Sears Robuck Auto Case

CASE

SEARS, ROEBUCK, AND CO.: THE AUTO CENTER SCANDAL

Sears, Roebuck, and Co. began in the late 1800s as a mail-order company that sold

farm supplies and other consumer items. Its first retail store opened in the mid-1920s.

Responding to changes in American society, such as the move from farms to factories

and the presence of the automobile in many homes, hundreds of retail stores

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opened over the years. The company expanded rapidly, and eventually it diversified

to include other businesses: insurance (Allstate Insurance), real estate (Coldwell

Banker), securities (Dean Witter Reynolds), and credit cards (Discover). Each of

these other businesses became its own division, in addition to the merchandising

group that included retail stores, appliances, and auto service centers. By the early

1990s, the company was reporting revenues and earnings in the billions of dollars.51

Despite its long history of high earnings and its penetration into the U.S. market,

the Sears retail business began to experience serious financial difficulties in the

1980s. Discount retailers such as Wal-Mart were pulling ahead in market share, leaving

Sears lagging. Sears responded by adding non-Sears name brands and an ''everyday

low price'' policy. But despite these efforts, in 1990 Sears reported a 40 percent

decline in earnings, and its merchandising group dropped a whopping 60 percent!

Cost-cutting measures were planned, including the elimination of jobs and a focus on

profits at every level.52

In 1991, Sears unveiled a productivity incentive plan to increase profits in its

auto centers nationwide. Auto mechanics had traditionally been paid an hourly wage

and were expected to meet production quotas. In 1991, the compensation plan was

changed to include a commission component. Mechanics were paid a base salary

plus a fixed dollar amount for meeting hourly production quotas. Auto service advisors

(the counter people who take orders, consult with mechanics, and advise customers)

had traditionally been paid a salary. To increase sales, however, commissions

and product-specific sales quotas were introduced for them as well. For example, a

service advisor might be given the goal of selling a certain number of front-end alignments

or brake repairs during each shift.53

In June 1992, the California Department of Consumer Affairs accused Sears,

Roebuck, and Co. of violating the state's Auto Repair Act and sought to revoke the

licenses of all Sears auto centers in California. The allegation resulted from an

increasing number of consumer complaints and an undercover investigation of brake

repairs. Other states quickly followed suit. Essentially, the charges alleged that Sears

Auto Centers had been systematically misleading customers and charging them for

unnecessary repairs. The California investigation attributed the problems to Sears

Auto Centers' compensation system.54

In response to the charges, Sears CEO and Chairman Edward A. Brennan called

a news conference to deny that any fraud had occurred, and he defended Sears' focus

on preventive maintenance for older cars. He admitted to isolated errors, accepted

personal responsibility for creating an environment where ''mistakes'' had occurred,

and outlined the actions the company planned to take to resolve the issue. These

included

& Eliminating the incentive compensation program for service advisors

& Substituting commissions based on customer satisfaction

& Eliminating sales quotas for specific parts and repairs

& Substituting sales volume quotas

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According to Brennan, ''We have to have some way to measure performance.''55

Sears also introduced ''shopping audits'' of its auto centers, during which

employees would pose as customers, and Brennan published a letter of explanation

to the company's customers in the Wall Street Journal and USA Today on June 25,

1992.

Note that the compensation system for mechanics, based on number of tasks performed

and parts replaced, was maintained. In the summer of 1992, Chuck Fabbri, a

Sears mechanic from California, sent a letter about Sears' wage policy for mechanics

to U.S. Senator Richard Bryan. Fabbri said:

It is my understanding that Sears is attempting to convince your committee

that all inspections in their auto centers are now performed by

employees who are paid hourly and not on commission. This