The last thing a retailer needs is an activist investor
The downfall of Sears and J.C. Penney was less related to industry upheaval than it was to active disruption — and Starbucks could be next, writes Bob Phibbs, CEO of The Retail Doctor.
Editor's note: The following is a guest post by Bob Phibbs, CEO of the consulting firm The Retail Doctor. The views expressed are the author's own.
The downfall of retailers like Sears and J.C. Penney has been unrelated to the changing retail landscape — at least not in the way you might think.
It wasn't online shopping that pushed them out. It wasn't Amazon's growing influence. And it wasn't rising rents.
It was activist investors.
These investors purchase a significant portion of a company's shares so that they can drive major change within the company — all to "unlock shareholder value," as they like to say. They often leave significant damage in their wake.
In a time where many retailers are struggling, the last thing the industry needs is more disruption from these investors. Unfortunately, there's another brand in trouble. Bill Ackman recently announced his investment of nearly $1 billion in Starbucks, and I am concerned that this widely revered brand could see some major changes.
We've seen Ackman do this before. He acquired a $900 billion stake in J.C. Penney in 2010, and used his newfound position to install Ron Johnson as CEO. Ackman praised Johnson's "record of retailing success," claiming he would be "the ideal leader to fix JCP." No one predicted what would come next.
Not even a year and a half later, J.C. Penney's stock tumbled by nearly 50%, tens of thousands of employees lost their jobs, and sales dropped by more than 25%. Many poor decisions caused this; one of which was Johnson's complete reorganization of their pricing structure by eliminating coupons and instead focusing on everyday low prices. This reflected a poor understanding of J.C. Penney customers. Once a company loses sight of who it's there to serve, disaster often follows. After Johnson's series of missteps, Ackman then wanted to reinstate the CEO that he had pushed out in order to install Johnson. The brand had become a mess, and the damage was irreversible. J.C. Penney has yet to recover.
Sears faced a similar fate. Hedge fund wunderkind Eddie Lampert's long reign of poor leadership steered this once revered retailer into the ground. Lampert gained control of Kmart in 2003 and merged it with Sears in 2005, creating a massive conglomeration of retailers in decline. He parceled out the company into dozens of divisions and created an expensive, sprawling bureaucracy. His focus was on making money off Sears' real estate and spending profits on stock buybacks instead of actually investing in stores. He didn't care about the core function of the business – selling to customers. Sears was a great company, and it had no reason to die at the hands of greedy corporate investors.
In both of these cases, we see how employees often face the brunt of the consequences. When stores fail, thousands of people lose their jobs while the investor keeps making money. Those who remain employed are even worse off. For example, Sears hasn't funded its employees' pensions in years. It's an egregious way to treat those who are supposed to be ambassadors to your brand.
And now this brings us to Starbucks. We don't know what Ackman has in store for this classic American brand, but I imagine he'll want to squeeze every dollar out of his investment. In order to do that, some see the possibility of significant changes to the Starbucks experience we've grown accustomed to.
This is the brand that shut down its stores for a day to retrain their entire staff on how to make drinks when Starbucks leadership felt the quality had gone downhill. Starbucks has been a leader on a variety of socially progressive issues, like eliminating plastic straws, establishing equal pay, and paying for employees' college tuition. Those accomplishments are all very worthy — but they are expensive. All of this could be on the chopping block.
I firmly believe that you have to have a soul when you run a retail business. You need to be driven by a desire to serve your customers and a commitment to giving them the best possible experience. It's impossible to do that when your top priority is making money for shareholders. We should be very wary of investors that buy their way into controlling retailers, and other board members should defend the company from the kind of destruction we've seen in the past.