I've annoyed so many people by pointing this out: that anyone who says "free market solves all problems" misses that within that market we just embed thousands of tiny centrally planned economies, and there have been in fact numerous experiments trying to "free market within the free market" that lead to high profile disasters (i.e. Sears).
Sears failed because a venture capitalist realized they could buy Kmart, use it as collateral to buy Sears and drive both into bankruptcy and sell off after plundering all the assets for the shareholders.
How is that a success of the free market? 2 old companies destroyed because someone got enough money to run them into the ground and make a killing doing it?
PE machinations aside, Sears and Kmart were dead for a long time before they closed the last stores.
Their failures are free market successes, because the free market is all about vendors serving customers. Vendors that fail to do so, are expected to die. Sears grossly failed to do so, for a decade or two before being financially zeroed.
If there's any argument for market failure in the Sears case, it is that the death took soo long to be finalized.
The issue here is that both Sears and Kmart were large players in a tight market with low competition. Both of their demises ultimately have allowed further consolidation of the market into fewer players.
The fewer the players on the market, the more likely collusion and monopolistic behaviors start to form.
But I also do not buy your premise that both companies were "dead companies lurching forward." Both companies had GOBS of assets that they could have liquidated and used to restructure into success. Those gobs of assets WERE liquidated but instead of being used to serve vendors or customers, they were used to enrich the shareholders.
The failure here is that this behavior of pillaging a company to it's detriment is something that could happen to any business. It wasn't done out of stupidity or ignorance, it was a malicious act of greed.
The problem I have with the free market hypothesis is it works only when there are many players on the market. However, entry into the market is by it's nature expensive and the economies of scale practically guarantee monopolistic end-states.
Consider, for example, the current state of the semiconductor industry. If Intel fails, would that be a free market success story? I would argue no because the market, particularly around fabrication, is already hugely concentrated into very few key players. We are not going to see a new cutting edge fab company (barring trust busting).
This consolidation action is happening up and down the market in everything from food to healthcare. We are actively seeing the death of small time farmers because of consolidation in meatpacking, groceries, and milling. Because a big mill doesn't want to deal with some 100acre farmer, they are actively locking them out of participation. And because a company like Nestle doesn't want to deal with 100 mills, smaller mills are being locked out of the market. These actions are all free market.
I call the death a Sears a failure in the market because it kills off competition. The only time it could be a market success story is if we had an actively competitive market with a large number of players.
But I maintain that the failure of Sears, Roebuck & Co. was the free market doing exactly what it's supposed to do.
Market distortions due to consolidation are a huge problem. But Sears was not fit for survival and there's no reason to believe that cash-for-assets could have been turned into a new viable business of any kind.
There was nothing to salvage out of the business model, vendor relationships, retail locations, consumer brand equity. Nothing. They abused their brand (and their Craftsman etc house brands!) for years. Some macro events and shifts were clearly out of their control and might have been insurmountable anyway, but the brand damage was entirely self-inflicted, and ultimately the only thing that might have saved the rest.
There was nothing left except lease obligations, slow-moving inventory, and nostalgia.
But enough about Sears. Your point, IIMBSB, is that the free market doesn't necessarily produce the most viable ecosystem. No argument there -- the natural end state of a free market appears to be 85+% monopoly or duopoly, and this is harmful to consumers and the economy!
> There was nothing to salvage out of the business model, vendor relationships, retail locations, consumer brand equity. Nothing.
I have to somewhat disagree here.
Amazon purchased wholefoods in 2017 to bootstrap their own distribution system. One year after sears went under.
My point is that sears had room and time for years to pivot their business model into something more profitable. They had the land, warehouses, and distribution system bigger than what amazon paid $13 billion to acquire. Heck, for fairly little money, sears could have entered or expanded into the shipping industry to compete with FedEx and UPS. They could have partnered with Amazon to handle their shipping.
The free market failure here is that the management team did nothing wrong by shareholders which in turn killed the company. They didn't die because they were being out competed, they died because management valued the next quarters profits over the long term success of the business.
The fact that the free market doesn't really care if a business does that is where it fails. The negative social impacts of large companies failing is tremendous and another problem with the free market. While business failing is value neutral for the free market, it's economically and socially a disaster.
Whole Foods was a standalone viable business with high-quality retail locations. Sears was neither.
But I'll certainly grant you that with the resources, a fantastic new model, and lots of luck, there were better outcomes possible. Not sure about likely.
As for the free market failure, I do think Sears was out competed, by a wide margin. By Target, Best Buy, Amazon, Home Depot, etc. New (ish), smarter, more nimble retail without the lethargy that had been inside Sears since the 1990s at least.
I agree that there's something wrong with the fact that management can do right by shareholders but simultaneously wrong by consumers. I don't know if I'd call that a free market failure though. Some kind of corporate governance discontinuity perhaps?
But the "market" as I think of it is strictly the retail consumer market, so when Sears failed the consumers, they were removing themselves from the retail gene pool. It would not be healthy for the market for them to continue operating.
> I don't know if I'd call that a free market failure though. Some kind of corporate governance discontinuity perhaps?
How could this corporate governance discontinuity be resolved?
The reason I call it a failure of the free market is because the corporate governance model is something born from free market fundamentals, not from any sort of government regulation.
IMO, the fix to such problems is government intervention. In the case of consumer retail, I think governments should be MUCH more aggressive using anti-trust to break up large companies to actually start competition.
Unbridled capitalism, especially on the scale possible today, is anti-competitive and consumer-hostile. And economically and socially destructive in the medium-to-long term.
But still, given what it was, Sears had to die. Or be reborn. Death is more common! So the death was not the market failure. That was proper and expected. The state of the world left behind might well highlight a weakness/failure of the free market model. We may be in full agreement, just semantically misaligned.
I am not confident I have a good solution. All models impose some arbitrary metrics that are probably wrong (even if they are an improvement!).
But I agree that some form of anti-trust regulation and enforcement is the only possible structure for it.
My deepest relevant experience is in broadcast media, and I strongly believe that relaxed ownership restrictions and the outright repeal of the Fairness Doctrine were economic and social mistakes that we are paying for dramatically today. The issues are complicated, but the results are bad.
When I'm saying something is a free market failure I'm talking about the model of the free market.
And I think that by free market success you are saying "this what is supposed to happen under the free market and a good thing from the view of the free market".
And I agree that the free market model does say that failure like this is a necessity and a good thing.
You made me read the history of Sears on Wikipedia and the story seems much more complicated than you describe. It's not very clear who took a loss and by how much, and who gained and by how much, but overall it seemed to be the usual story of distracted mismanagement unable to keep up with changing competition and going into a death spiral. In other words, just another slow inevitable boom-bust-style cycle that's constantly happening everywhere around us.
No I worked at Sears and it was driven into the ground by an idiot PE fund manager and his arrogant consultants.
Sears had one big problem when Eddie took over: it was out of step with the then-current retail format (big box stores). Its stores were heavily situated in enclosed malls that were out of fashion. The solution was straightforward if expensive: reformat the business (Sears had already done this twice before).
But then Eddie rolled into town with his genius consultants and a galaxy brained idea: Kmart has stand-alone stores that kinda look like big box if you squint. So let's just merge the brands together! Then Sears ends up in big boxes without expensive reformatting!
The fact that the brands were completely incompatible was pointed out by everyone who knew anything, but those weren't people in Eddie's inner circle so their opinions meant nothing.
By the way I don't think ESL Investments ended up making money on Sears. They stripped the company of assets yes, but most of those assets were distressed by the collapse of Sears. Like a lot of real estate was in struggling malls that had Sears as the anchor tenant. ISTR some of ESL's LPs suing Eddie.
Eddie made money the way all PE fund managers make money even when everyone else involved loses their shirt: by charging fees.
I did not work at Sears, but from the retail customer side, Sears was dead for a decade or two before it died. You might be able to imagine pivots that could have brought the company back to life, but none of them were guaranteed, or, from my perspective, even remotely likely.
Sears was dead dead. Too ossified, too big, too out of touch. Just like Kmart. And Radio Shack. And Circuit City. JC Penney. The stores were dead, the products were marginal or worse, the prices were out of line. Retail staff was sparse and generally not great. The house brands were eroded. The national brands were overpriced. Sears had no reason to live. And it died, whatever the corporate machinations were to attempt to extract every last bit of residual/perceived value beforehand.
The PE machinations were not a success, but the ultimate death was the correct and expected result for a free market.
It was sad to lose a brand and a community fixture like that. But it was gone for so long before it finally went away that there was zero surprise, except the duration of the death throes. IMHO of course!
Eddie took over in 2005. Sears was profitable before the KMart merger. KMart was already owned by Eddie and already in bankruptcy during the merger.
Sears could easily have been Target or Wal-Mart. The company was full of people who knew retail and knew how to execute on retail. It was destroyed by absolutely horrible management by up-their-own-asshole finance bros who knew nothing about how to run a retailer and who refused to listen to anyone who did.
My current employer is also being destroyed by PE. This time the chief idiot is Paul Singer but otherwise the script is the same: the company had one issue that was depressing the stock. The PE firm and their McKinsey children went about doing everything possible except fixing that problem. Now the company is in a death spiral.
Wal-Mart was already Wal-Mart, and while I have no love for them as a retail outlet, their execution is meticulous and aggressive. Sears was never, in my lifetime, that intense.
Target had, and mostly continues to have, something that Sears could not touch: taste. Sears was busy being a default option for everyone, but never an exciting choice for anyone. No way could Sears have become Target. They'd need a new brand.
Now of course, if you take $X billion dollars of assets, dump the backward-looking real estate and locations, go through massive layoffs and an amazing rebrand, reorient toward online, unwind decades of dilution in house brands, open new smaller stores in the new correct locations, and masterfully pivot the entire corporate culture to be something new by hiring the buyers and marketing people from, say, Target. Then yeah, you might be able to pull something off. But that'd be easier to do with just the $X billion from some other source.
But Sears was what it was, and it's an open question whether the market would have supported a whole new Target, or if the existing Target (etc) would have been able to quickly shift into whatever small gaps the amazing team at NeoSears had identified for them.
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Total agreement and sympathy for you on the PE cannibalization process and the inevitable negative result for everyone except the private investors.
