New Look for the Top Retailer

By Alexander L Taylor III

Sears perks up its profits by putting some fresh sparkle into its stores

'Twas the month before Christ-mas--and retailers everywhere were poised for what could be the best selling season in five years. Last week the release of two important economic measurements confirmed the upbeat forecasts.

Personal income, a key gauge of buying power, jumped ahead by 1.2% in October, the biggest surge in more than two years. At the same time, the Consumer Price Index rose only .4% during the month, continuing a trend of moderate increases that this year have pushed the rate of inflation ahead only about 4%. Says Consumer Expert Fabian Linden of the Conference Board, a business re-search group: "All the pieces are in place for a lively Christmas season."

No company is in a better position to profit from this spending surge than Sears, Roebuck. The giant retail chain and catalogue merchant, largest in the U.S., is on a hot streak. After a decade in which profits sagged and the 97-year-old company seemed to have lost its sense of direction, Sears has found its way. During the first nine months of 1983, profits shot up 89%, to $759.5 million, while revenue surged 18%, to $25.1 billion. Around the Sears Tower, the 110-story black steel-and-glass skyscraper in downtown Chicago that still bears the title of the world's tallest building, a mood as merry as Christmas exists. Not only is Sears' bold expansion into financial services and real estate paying handsome dividends, the firm's merchandise group, which once seemed to display all the deftness of a wide receiver with broken thumbs, is also on a roll.

Sears' new sparkle can best be seen in its dramatically restyled "stores of the future."No longer is the center of attention reserved for such hard goods as Craftsman tools, DieHard batteries and Kenmore appliances. Now the emphasis is on the color-coordinated, freshly fashioned displays of stylish clothes and jogging gear, modern furniture and gourmet cookware. While the likes of Bloomingdale's and Neiman-Marcus have long merchandised their wares with flair, the redesign and reorganization are a revolutionary departure for Sears. Says Joe Fragale, operating manager of the Oak Brook, Ill., store: "We had so many people think they were in the wrong store, we put up a sign YES! THIS IS SEARS." The company is betting heavily on the success of its new look. Twelve of the stores have opened in time for Christmas, and 99 more will be remodeled or built from scratch next year. By 1989, Sears will spend $1.7 billion to spruce up 600 of its 831 retail stores and build 62 new ones. It is the most expensive facelift in the company's history.

"Few events have stirred greater excitement throughout the organization," says Chairman Edward Telling, 64. Others might have added: "Or greater fear." Sears' previous two attempts to reshape its merchandising image ended in embarrassing failure. In the early 1970s, Sears decided to compete with the specialty stores then springing up around its suburban shopping malls. But a former Bloomingdale's fashion director who was hired to move the company into high-fashion merchandise succeeded only in turning off Sears' traditional value-oriented shopper. In the mid-'70s, Sears tried to go up against fast-growing discounters like K mart. When prices were slashed, customers came back but profits did not. Then the recession hit. By 1981, earnings at Sears stores had slid 45% from levels of only five years earlier.

Shortly after Telling took command in early 1978, a secret document known as the "Yellow Book" leaked out of Chicago headquarters. It laid out the company's woes in a disarmingly direct manner. "We are not a fashion store, we are not a store for the whimsical, nor the affluent," it declared. "Sears is a family store for middleclass, homeowning Americans." To refocus the company, Telling in 1980 promoted Edward Brennan, a third-generation company man, to head the merchandise group--to the astonishment of longtime employees; Brennan was only 46 at the time.

Brennan stationed market researchers outside Sears stores to poll customers about the company's strengths and weaknesses. Studies showed that Sears' emphasis on big-ticket items like appliances meant that customers went there to buy, not to browse. They were not purchasing high-profit impulse items like clothing. In addition, consumers went shopping at Sears less often because it was not considered fun.

Says Marketing Professor Louis Stern of Northwestern University: "Sears had nothing, just bland stores that were unappealing and not exciting.

They lost a whole younger generation of shoppers."

Nonetheless, Brennan uncovered 1 some Sears strengths. Since the chain's buyers specialize in single ., lines such as shirts or pajamas rather than whole departments, when Sears decided to change its merchandise mix its buyers knew the hot sellers and top values. Sears' geographical spread also allowed it to test different merchandise displays around the country. The experiments demonstrated that imaginative presentation can boost sales of even the most mundane items. A test store in Indianapolis that remodeled its displays, for example, sold 44% more small appliances and 45% more light bulbs.

Sears has been making more than cosmetic changes. It has also been revamping its operations. More inventory has been moved onto the floor to avoid time-wasting runs to the back room. Stockroom clerks who formerly stayed behind the scenes now put new goods on shelves in full view of customers. Shopping carts used to be anathema because they bore the aura of discount stores, but now they are being tested in some locations. Salespeople have been ordered to keep displays tidy and to fill in at cash registers to help cut average checkout time from three minutes to 90 seconds.

The merchandise mix has also been altered. Some 30 slow-moving and less profitable lines, including men's hunting clothes, movie-camera equipment :and automobile air conditioners, have been thrown out. Others have been reorganized.

The electrical department used to include fans, heaters, lighting fixtures and small table appliances. These items have been dispersed around the store. For example, kerosene and electric heaters are now grouped together. Says Brennan: "We're really changing the face of the store, not the soul. We want people to say, 'This is Sears, but it's different.' "

The most striking difference in the new Sears is the emphasis on apparel. Whereas in the past, customers had a choice only of Sears' own lines, they can now find national-brand merchandise as well as labels bearing the names of celebrities. In the jeans department, Levi's can be found next to Sears' familiar Tough-skins. The men's departments have an Arnie line, named for Golfer Arnold Palmer, which includes $95 tweed sports jackets, and will soon carry Johnny Carson suits. Women can find garments bearing the labels of Model Cheryl Tiegs and Tennis Player Evonne Goolagong. Adding fashion to its fundamentals has been a surprising hit. The Tiegs line has generated an estimated $200 million in sales during its first 15 months.

But the strategy of promoting national-brand fashion clothing is risky. It puts Sears in direct competition with such off-price retailers as Marshalls and TJ. Maxx, which sell name-brand merchandise at less than full markup. Warns one retailing analyst: "A lot of business is going to come out of Sears' hide."

The effort and money expended to create this retailing look are not aimed just at attracting new customers. Sears estimates that 75% of all American households already shop at Sears at least once a year. The firm has 24 million active credit-card holders (more than American Express) and an additional 12 million catalogue customers. Sears wants to entice current customers to buy more once they are in the store. So far the company thinks it has succeeded. In the new stores, according to Brennan, "the average transaction per customer is substantially higher. In towels, washcloths, carpeting, toilet covers, for instance, people are picking up armfuls." At new stores in King of Prussia, Pa., and Valley Stream, N.Y., sales per sq. ft. are projected to be 50% higher than at newly opened traditional stores.

ore sales per customer translate into higher profits for Sears' merchandise group. Net income climbed 164% in the first nine months of 1983, to $320.5 million. Competitors are beginning to take notice. Says Floyd Hall, chairman of Target discount stores, a division of Dayton Hudson in Minneapolis: "From what I've seen, I'm impressed. Obviously, they are doing a lot of things right."

That philosophy of trying to get more sales out of existing customers was behind Sears' acquisition in December 1981 of Dean Witter Reynolds Organization stockbrokers and Coldwell, Banker, a national real estate firm. When Sears was struggling to get out of its 1970s slump, a strategic planning committee looked at diversification. Recalls President Archie Boe, 62, who will retire next March: "We studied every industry in the U.S." After looking at areas as diverse as steel and automobiles, Sears decided to go into financial services.

The company already had one remarkably successful entry in the field, Allstate Insurance. Founded in 1931 to sell automobile insurance by mail, Allstate is the most profitable Sears group. Through September this year, it earned $418.5 million on revenues of some $6 billion. Sears also owns Allstate Savings and Loan Association in California, with 87 branches; a San Francisco mortgage insurance firm, PMI; and Allstate Enterprises, which specializes in consumer loans. Brags Allstate Chairman Donald Craib: "We invented the wheel. It's been successful."

Now Allstate is linked with Dean Witter and Coldwell, Banker in financial centers in 133 Sears stores. Though observers remain skeptical about the wisdom of selling stocks and socks or blouses and houses under one roof, the financial s outlets, which are located in stores in the hard-goods departments, have been successful. Dean Witter says it is opening 3.5 new accounts in some Sears stores for every one at its conventional offices. For its part, Coldwell, Banker is on track with an expansion plan that will more than quintuple its sales force by 1988. Sears plans to add 150 more financial centers next year.

The combination of all the companies gives Sears enormous reach. Dean Witter, for instance, can sell federally insured money-market accounts through Allstate Savings and Loan. Coldwell, Banker has started offering discount coupons on Sears merchandise to home buyers in 28 states. Sears is considering the introduction of a universal credit card that will be able to handle any household financial transaction, from buying a pair of gloves to arranging a second mortgage. It also wants to acquire savings and loans or banks. Chairman Telling told stockholders in May: "We can greatly broaden the activities of our financial network and give our customers a far more efficient method of saving and spending their money."

That will place Sears even more squarely in competition with financial firms such as Merrill Lynch, American Express and Citicorp. Sears' huge base of cardholders will give it an advantage in the tough battles on the way. Says Stuart Greenbaum, professor of banking and finance at Northwestern University: "Sears could end up being the biggest bank in America without much trouble."

To complete the transformation of the Sears empire, Chairman Telling agreed to a request from the board of directors to stay on for 19 months past his planned retirement next May. The question of his successor is unsettled. In a company with this broad a sweep, the next chairman could come from the insurance, financial services or merchandise divisions.

Pushing through all the changes at Sears is turning out to be a difficult task in ways large and small. The staid Sears corporate culture coexists uneasily with the style of the new ventures. Telling, Brennan and other top Sears executives still wear Sears suits, but the Dean Witter stockbrokers are more likely to shop at Brooks Brothers. The hefty entertaining allowances and six-figure commission incomes paid to top brokers grate on some middle-level Sears managers. Says Charles f Moran, head of corporate planning:

"Our goal has been to share the values |of the different corporate cultures and yet protect them. If you weaken the en|trepreneurial drive in these firms you weaken the company."

At the same time, the merchandise group is hewing more closely to the wishes of headquarters. Layers of bureaucracy have been stripped away and 1,500 managers sent off to early retirement. In November, executives from across the U.S. filed into the Sears Tower to learn the latest company look in mannequins and displays. Said one manager: "We are getting to the point where every store will look the same, like McDonald's.

When you go into a Sears store anywhere in the country, you'll know you're home."

Sears has spent 97 years adjusting to the changing whims of American shoppers. The success of its latest rejuvenation proves that it has not lost its touch as a retailer. And should future stores require teller windows or cash machines, Sears wants to be prepared to offer those services too. --By Alexander L Taylor III.

Reported by J. Madeleine Nash/Chicago

With reporting by J. MADELEINE NASH This file is automatically generated by a robot program, so viewer discretion is required.