Your reaction to the news of Sears’ bankruptcy would tell us a lot about your age and economic status growing up.
But whether you’re sad and nostalgic because there’s another nail in the coffin of an iconic piece of Americana …
… or you’re completely oblivious because the Sears brand has no meaning or relevance in your life …
… there are several important lessons for real estate investors to be gleaned from the slow, painful demise of this 125-year old retail institution.
We could do an entire series on this topic … as each lesson could be an article in its own right.
But with so many things to comment on, we’ll keep each lesson short …
Lesson #1: Evolve or die
Sears revolutionized retailing when it pioneered catalog sales. Sears was the Amazon.com of its day.
But Sears failed to evolve with technology … and with a shrinking middle-class.
So pay close attention to emerging trends in your niche and do your best to stay ahead of the curve. Attend conferences. Talk to other active investors.
Because the world is constantly changing. For example, the services and amenities desired by today’s tenants are very different from even 10 years ago.
And as the Millennial demographic wave rolls through the seasons of life, don’t assume they’ll mirror the needs of the boomers before them.
Surveys are already indicating it’s a whole new ballgame. So be prepared to evolve … or die.
Lesson #2: Don’t let the fox guard the hen-house
Maybe this is a little harsh … and we’ll admit we only have visibility into the situation from what we’ve read in the news …
… but it sure seems like the head guy at Sears had a huge conflict of interest.
We’re not here to accuse or defend. Time will tell if he wins or loses, but it seems clear he’s on both ends of the deal … so at the very least, the temptation is there.
As your portfolio grows, and more people are involved in helping you operate it, be VERY aware of when someone may be tempted to enrich themselves at your expense.
And be EXTRA careful when you’re managing investor money.
Lesson #3: Consuming equity to pay operating expenses is a cancer.
Because Sears failed to evolve, it managed to lose money for SEVEN YEARS in a row. It made up the shortfall by going into debt and selling off assets.
We know this is a bad plan because we’ve done it. (See Lesson #4)
It’s one thing to see your net worth shrink as a result of fluctuating asset values. This is par for the course when you denominate net worth in dollars instead of doors.
But as long as you’re playing the long game, fluctuating asset values is a side-show.
And if your cash-flows are solid and your holdings of real assets (doors, tenants, properties, ounces, etc.) is growing, you’re on the right path.
When the market gives you a temporary spike of paper equity, it can be smart to quickly convert it into more units of real value. But that’s a lesson for another day.
Our point now is when you start using equity to debt-service or pay operating expenses, your portfolio has cancer. And you better fix it FAST.
If you don’t, your negative cash-flow will eventually consume you … like it has Sears … even though it may take many years.
Lesson #4: Don’t let a strong balance sheet make you lazy.
With lots of assets, including real estate, Sears’ management could handle the financial problems their business problems created.
It’s like a football team with a big lead that stops playing to win and just tries to protect the lead.
They use the scoreboard to make up for not scoring points on offense or giving them up on defense … hoping the game-clock will win the game.
When your P&L and cash-flow reports tell you that your properties are failing, don’t kick the can down the road with your balance sheet just because you can.
Because when your balance sheet is really strong, you might be able to avoid dealing with the real problems for years … sometimes decades.
But you risk losing the momentum, resourcefulness, and relationships you need to turn it around.
As Jim Collins says in Good to Great, you must “confront the brutal facts.” And the sooner, the better.
Uncle Sam, are you listening?
Lesson #5: You’re in the people business, not the numbers business.
Your brand (your reputation … how people feel about you) is your MOST important asset.
When you have lots of people who know you, like you, trust you … then even when you need to change what you sell because of market dynamics … your customers will buy.
Over-time, Sears … like MANY big companies … became more focused on the numbers than on the customers’ experience.
When this happens, you not only break trust with your customers … you forget how to innovate.
Innovation comes from looking at everything through the eyes of the customer and asking, “How can we make this better for the customer?”
When you do this, you grow revenue, retention, referrals, and profit. It’s an abundance mindset. And it takes faith.
But when it’s only numbers, you ask, “How can we squeeze more profit out of what we’re already doing?”. It’s lazy (see Lesson #4).
It’s also a reflection of scarcity thinking. It’s rooted in fear, and asks the customer to conform to the company’s needs. Bad plan.
Your tenants are customers. They have needs. They aren’t just rent mules who exist to pull your financials to the next plateau.
When you take care of the people and your business model, your numbers take care of themselves.
Lesson #6: It’s not over until it’s over.
We got hit HARD in 2008. In many ways, we’re still recovering. For Sears, Chapter 11 provides some relief while they work on re-inventing themselves.
Sometimes no one believes in you and you’re on your own to keep grinding it out to save things.
We don’t know anything about Sears’ team or relationships. So we have no opinion on whether they have what it takes to make it or not.
But there are many companies who go into bankruptcy, re-organize, and get back on their feet. American Airlines is a fairly recent example.
For Main Street real investors and entrepreneurs, it’s like Les Brown says …
“Any day you wake up and there’s not a white chalk line around your body … it’s going to be a good day!”
In other words, where’s there’s life, there’s hope.
So whether you’re crushing it now … or being crushed … it’s wise to never take anything for granted. Just keep pushing forward because neither good times nor bad times last forever.
Until next time … good investing!
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