Sears Holdings Corp (SHLD), Toyota Motor Corporation (ADR) (TM): This Retailer Is Making the Wrong Call

Once upon a time, there was a company that forever changed retail in the United States. In 1893, Sears Holdings Corp (NASDAQ:SHLD) – then known as Sears & Roebuck – distributed its first catalogue around the country. Since then, Sears Holdings Corp (NASDAQ:SHLD) built a brick and mortar empire with over 860 stores in US. Over the years, the retailer became known for appliances, tools, sturdy clothing, and now… Rolex watches?

The Wall Street Journal reported that Sears Holdings Corp (NASDAQ:SHLD) is now selling Rolex watches, Chanel handbags, and other luxury items on its website. The items are sold in Sears Holdings Corp (NASDAQ:SHLD)’s marketplace section that features third party dealers. Sears CEO Edward Lampert says that the focus on luxury items is part of his company’s plan to overhaul its image and become more “hip.”

Here’s why I think Sears Holdings Corp (NASDAQ:SHLD) is making the wrong move, and what the firm should do instead.

History says no

Rich people don’t shop at Sears Holdings Corp (NASDAQ:SHLD). Not that Sears doesn’t carry quality products, but it’s an image thing. Wealthy consumers prefer to shop at stores with a certain high-end reputation. Sears historically catered to the working middle-class, and changing that 120 year-old image will be almost impossible. Other companies have tried, and found that Americans are extremely brand conscious.

Take Volkswagen for example. The company marketed itself in the 60s and 70s as a cheap, hip German auto-maker (think Beetle). Over the years, VW further cemented itself as a middle-end vehicle, known for being a reliable, affordable car. Then, in 2004, VW released the Phaeton onto the US luxury sedan market. The Phaeton was praised by experts, and though it was meant to compete with the likes of BMW and Mercedes-Benz, the Phaeton was compared by some to a Bentley. In addition, the Phaeton was priced at $64,000 much less than competitors’ similar luxury sedans.

By now, you probably guessed that the Phaeton failed miserably. In fact, VW only managed to sell 2,253 Phaetons in the US from 2004-2005. Compare that to BMW’s 6-Series US sales of 18,132 during the same period. Phaeton sales were so dismal that VW pulled the Phaeton out of the US completely in 2006.

The car was a brilliant feat of engineering, but it couldn’t overcome VW’s brand. The Phaeton didn’t sell because consumers didn’t even consider VW when buying a luxury car. Marketing is about perception, NOT products, and VW wasn’t perceived by consumers as a luxury brand.