How J.C. Penney and Sears Could Have Steered Clear of the Slope of Death

As if the recent holiday season in the wake of the payroll tax increase and government shutdown hasn't already made 2014 a disappointment for retail, then the rest of the year may require a stiff upper lip in girding for the rest of the iceberg.

Severe weather is reducing in-store foot traffic, while the red flag over data privacy is threatening to further chill a selective, discount-chasing public already bored with the experience of shopping at a physical store. On Wall Street, earlier cautious optimism has given way to pessimism — and with good reason. A sectorwide sales slump is looming.

Teen retailer Abercrombie & Fitch is out of favor with its core demographic; American Eagle has ousted its underdelivering CEO; and RadioShack is betting a cosmetic makeover can solve a fundamentally weakened business. Meanwhile, restaurant franchise Applebee's, bookseller Barnes & Noble, consumer electronics multinational retailer Best Buy and casual dining chain Olive Garden continue to struggle.

In spite of the cloud hanging over the whole of the retail sector in early 2014, J.C. Penney and Sears deserve special attention. JCP and Sears are illustrative of what some may call the "Slope of Death" in business distress — a prolonged decline that can often end a company if an appropriate restructuring plan isn't implemented and carried out.

What the Slope of Death is not is irreversible or unstoppable. Frequently, responding to the smoke before the fire can keep a company out of mortal danger. Avoiding the Slope of Death in the first place is the objective, and here the backstory of both J.C. Penney and Sears offer a textbook guide of what not to do.

As a U.S. brand, Sears is iconic for its practicality, not to mention its success — until recently. The company began as a mail order catalog serving the turn of the century rural Midwest and went on to pioneer the concept of the "department store." However, a long period of diversification into nonretail would come back to haunt Sears.

Though nearly as old, J.C. Penney, on the other had, is essentially the inverse of Sears. The store stuck to its niche, catering to a middle-income, fashion-conscious, largely suburban demographic. Though never as celebrated as Sears, JCP did boast a dedicated following … a following that dissipated with the 2011 appointment of erstwhile Apple exec Ron Johnson as CEO.

So what could Penney and Sears have done early on to steer clear of the Slope of Death? In hindsight, that's readily apparent:

Pick a niche and stick to it. Sears tried to be a one-stop shop to the entire planet, even bringing a financial services provider (Dean Witter) and real estate firm (Coldwell Banker) under its umbrella. For its part, Penney could have actually broadened its focus, but not before remerchandising each store first.

Location, location, location. Meant figuratively as well as literally. J.C. Penney and Sears never cornered a market, giving them a confused place in the public mind. They're not Nordstrom, not Target, not really anything. Moreover, JCP isn't Apple, which can open a successful store no matter the location. Market research and solid execution should have been used.

Forget financial engineering. Sears is controlled by a hedge fund manager and Penney hired a CEO based on hedge fund input. Running a successful business and operating and successful hedge fund aren't one in the same.

Like the Slope of Death itself, business distress is often a long time in the making before having a material impact. Hopefully, Penney and Sears serve as a wakeup call to all.

Dan Scouler is chief executive of Scouler & Company, a financial consulting, restructuring, crisis management and transaction services firm.