The reason hedge fund managers are not as distrusted as much as used car salesmen are because most people don’t know what hedge fund managers do.
Hedge fund managers are essentially gamblers; they place big bets and bucks where others fear to tread. Sometimes they win; very often, they don’t, but they still make money.
Which brings us to the case of Edward Lampert whose hedge fund ESL bought Kmart and then Sears. Sears has filed for Chapter 11, closing over 140 stores, but keeping some 550 operating. That move saw Mr. Lampert come in for a large share of criticism.
The Wall Street Journal ran a long story on Lampert’s legacy with Sears. “People have been trying to figure out why I haven’t given up or what’s in it for me,” Lampert said a few months ago. “I really believed this could be something special.” Lampert blamed Sears inability to adapt to e-commerce. “If we could play that game and play it well, we had a chance.”
As the Wall Street Journal points out, Lampert made some questionable moves. As one investor said, “Just because you’re a smart investor, doesn’t mean you’ll be a good operator of a department store.” Former hedge fund manager Whitney Tilson said, “It’s exhibit A of hedge-fund hubris. This is a case study I will teach in my seminars for years.”
Lampert sought to run Sears “lean and mean.” He limited television advertising and trimmed investment in store upgrades, giving them a hollowed out, forlorn appearance. Lampert also cut inventory, which means he cut down on the shopper choices, something that Sears had prided itself on for generations. He also sold off the Craftsman brand.
Lampert was at a remote CEO, rarely visiting the stores and checking in via teleconference. From my experience in working with retail executives, one thing is certain. They shop stores. Sam Walton prowled the aisles always asking questions, continually seeking to improve.
The best retailers are those who have an intimate knowledge of customer habits and how their merchandise is positioned to satisfy those needs. They also spend time speaking to those who work in the stores to find out what customers think of the store's merchandise and selection.
By contrast, Lampert once told his management team that Hermès was an example of customer service as a “deeper notion of what it is to serve people.” That is like comparing Carnival Cruises to the Cunard Line. Two different customer sets, two different sets of customer expectations. Neither the twain shall meet.
Regardless, it seems that, save for a move to e-commerce, little could make Sears relevant again. Its time had come and gone. Amazon, for all intents and purposes, is the “all-in-one store” that Sears was a generation ago.
William D. Cohan, himself a former investment banker, writing in the New York Times, blames Lampert’s faith in financial engineering. While Lampert had success with automotive retailing ventures (AutoZone and AutoNation), it eluded him with Sears. Cohan believes that hubris kept Lampert running Sears despite the heavy losses.
Lampert serves as an example of an executive who meant well but invested in something in which he did not understand. And instead of bailing as most outside investors would, he kept plowing resources into the dying store. Bankruptcy was inevitable.
Lampert acted from a standard playbook for reviving a dying business: cut costs. That approach stems the bleeding, but it does not provide an avenue to a new tomorrow. If Sears is to survive, it must be a completely different enterprise with new and different ways of reaching its customers. Sadly, that road forward might be closed forever.
In fairness, Lampert was looking to be a savior, not a plunderer, something that cannot be said of some hedge fund managers. He wanted his Sears gamble to work.
For that reason, it is hard, at least for me, to be overly critical of Lampert. His heart was in the right place; his investment savvy was elsewhere. Some 175,000 Sears employees will have lost their jobs. Lampert, however, will remain as chairman, still hoping to revive the brand.
