How Did Sears Blow This Gasket?
Two years ago, with his job apparently on the line, Sears Roebuck Chairman Edward A. Brennan scrambled to shake up the retail giant. He slashed costs by $600 million in 1991, began renovating the company's 868 lackluster stores, and pushed new low prices. The overall thrust: make every employee, from the sales floor to the chairman's suite, focus on profits.
That may have been the germ of trouble. The downside of Brennan's big shakeup became all too clear on June 11, when California charged that the state's 72 Sears Tire & Auto Centers had systematically ripped off customers. The Consumer Affairs Dept., which conducted a yearlong undercover investigation, alleges that Sears made unnecessary auto repairs. Now, the department wants to shut down all of Sears' auto operations in the state. Says Consumer Affairs' Bureau of Auto Repair Program Manager Allen D. Wood: "People trusted Sears, and the company took advantage of them."
The trouble is likely to spread. Several states, including Florida, Illinois, and New York are studying California's action. And on June 15, New Jersey, after a four-month undercover operation, accused six Sears auto centers, along with five unrelated repair shops, of doing unneeded work.
The controversy raises concerns that Sears' drive to boost profit and revenue may have run amok. Wall Street analysts and some shareholders worry that the boardroom pressure on Brennan trickled down to the shop floor. Indeed, the California agency says that complaints about Sears Tire & Auto Centers jumped by 29% in 1990 and an additional 27% in 1991--just as Brennan's new programs took hold. "Absent a coherent growth strategy, these sorts of things can happen," says dissident shareholder Robert Monks, who has unsuccessfully sought a Sears, Roebuck & Co. board seat.
Sears strenuously denies any wrongdoing. "There's lots of room to dispute these charges," says San Francisco attorney Dirk Schenkkan, who represents Sears in the California case. Schenkkan accuses the Consumer Affairs Dept., whose funding is threatened by California budget cuts, of beating up on Sears to boost its own standing. And Sears claims Consumer Affairs confused preventive-maintenance suggestions with attempts to defraud consumers.
INCENTIVES. But Ruth Hernandez of Stockton, Calif., doesn't buy that. Last October, she went to Sears to buy new tires for her 1986 Honda Accord. The mechanic who worked on the car insisted she also needed new struts, at a cost of $419.95. Hernandez, 53, sought a second opinion, and another auto-repair store told her the struts were fine. A livid Hernandez returned to Sears, where she says a sheepish mechanic admitted his diagnosis was wrong. "I kept thinking," she adds, "how many other people has this happened to?"
Too many, claims Consumer Affairs. In its undercover investigation begun in late 1990, the agency found that on 34 of 38 undercover runs, Sears charged an average $235 for unnecessary repairs.
What was the problem? Consumer Affairs officials say Sears pressured employees to sell, setting high quotas. Sales commissions and incentives, such as free trips for top sellers, may have contributed to the high-pressure atmosphere, suggests Bureau of Auto Repair chief James Schoning. Sears says its compensation system conforms to industry standards, that sales goals are reasonable, and that it emphasizes "outstanding service," not revenues.
At stake is Sears' license to operate its auto centers in California. If they close, Sears would lose up to $200 million in annual revenue, says Prudential Securities Inc. But with over 3,000 jobs on the line, and with the state in recession, a settlement could be in the offing.
The news couldn't have come at a worse time for Brennan. On June 15, Sears' board agreed to adopt four reforms supported by dissidents, including confidential voting for shareholders and a requirement that directors own 1,000 Sears shares. But with the auto controversy heating up, those minor repairs don't figure to keep Brennan out of hot water.