Sears Works to Pull the Pieces Together : Building Its Financial Network for the Masses Proves a Difficult Task
When Sears, Roebuck & Co. branched out three years ago from sweaters and dryers into stocks and bonds, company officials reported some initial success. A few customers, in fact, had set up million-dollar accounts.
Whoever those customers were, neither they nor others like them have set up accounts with novice broker Larry Barnett at his Dean Witter cubicle next to the lamp department in a suburban Sears store here. Forget million-dollar accounts, “very seldom does someone come in with $100,000 and make a trade,” Barnett says.
Barnett gets a lot of unsolicited transactions involving 10 shares or so. Mostly, he has developed a list of prospective clients from customers who have strolled by. Since last July, the account executive has made about 800 phone calls and successfully set up 80 accounts.
Not that Barnett is pessimistic. He sees a bright future. But Barnett and Sears are both learning that it’s not easy selling financial services to the mass market that the company has served so well since founder Richard W. Sears began selling watches in 1886.
While Sears’ profits last year rose 8.4%--and a key measure of profitability, return on equity, stood at more than 14%, compared to 8.2% in 1981--Sears is still struggling, after some embarrassing snafus, to figure out how to link its insurance, securities and real estate units, not to mention the task of folding its awesome department-store and catalogue network into the picture.
But Sears, whose ascendancy in merchandising is considered a classic American business success story, is doggedly sticking to its ambitious, long-term plan for financial services. However difficult the path, its goal is simple: to secure a place in the field that equals its No. 1 position among the nation’s retailers.
The move into financial services should reveal just how well Sears can capitalize on its reputation as one of the most trusted companies in the United States. A key test will come this fall when Sears unveils its new Discover credit card, even as it scales back expansion plans for its securities unit.
Designed to stand apart from conventional bank cards such as Visa and MasterCard, Discover will offer users both credit and debit-card features and a variety of financial services. The card will provide the first major operational linkup of the company’s various financial units--Sears Savings Bank, Coldwell Banker, Allstate Insurance as well as Dean Witter. More importantly, Discover will give Sears a slick way of providing banking services across state lines.
Sears has long prospered by sniffing out changing consumer needs and filling those needs with profitable businesses. When rural Americans flocked to cities, Sears expanded its catalogue operations to include retail stores. When automobiles became the rage in the early 1900s, Sears began selling Allstate Insurance at booths around the corner from where it sold auto accessories.
The latest diversification came shortly after Sears successfully repositioned its merchandise group by introducing its own line of sportswear. The chain made a comeback in 1981 after a string of disappointing profits in the late 1970s as it tried one unsuccessful merchandising formula after another.
Face Slower Growth
But mass merchandisers in general are believed to face the prospect of slower growth for some time. And as the U.S. economy shifts to services from one based on goods, Sears sees its next big expansion in financial services, according to James C. Worthy, a professor of management at the J. L. Kellogg Graduate School of Management at Northwestern University who worked at Sears for 23 years and has studied the company since he retired in 1961.
The idea of Sears selling financial services is not as revolutionary as it appears, according to Worthy. The chain first extended credit to farmers in 1911 and has long operated a lucrative credit card operation--the largest in the country, with 60 million card holders.
From Wall Street’s perspective, the issue is not Sears’ financial-services strategy but whether the company has the right people and the right organization to carry it out.
“Their main thrust is right in step with the times,” says John S. Landschulz, retail analyst at the Mesirow & Co. brokerage in Chicago. But he adds, “The question is do they have the management to go into businesses such as financial services? Have they enough talent to see this through properly?”
Such questions become more compelling now as Edward R. Telling, who steered Sears onto its new course and was asked by directors to postpone retirement for two years, steps down as chairman and chief executive at year’s end.
Needs Firmer Control
While Telling is considered good at outlining the broad strategic picture, both Sears officials on the inside and analysts on the outside have argued that the company needs to exert firmer control over its diverse operations.
The answer to such criticism appears to be Telling’s presumed successor, Edward A. Brennan, who was promoted to president and chief operating officer last August from chairman and chief executive of the Sears Merchandise Group.
Brennan, who declined to be interviewed, is credited with the successful redirection of the Sears Merchandise Group. “He is an outstanding leader,” says Walter Loeb, an analyst at the New York-based Morgan Stanley investment firm.
“Brennan by his own admission is more hands-on,” says C. Wesley Poulson, chairman and chief executive of the Coldwell Banker Real Estate Group. “He likes to be involved in details, but he has done a good job of holding back.”
Just how firm a hand the headquarters staff should exercise over units that were once free spirits is increasingly at issue as Sears tries to create some synergy between them while preserving their cherished autonomy and entrepreneurialism.
Officials at the various units contend that autonomy has been maintained, and to a large extent it has. But the financial-service firms are no longer totally independent as Sears, gradually but inexorably, tries to make them work in concert to serve the company’s grand strategy.
Needs Political Finesse
With the units accustomed to fierce competition against each other in certain fields, splitting up various duties should require as much political finesse as business acumen. Dividing up duties also means dividing up the spoils--that is, the commissions and bonuses.
Early efforts directed at merging Dean Witter and Coldwell Banker into the parent involved regrouping Sears’ various businesses. For example, Homart Development Co. a shopping center developer which had been part of the Sears Merchandise Group, was put under Coldwell Banker. Sears Savings Bank, formerly Allstate Savings & Loan, and Allstate Enterprises, were made part of Dean Witter’s consumer deposit and lending operations.
At the same time, some of Sears’ corporate staff was dispatched to fill key positions at the new acquisitions. For example, Philip J. Purcell, a senior vice president who had once headed a major reorganization study for Sears as an outside consultant, was named president and chief operating officer of Dean Witter Financial Services Group in 1982 despite his lack of experience in the securities business.
“We cross-pollinate so we can develop people with a good knowledge of what Sears is attempting to do overall,” Telling says. “We are pleased with the cross-pollination and plan to do more and more.”
Prefers Loose Reins
Otherwise, Telling has had a light touch. “The merger of people and culture has been far more important to me than the financial figures,” Telling says. “We have to patiently let them come together rather than to come down heavy handed. I don’t think the time spent has been wasted. It has allowed us to evaluate people. Evolution is better than revolution.”
The mergers have required considerable adjustment at both Sears and its new units. “Sears as a large organization is more conservative, ponderous,” says Poulson, noting that such traits are not unique to Sears. “There are more checks and balances because of its complexity and size. The difference today is that it takes longer to do things.”
Telling’s preference for evolutionary change also has resulted in some awkward operational overlaps that Sears now feels compelled to address.
With its acquisitions, Sears ended up with half a dozen corporate entities providing mortgages. The company is now attempting to assemble one system in which various mortgage service duties are assigned to different Sears units. For example, Coldwell Banker’s role probably will be to originate loans and then turn over to a sister company other functions such as insurance and distribution.
“The question is who gets what from the buck along the system?” Poulson says. A committee with representatives from Coldwell Banker, Sears Savings Bank and Dean Witter is working on the problem. If the issue can’t be resolved by the units themselves, Brennan will decide what to do, Poulson says.
Error in Marketing
In another instance of duplication, Coldwell Banker last year, working in concert with the T. Rowe Price investment firm, ended up marketing a real estate mutual fund similar to one being sold by Dean Witter. “It was an out-and-out error. It will not happen again,” Telling says. “I don’t know how it happened or it wouldn’t have happened.”
As it turns out, both Dean Witter and Coldwell Banker knew what the other was doing but went ahead independently anyway. But competing funds might be confusing to the public, Poulson explains. “It is more of an image thing.” The two units are working on a solution.
Cross-merchandising efforts among the various Sears units have been largely confined to simple efforts such as the home buyers savings program offered by Coldwell Banker and Sears. When Coldwell sells a home, for example, it gives the buyer a coupon book of discounts for Sears merchandise.
Perhaps the most visible effort to date to bring together the various units has been an advertising campaign, initially starring actor Hal Holbrook, to promote what is being called the Sears Financial Network. After spending a total of $60 million between 1982 and 1984 to advertise the network, this year Sears will spend less than $10 million on the campaign.
Made Consumers Aware
The promotion seems to have worked. A recent consumer survey by American Banker showed that nearly half of the nation’s consumers have seen, heard or read about the Sears Financial Network.
Included in the network are the Sears Financial Centers located in 300 of the company’s stores. Coldwell Banker, Allstate Insurance, Dean Witter and Sears Savings Bank each operate booths independent of each other at the centers which operate 12 hours a day, seven days a week.
Because of state and federal restrictions, not all centers offer a full range of Sears financial services. Centers outside California, for example, do not include a Sears Savings Bank, which is based in Los Angeles, because of laws prohibiting interstate banking.
Dean Witter has 1,700 account executives at all 300 centers, and they were responsible for about 40% of all new accounts generated each month in 1984.
Customers Conservative
Robert M. Gardiner, chairman and chief executive of the Dean Witter Financial Services group, says Sears customers generally open accounts to place money in investment funds or retirement accounts.
The Dean Witter acquisition has not been easy for either the brokerage or Sears. Much of Dean Witter’s top institutional traders have departed, its investment banking activity is down and the brokerage has assumed a somewhat pedestrian image.
As it expanded its sales force last year by 40% to 7,000 and added 166 new centers, Dean Witter suffered a $45-million loss on its securities-related business, which was partially offset by a $12-million gain from its consumer banking business. Investment banking revenues last year dropped to $256.9 million, or 10.3% of Witter’s revenues, from $307.2 million, or 14.6%, in 1983. Trading revenues also fell to $216.9 million, or 8.7%, down from $249.9 million, or 11.9%, from the previous year’s total.
Will Be Nerve Center
Dean Witter will be the nerve center for Sears’ financial services. It will distribute the Discover cards on a test basis in Atlanta this fall through Greenwood Trust Co. of Delaware. In addition to conventional bank card services, Discover provides Sears the mechanism to engage in what is effectively interstate banking.
The chain is negotiating with existing automated teller networks to make their machines available to Discover card holders whose cash withdrawals would be charged to their accounts.
Sears currently can take deposits and lend funds through Sears Savings Bank in California and through the consumer banking division of Dean Witter. Sears ultimately wants to develop a nationwide network of “family banks.” While conventional banks make commercial and consumer loans, family banks would lend only to consumers.
With family banks, Sears, like other financial firms, aims to circumvent federal laws that prohibit conventional banks from expanding across state lines. The future of interstate family banks is unclear. Regulators, legislators and courts have yet to definitively determine what kinds of interstate banking incursions will be allowed.
Meanwhile, Sears is doing what it can to expand nationwide. It has purchased the Delaware-based Greenwood Trust, where the commercial loan portfolio was sold off. Sears also is acquiring Hurley State Bank in South Dakota, where state officials generally have welcomed outside banking firms.
Involved in Suit
Some states, however, are attempting to pass laws to curb expansion of nonresident banks. Sears is now involved in a suit with the Connecticut State Banking Commission which passed a law last year requiring that any bank holding company must receive approval from the commission before opening any office within the state whether it involves lending activities or not. Under the rule, Sears must get approval to open a store.
Meanwhile, preparations for Discover’s launch continues. Sears is now working at signing up stores and service outlets that will accept Discover. So far, American Airlines is the only major non-Sears establishment to participate in the test. However, Telling is expected to announce three other major participants at the Sears annual meeting Monday.
The card, which Sears will introduce nationwide next year, also will offer a package of financial services from Dean Witter.
While Discover’s introduction should have little effect on Sears’ profits this year, the costs associated with it will eat more substantially into earnings for the subsequent two years. Brennan told analysts, “We’ll begin to do very well with it on the bottom line” by 1988.
Loeb at Morgan Stanley is forecasting that Sears will spend $15 million this year and $75 million in 1986 on Discover. Telling would only say that projection is a little high.
