Friday, April 12, 2013

J.C. Penney In Big Trouble ... Several Other Retailers Are As Well

Q -- What do J.C. Penney, Staples, Sears, Radio Shack and Barnes & Noble have in common with each other that makes them completely different than the U.S. Postal Service?

A -- They will likely cease to exist while the U.S. Postal Service will continue to lose billions of taxpayer dollars each year.

Why? -- These five companies are in the competitive private sector where customers rule, whereas the U.S. Postal Service is in the non-competitive monopolistic public sector where government rules.

So What? -- Taxpayers aren't negatively impacted in the competitive private sector, and taxpayers pay the bills in the monopolistic public sector.

The one thing about free markets and capitalism is that nothing about the future is guaranteed. The customers decide who wins, who loses, who stays and who exits from the market place. It's very much a MOM centric world.

That's the fundamental difference between the private and public sectors, and it shows up in the quality of the products and services being offered as well as the productivity gains of successful private sector companies.

Government OPM style monopolies don't require quality products and services propelled by productivity gains to survive. Instead they live off the taxpayers.

But in the private sector, it's all about competition for the customer's MOM. Companies live and die by the rules of creative destruction. In simple terms, creative destruction is the market centric process by which new and improved products and services replace the old ways of competing for customers. For both old and new companies, it means adapt or cease to exist.

We know J.C. Penney is prominent on the list of endangered companies (See J.C. Penney, Bleeding Cash, Seeks to Raise $1 Billion), but let's look at why the other four companies are in existential danger as well.

In 5 Big Retailers That'll Be Gone in 5 Years, financial analyst Brian Sozzi provides this set of predictions about five retailers that won't be around five years from now. Although there are no guarantees about the future, of course, he very well may be right on the money about these five:

1. J.C. Penney (JCP)

It's become fashionable to pick on Penney's lately. (In fact, this may be the first time the word "Penney's" and "fashionable" have been used in the same sentence since the late 1970s.) Sozzi says JCP's decision to fire ex-Apple retail head Ron Johnson and bring back former CEO Myron Ullman will only speed up their inevitable demise.

As fast as Johnson was running through JCP's cash with his ambitious remodel plan, it's going to be almost as expensive to undo it. Half of Penney's stores are in the various stages of being gutted and about 500 stores haven't seen a paint brush in years. To bring the two versions of JCP together is going to cost a fortune and confuse customers even more.

"It's going to get worse," says Sozzi, adding that the stock will ultimately move "in one direction — down."

2. Staples (SPLS)

Sozzi thinks Staples is a victim not so much of ineptitude but changing times. Tablets, emails and texts have finally reached the long awaited point at which they've obviated the need for an office supply store down the street.

The products people need to help them work at home (printer paper, ball point pens, etc.) are available at every merchant in town, and more exotic products can be ordered online and delivered in record time. Staples has a robust online presence, but nothing so great that a company like Amazon (AMZN) could not destroy it on a whim.

Staples' most obvious way to escape its death spiral would be expanding internationally. Unfortunately history hasn't been kind to even the best retailers trying to tap foreign markets. As dim as Staples' prospects are domestically staying home gives the company a better shot at survival than a cash-draining attempt to go global.

3. Sears (SHLD)

It may be impossible for most to remember, but Sears was once the "go to" merchant for almost anything. The Amazon of its time, Sears was the first retailer to make it easy for customers to shop from home via its once iconic catalog.

That was a long time ago. Sears has been on a steep slide for ages . . . .

"Here's a fast fact," offers Sozzi, "the domestic same-store sales have been down for seven straight years." The slide is inexorable. Sears stores will disappear, and the company will be chopped into pieces.

4. Radio Shack (RSH)

Despite still having thousands of stores, RadioShack embodies an idea that is behind the times. They've tried almost everything to maintain a place in America's shopping habits, but there just isn't that much need for speaker wire, knock-off remote controlled toys or another cell phone seller.

RadioShack is "a little, small store of product deflation," Sozzi notes. Everything in the stores, except perhaps the batteries, once cost more than it does today. It's somehow encouraging that a handheld robot with almost no functionality can be had for less than it cost 20 years ago, but there's no margin in such toys and gadgets.

5. Barnes & Noble (BKS)

Say it isn't so! The last of the major physical book retailers had one shot at relevance, Sozzi says. That was in the form of the Nook, a would-be competitor to the iPad and Amazon's Kindle.

Barnes & Noble's "big idea" was that people who had a Nook could be driven into stores, where customers would congregate to enjoy each others' company and perhaps buy a cup of high-margin coffee and a few magazines.

Instead, Nook sales have dwindled to the point that the company can no longer afford to pursue what little opportunity there may be for a third-place offering in the tablet arena. Sozzi says Barnes & Noble giving up on the Nook eliminates its long-term chance of survival."

Summing Up

Unlike the government run monopolistic post office with its unlimited taxpayer backstop, these retailers must either find a way to compete effectively or they will cease to exist. Sometimes the dying process is slow, as with J.C. Penney and Sears, but the end result is the same.

If the customer decides the time is up and it's game over for the company, then the time is up and the game is over.

And innovative competitors like Amazon who are making full use of the internet's capabilities are having that 'creatively destructive' effect on lots of old line companies, excluding the government sponsored monopolies like the U.S. post office, of course.

And that's a shame -- about the lack of real world competition for the post office, that is.

For everybody else, it's just the way the competitive free market works.

In the free market, We the People are free to choose how we will elect to spend our own money, aka MOM, as we seek to make our own lives better and more enjoyable.

Thanks. Bob.

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