- Retailers such as Macy’s, Sears, and JCPenney are closing stores as sales decline.
- Warren Buffett’s book of essays has an explanation for the root of the problem: companies prioritising short-term goals over long-term investments.
- If Buffett’s theories are correct, it may be too late for retailers to turn business around.
Retailers like Macy’s and Sears are struggling to stay alive, as stores close and sales slump. And, a single overarching mistake is the root of all their problems.
In “The Essays of Warren Buffett: Lessons for Corporate America,” the Berkshire Hathaway CEO lays out a problem that plagues many businesses: prioritising short-term goals over long-term success.
“If management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage has been inflicted,” Buffett writes.
In the early 2000s, as e-commerce competition was on the rise, many retailers failed to build up their e-commerce business, instead choosing to focus on the short-term and drive in-store sales — still the largest part of most traditional retailers’ business in 2017. Then, when the recession hit, retailers slashed prices in an attempt to draw at least some customers to stores.
While this might have helped in the short term, the lack of e-commerce infrastructure and introduction of year-round discounts have had dangerous consequences in the long term.
Customers are now primed to only buy discounted items, cutting into profit margins. Retailers lack the funds to invest in store upkeep and remodeling, leaving locations looking like disaster sites. Retailers like Macy’s, Sears, and JCPenney have been forced to close hundreds of locations as the companies struggle to survive.
“Charlie [Munger, Buffett’s business partner] is fond of quoting Ben Franklin’s ‘An ounce of prevention is worth a pound of cure,'” Buffett continued in his essay. “But sometimes no amount of cure will overcome the mistakes of the past.”
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