NEW YORK (TheStreet) -- J.C. Penney (JCP) was a painful disaster for Bill Ackman and his hedge fund investors in 2013. Ackman had the right idea but the wrong retailer. What if, instead, he had set his sights on Sears Holdings (SHLD)? I think his plan to revitalize a failing retailer would have been genius with the right fit. Sears enjoys many competitive advantages compared to smaller competitor J.C. Penney.
One needn't look any further than each company's products to know that Sears has the greater potential. You probably can't name two principal household brands owned by Penney's, but Sears owns Craftsman, DieHard, Kenmore and others.
It's difficult to imagine now, but it wasn't that long ago that Sears was the largest American retailer, before it surrendered to Wal-Mart (WMT). Sears continued its slide towards irrelevance as Target (TGT), Best Buy (BBY), Ebay (EBAY) and Amazon (AMZN) surpassed the retailer in total merchandise sales.
Sears has the tools, but not the craftsman to get the job done. The company is missing the one element needed most: leadership focusing on customer service. Current CEO and chairman of the board Edward Lampert may have a keen grasp on business finance from his time at Goldman Sachs (GS), but in retail and merchandising, he's a rudderless boat. Since 2010, Sears, a.k.a. the S.S. Going Nowhere, has drifted mostly lower, and losses continue to erode shareholder value.
It's time for new leadership at Sears. Someone with the skill set of Ron Johnson would make an excellent fit. After his time at Target in merchandising and at Apple (AAPL), Johnson is well prepared to take the reins at Sears. At J.C. Penney, Johnson was fighting with one hand tied behind his back. Simply put, J.C. Penney doesn't have brand pricing power that he can monetize as effectively as he could at Sears. Unfortunately for shareholders and employees alike, Lampert's strategy was to bastardize valuable Sears brands to Kmart (also owned by Sears) in an attempt to increase sales.
There are better Kmarts, but in many locations, they're one small step away from flea market status. And TheStreet's Rocco Pendola and Brian Sozzi recently documented the mess at more than one location of Sears and J.C. Penney.
The problem faced by shareholders is that Sears Holdings isn't a financial company, it's a retailer. It appears this fact is lost upon the leadership. As desperate as the front line staff is to perform; they're not given the tools to succeed.
I highlighted a service issue that demonstrated how far the company is willing to allow a customer to fall through the cracks this summer. Sears's problem wasn't pricing, product knowledge, availability, or location. Sears's defects are logistics, customer service and procedure. It shouldn't take two hours to complete a sale for a storage unit and gas grill, and when the order gets screwed up, it shouldn't take several visits and phone calls to get it right.
A few weeks ago, my wife purchased a $1,500 LG washer and dryer set. Sears offered a competitive price with free delivery (she paid extra for the setup). In all fairness to my wife, she suggested either Best Buy (BBY) or a local dealer instead of Sears. She argued that Best Buy or a local store might price match. I countered that it was a hassle to try to get a price match, and that while Sears dropped the ball, they came through in the end. But I should have listened to my wife.
The installers refused to position the dryer door to the correct orientation, insisting that it should have been changed before leaving the store (as if that matters to a customer). During the first load, a light bulb died. I'll skip all the details about each attempt to make it right, but it took several phone calls and a second store visit to achieve a resolution which resulted in a refund of the setup fee (although they didn't volunteer it). It wasn't much consolation, because we still needed to get a handyman to correct the door.
All retailers make mistakes from time to time. Its how you handle mistakes that sets you apart. Any marketing teacher will tell you: ensuring that existing customers are happy and return to buy again is more cost effective than gaining new customers. Amazon will pay the return shipping cost and give a full refund for items you don't want. In comparison, Sears is willing to allow their ideal customers to stew in frustration. Is it any wonder that it's losing sales when customer service is given such a low priority?
Any retail chief worth his or her salt knows that unless you have customers singing your praises about your products and business, everything else becomes inefficient. Every dollar spent on advertising to unhappy customers is wasted. In-store promotions don't perform well if no one is shopping in the store. Lampert should go back to Goldman Sachs or buy an investment bank and let someone like Johnson who lives and breathes retail take the helm.
Sears can get back to serving customers, with effective procedures for checkout and for when a sale doesn't execute well. Customers will regain faith again (albeit slowly), the company will become profitable, and Lampert, ESL, and other shareholders will finally realize a return on their investment. It's too bad Ackman didn't pick Sears instead.
In fairness to Ackman and, unfortunately for shareholders and customers alike, Sears isn't a candidate for an activist investor to whip it into shape. Lampert and ESL have de facto control. Until that changes, don't expect Sears to change.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.