year to an auto parts chain from Roanoke, Va. The charges from those two retrenchments cost Sears $245 million in losses on an after-tax basis.
Last year, mostly because of fewer merchandise markdowns on holiday goods and reduced levels of bad debt at its credit card unit, Sears posted a 39 percent increase in net income to $1.45 billion, even though its overall revenue declined 1.2 percent to $41.07 billion.
Still, Sears earnings have not reached the $2.37 billion level they achieved in 1993. Revenue growth has been virtually flat for the last three years.
What happened to Martinez’s grand plans to reinvent Sears?
To be sure, Martinez moved quickly and accomplished much that was good. The company’s balance sheet and cash flow are stronger, its 860 department stores look better, and apparel offerings have greatly improved.
The culture has changed too. Martinez has pushed down decision-making in the organization, forcing managers to take risks and act like entrepreneurs. More of their compensation is tied to quantifiable measures such as improvements in customer service scores and increases in Sears’ earnings per share.
“Is this a better company than when I joined eight years ago? The answer is yes,” Martinez said.
But Sears’ competitors, such as Wal-Mart Stores Inc., Target Corp. and Kohl’s Corp., have improved faster, arguably leaving Sears in a worse competitive position than when Martinez arrived. Even Martinez, who was quickly celebrated as the savior of Sears in the mid-1990s, has acknowledged his transformation ran out of steam after only a few years.
Turnaround questioned
Now, some analysts are questioning whether Sears’ first turnaround under Martinez was ever real.
“I don’t think it was ever fixed originally,” said Jeffrey Edelman, retail analyst with PaineWebber. “It was one thing to take dead store space, put some new product in there and generate more sales. Beyond that, there was very little follow-through.”
Indeed, the boost to Sears’ image in Martinez’s early years has largely evaporated. Many middle-class women still think of Sears as a place where elderly women shop, not a place they will find fashionable clothes for themselves. Many teenage girls, who have more choices than ever about where to shop, would be embarrassed to say their prom dress came from Sears.
That’s no surprise to Chris Ohlinger, chief executive of Service Industry Research Systems, a retail market research firm in Highland Heights, Ky. Ohlinger has made a career out of tracking shoppers’ perceptions of retailers.
In 1993, when Martinez’s turnaround efforts began to take shape, shoppers surveyed by Ohlinger’s firm gave Sears failing grades on both value for the money spent and as a fun place to shop. On a scale of zero to 100, Sears received a rating in the low 30s as a “fun and exciting” place to shop.
Of course, Sears has lots of company, Ohlinger points out. Only a few retailers are perceived as fun by shoppers, such as Crate & Barrel, which scores in the 60s.
During the years the Softer Side campaign rolled on, the scores improved slightly. But they have since fallen again, back to the low 30s where they started. Even Wal-Mart’s downscale, crowded stores now score higher than Sears as a fun place to shop.
“According to customers, the changes at Sears really haven’t gone far enough,” Ohlinger said.
Sears acknowledged the perception gap when it scrapped the “Softer Side” ads in favor of more price-oriented spots last year.
The Softer Side was a very powerful and appealing advertising campaign, marketing experts agree. But it may have tried to move Sears’ image too far too fast, according to Christie Nordhielm, an assistant professor of marketing at Northwestern University’s Kellogg Graduate School of Management.
“It was too ambitious of a movement,” she said. “When you try to make a big leap, it can almost push you backwards. People will tend to get even more solidified in their original opinion.”
Another major change also was working against the Softer Side, she said. In the mid-1990s, shoppers stopped associating themselves with brands and began associating themselves with retail outlets.
“Instead of shopping for Levi’s, you were shopping at the Gap,” Nordhielm said. “It became a question of where you bought it. People didn’t want to say they got their clothes at Sears. They wanted to say they got them at Banana Republic.”
By playing up its Softer Side, Sears was working against a very formidable competitor: its own reputation as a trusted, reliable supplier of commodity goods, not fashion items, Nordhielm said.
`Softer Side’ defended
Martinez isn’t ready to write off the Softer Side so fast.
“The Softer Side succeeded on both levels and went far beyond,” Martinez said. “It’s very hard to have straight-line improvement in perception. Do I give myself an A+? No, a B+. On balance, we’ve done a pretty good job.”
Oddly enough, many of Martinez’s most intractable problems fell in areas of his greatest expertise–strategy and finance. HomeLife and Parts America were failures because Sears didn’t understand the capital investment involved for them to succeed nationally.
The push in credit resulted in a surge of delinquencies and bad-debt writeoffs that dragged down Sears earnings in the late 1990s.
To be sure, some of Martinez’s growth strategies were winners. A fledgling chain of upscale, home-remodeling stores known as the Great Indoors “has been a huge home run for Sears,” Martinez said. Another success: Sears’ freestanding chain of hardware stores.
One thing is certain: Martinez already has addressed, although not always successfully, Sears’ most obvious problems. The “low hanging fruit” is gone, leaving his successor with even tougher challenges than he faced in 1992.
As Martinez prepares to depart, he is philosophical about the ability of any one to pull off the kind of radical makeover that he was once credited with.
“This is a tremendously complex company. I’m reminded of this every day. No one person could grasp and manage all the elements.”
He adds: “We’re getting away from the notion of leader-centric company. Sears has a great tendency to delegate too many decisions upward. I spend a lot of time telling people, `That’s your decision to make.'”
