Wall Street History
With the announced merger between Kmart and Sears, Roebuck
& Co., I thought it was a good time to reprise a piece I did 3
years ago on Montgomery Ward, whose history dovetailed
Sears’s though with differing results.
It was back in 1872 that Aaron Montgomery Ward, a clerk and
traveling salesman who thought he could sell goods directly to
people in rural areas by mail, established the first mail order
business in America, sending out a one-sheet leaflet that offered
various bargains. Sears Roebuck followed about twenty years
later and the two companies pioneered the field of catalog sales.
The farmer would look through it, place his order, and then
receive the product by mail.
By the 1920s, though, the feeling had developed (as an account
of the day put it) “that it was better for the customer to actually
see and feel the product he or she was buying than to have to rely
upon pictures in catalogs. Wasn’t it thus more convenient to take
possession of the product immediately rather than waiting for it
to arrive in the mail?” [So much for e-commerce, eh?]
But while Montgomery Ward was first into the catalog business,
Sears had gained the edge prior to World War I. After the war,
however, both companies suffered from the cutback in spending.
Sales for Monty Ward, for example, dropped from $102 million
in 1920 to $69 million in 1921. But then the economy began to
expand exponentially and Ward also began to close in on Sears.
Robert Wood was the #2 at Ward at the time and he saw the
potential that the Model T had to transform American business.
The mail-order business was going to be a relic of rural America.
To Wood the future lay in retail department stores, and with
Ward’s name it only made sense to establish stores in and
around the large cities.
But the CEO at the time, Theodore Merseles, rejected the idea.
Wood ended up taking it to Sears and it proved deadly to Ward.
[Incidentally, at Sears, Wood founded Allstate as a wholly
owned subsidiary to insure his beloved Model Ts.]
By 1924, Ward’s sales were three-quarters those of Sears but the
penny-pinching organization did have a higher profit margin.
Merseles, though, finally saw the light and began to add retail
stores. In 1926 they had 10. By 1930 the number was 550.
[Monty Ward’s share price was also skyrocketing, along with the
rest of the stock market, rising from $133 to $467.]
But by 1931, with the Depression in full swing, the stores were
showing losses and Ward was deeply in the red (as was Sears).
Over the course of ‘31 the shares would plummet. Change was
in the air and Ward’s banker, J.P. Morgan and Co., suggested
that Ward bring in a seasoned executive, Sewell Avery, a man
who had made his mark running U.S. Gypsum for 25 years.
Avery was offered $100,000 plus an option to buy 100,000
shares of Ward at $11 a share. Wall Street greeted the news by
sending the common down to $3.50. [The options were good
until 1936 and, by then, the stock was back to $68.]
A driven man, lacking in charm, Sewell Avery was one tough
CEO and the turnover in the executive ranks was high. Soon
Monty Ward had the reputation as being a one-man shop, but
from a profit and loss standpoint Avery had quickly turned a $9
million loss for 1931 into a $9 million profit in just 3 years.
For a while there was talk of a merger between Ward’s and
Sears, but that faded and the war was on between the two. By
1939, Ward’s sales were 80% of Sears’s. Robert Wood told his
Sears troops: “Learn from your competition, examine yourself to
see what are your weak spots, and see if you can''t discover new
ways in your line to make sales and profits.”
Then World War II hit and Sewell Avery took Ward’s into the
bunker, so to speak. The exceedingly cautious executive
believed that the war would pull the nation out of its doldrums,
but the demands of the military put a crimp on the peacetime
goods that Ward’s specialized in. Further, when the war ended
Avery was convinced that there would be massive dislocation
and a new depression. So he sought to pass Sears by retrenching,
[Sound familiar? Michael Dell once emphasized that he would
do the opposite; that despite the then slowing U.S. economy he
was going to keep expanding and grab market share today.]
Montgomery Ward stopped opening stores in 1941. Yes, Avery
brought the company out of World War II in superb financial
condition, though he would fail to meet some of the challenges
But to digress, in 1944 the surly Avery, who hated all things
about the government, refused to renew a union contract even
when the War Labor Board demanded it. So when negotiations
proved fruitless, FDR was forced to send in the military.
Attorney General Francis Biddle led a contingent of steel-
helmeted U.S. soldiers into the Chicago headquarters of
Montgomery Ward and Avery was physically ejected from his
offices. A famous photo was taken of a sour-looking Sewell
Avery being carried out by troops. “To hell with the
government,” he shouted and then, turning to Biddle, said, “You
New Dealer!” Man, them’s fightin’ words. [Source: David
Kennedy] Actually, because of the photo, Biddle was widely
condemned. But the attorney general also showed labor that the
wartime partnership with government was critical to the overall
After the war, Avery was prepared for a big slowdown. In a letter
to shareholders, he predicted that massive unemployment and
deflation would accompany the end of the Big One. The New
York Times had an account of the time.
“Mr. Avery is a great believer in charts. He has been greatly
influenced by one in particular (that) traced the course of
commodity prices for the years 1805 to 1945 and with stress on
four periods: The Napoleonic War of 1812, the Civil War, and
World Wars I and II.
“The chart indicated, contrary to popular impression, that there
had been no long uptrend of commodity prices. Just prior to
World Wars I and II, for example, they were substantially lower
than in 1805-07 or 1855-57. In each past war period, prices
soared, only to plunge when peace returned. There was a
remarkable continuity to the pattern. ‘Who am I,’ Mr. Avery
asks, ‘to argue with history.’”
Avery had picked this up from the famous business-cycle
theorist, Geoffrey Moore. But while unemployment rose as the
men returned home, the dire predictions proved to be way out of
whack. Soon there was a postwar demand boom. Avery, of
course, said it was nothing but a bubble and would be followed
by a crash and his long-called for depression. He thus
accelerated his hoarding.
Meanwhile, over at Sears, Robert Wood set out on the “biggest
gamble of my career.” From 1945-54, Sears invested $300
million in 100 new stores. Montgomery Ward, on the other
hand, had reduced its number of stores by about 60 and had now
gone 14 years without opening a new one. At the end of the
year, revenues, which had once been 80% of Sears’s, were now
down to just 29%.
After the war, any executives who suggested to Avery that they
should expand were fired. Finally, in 1955, one of the fiercest
proxy fights in U.S. corporate history was waged against the now
81-year-old Avery. While he beat back the challenge, the price
he had to pay was to turn the company over to a successor within
weeks. The new CEO then began to implement an all-too-late
expansion program. Montgomery Ward never did recover, as it
limped along until finally declaring Chapter 11 in 1997. They
should have been put out of their misery years earlier.
Lots of lessons here, folks. Now we wait to see what kind of
history Kmart and Sears write together.
Wall Street History will return November 26.
“New York Times Century of Business,” Floyd Norris and
“When Giants Stumble,” Robert Sobel
“Freedom From Fear,” David Kennedy
“America: A Narrative History,” Tindall and Shi