Today's Opinions, Tomorrow's Reality
By David G. Young
Rehoboth, DE, May 22, 2018--
The decline of America's catalog retailers alongside the growth of Amazon shows how large companies lose their way.
When sagging shares of JC Penney dropped eight percent in the wake of the resignation of the company's CEO, confidence in traditional retail fell with it.1 It is only the latest in a long string of bad news for department stores which have been battered by competition from internet retailers like Amazon.
JC Penney focussed heavily on shopping malls during the rise of the suburbs, and never regained its footing once the mall began to lose its luster. Why fight traffic, parking and crowds to shop at JC Penney in the mall, when Amazon will deliver anything right to your doorstep?
Ironically, once upon a time, JC Penney would do exactly the same thing. For several decades, it operated the JC Penney catalog, what was once the largest mail order catalog in the world. It ceased publishing in 2011.2 JC Penney's catalog competitors, Sears and Montgomery Ward were even bigger back in their heyday, with business models that were as revolutionary as Amazon's today.
Montgomery Ward pioneered delivering products to your doorstep back in 1872, made possible by the country's new coast-to-coast railway network. The catalogs were in paper books, not web pages, but the basic principles of the business were largely the same as today. Competitor Sears, Roebuck and Company caught up with Montgomery Ward by the end of the 1890s. In the early 20th century, the products sold by Sears and Montgomery Ward included automobiles and kit houses, both delivered by rail, and the catalogs continued to grow.
Compared to Wards and Sears, JC Penney was a relative late comer to the catalog business, but the business model remained popular late into the late 20th century. In the late 1970s, I can remember holiday catalogs from all three companies being over a thousand pages long, with hundreds of thousands of products available. The three stores' mall locations in the 1980s all featured a catalog counter, where you could get out-of-stock or niche products delivered to the store.
Today, Amazon is experimenting with with brick-and-mortar stores to which its own products can be delivered, bringing a sense of deja vu to any of us old enough to remember those catalog counters in the mall.
How is it possible that Amazon has managed to disrupt America's retail landscape when while its catalog forerunners — the ones who were delivering products to Americans' doorsteps in the 1890s— continue to weaken and die? Montgomery Ward went out of business right after Christmas 2000. Sears and JC Penney continue to limp along with a focus on retail stores and "soft-line" clothing products.
In perhaps one of the worst moves in business history, Sears pulled the plug on its general catalog in 1993, just one year before Amazon was founded. Sears soon realized it had to start over to rebuild its catalog business for the internet. By 1998, Sears had started selling Craftsman tools online with a clunky web page3, even before Amazon had moved beyond books and music.4
Why did Sears not go all-in on selling products online? Why did the retail giant it let tiny Amazon take over? The answer to this question is tragically common in business.
In 1998, Sears was a huge business with a century of history and sales that eclipsed those of tiny Amazon. It had learned early on that people living in urban and suburban areas had deeper pockets than their rural cousins, and selling to deep-pocketed consumers in department stores was more profitable than selling to their rural cousins by mail order. As its paper catalog business declined, the crusty old folks running it did so by following the rulebook from long ago — changing times and innovation were simply not part of the equation. Its mail-order heritage was actually a hinderance to e-commerce because mail order had acquired an internal stigma that had to be overcome.
Sears' experiment selling Craftsman tools online just was a sideshow. Why make a big, risky investment into e-commerce, when shareholders expected regular quarterly dividends? Amazon's online sales had smaller margins than Sears' in-store sales. Sears had to protect its bricks and mortar empire with a conservative strategy.
Amazon, meanwhile, started from nothing. Internet sales were its entire reason for being, and expanding online was the only way to grow. Amazon was a scrappy upstart in the right place at the right time. Sears, Montgomery Ward and JC Penney were behemoths in the wrong place at the wrong time.
The lesson for American business is that size and institutional history are ultimately no match for innovation and the willingness to take risk. No company is immune to this rule. Now that Amazon has itself become a retail behemoth, it will face the same challenges. Amazon's era of stagnation will soon be upon us.
2. Bizjournals.com, J.C. Penney Closing Department, Outlet Stores, January 24, 2011
3. Internet Wayback Machine, shop.sears.com, August 5, 1998
4. The New York Times, Amazon.com Is Expanding Beyond Books, August 5, 1998