We’ve got a birthday coming up for our little two-year-old granddaughter, who is into all things “Elmo “. If something is red or fuzzy, it’s an “Elmo ” this-or-that. And even if she just likes it, it is suddenly and decisively branded an “Elmo ” product (no arguing allowed). The good news is, there isn’t a lot of mystery in what to get her, and so we decided to load her up on Elmo sleepers, dresses, t-shirts, and sweatshirts. Well, actually ‘yes’, there was one problem – it was hard to find a retailer than carried “Elmo ” in our town.

But that’s why we have the Internet! After Googling around, we learned that our best source would be none other than Sears. I have to confess that it’s been years since I walked into a Sears (not counting RSR’s Black Friday walkabouts – I have in fact visited Sears stores on a couple of those occasions to experience the madness). But off to Sears at the not-too-distant Concord California Sun Valley Mall we drove, knowing that this was the last weekend before school begins – in other words, probably mobbed.

But the place was not mobbed- in fact it was nearly empty. This was one of those rare times when I can truly say that I saw more employees than customers (Sears is no Apple Store, so this was a real surprise). We even got help, being directed to the area of the huge and wildly over-merchandised store where we eventually found several suitable “Elmo ” things. So the trip was a success, but it brought up the inevitable question: how long can these guys keep this up?

That’s a question that seemed to have Jim Cramer on CNBC’s “Squawk On The Street ” in a twist on Friday morning. Sears had delivered an unexpectedly bad report the day before (Barrons reported that Sears Holdings “latest loss points to continuing operating woes, which show no signs of abating. “). Well, if there’s any one thing I learned as an executive in a publicly traded company, it’s this: Wall Street hates surprises, and will punish you if you deliver one. So Cramer was ready to do some trash talking: “Retail is about growth… <but> this company has the worst decline in retail…it is just bleeding. Sears Canada is now bleeding. I don’t know what you do, maybe you close every single unprofitable store… maybe you get a core profitability – a very small company…I don’t have anything good to say…. “.

Like the Mark Knopfler song says, “Boom – like that! “

Worst of a Bad Lot?

All of this got me to thinking: Sears/Kmart might be a train wreck, but they’re not exactly alone when it comes to poor performance by the big box general merchants. How do any of them survive in the next 10, 20, 50 years? Although Walmart met analyst expectations for their 2^nd QTR, it reported a fairly tepid 2.8% sales growth, and the U.S. Walmart stores (minus fuel sales) were essentially flat for the 6^th straight quarter. Because over 50% of Walmart sales come from grocery items, that (according to Wall Street analysts) makes them susceptible to “dollar ” stores. And it does seem that the smaller format dollar stores are moving right along (for example, Dollar Tree reported a robust same store sales increase of 4.5%, and at Dollar General, same store sales have risen for 24 consecutive years!). Walmart’s own small-footprint stores, Neighborhood Market, experienced a nice 5.6% same store sales bump. Is the lesson here that “smaller ” is the future?

The other big box general merchant in the U.S. is (of course) Target, and at this point it seems almost unnecessary to spend a lot of time discussing their situation. Simply put, since the 2013 data breach the company has suffered both bad press and poor results. Last week, it reported that second-quarter U.S. sales at stores open at least a year were flat, but in line with expectations. The company’s expansion into Canada, which has received a lot of recent criticism, experienced a same-store sales drop of 11.4%. But are there smaller Targets in the future? The Minneapolis retailer is in fact testing a small format urban store called TargetExpress.

One of the things that the big boxes have in common is that increasingly, “grocery ” is a part of the assortment – and its getting bigger for Walmart and Target in particular. As I just mentioned, a big part of Walmart’s sales come from the grocery category. But aside from the fact that grocery has infamously low margins on highly ubiquitous assortments, one has to ask the question, “if you had $1B that you didn’t know what to do with, would YOU decide to get into the grocery business? ” My RSR partner Paula Rosenblum and I came up with the same answer: “are you nuts? ” For the big boxes, the competitiveness of the category is compounded by the fact that the bigger the box, the less convenient it is.

Taking all of this into account, my entirely unscientific point of view is this: working people are toiling a lot harder and longer for the same or less take-home pay than before 2008, and they have neither the time nor the inclination to park two acres away from the store on the way home and then slog through aisle upon aisle of “stuff ” to buy their bread, milk, and eggs for about the same price as they would pay at the local Savemart. And a bottle of bleach, whether bought at Family Dollar or Target, is still a bottle of bleach. So the big box general merchants, who have spent the last 25 years blurring segment lines and delivering low prices through superior buying and brutally low SG&A expense ratios, have lost their advantage -the market has reacted and compensated. Now the big boxes have to compensate for their bigness by offering something that causes consumers to overlook the inconvenience of the experience, and so far, they’ve failed.

My unscientific point-of-view is backed up by some data. A study published earlier this year by the University of Arizona’s Terry J. Lundgren Center for Retailing found that 77% of 1200 survey respondents (regardless of age group) bought groceries from a non-grocer in 2013 and planned to do so in the future. And although the top two choices were Walmart and Target, they are followed by drugstores, dollar stores, convenience stores, and even farmers markets. And consumers now have the power of “digital ” at their fingertips, so they know they have options. If I had to summarize all of this in a couple of words, they would be “disloyal customer “.

Will ‘Omni’ Save the Day?

Both Walmart and Target are reporting e-commerce growth rates of 25% or better, and compared to physical same stores sales, that’s a real bright spot. But e-Commerce sales aren’t necessarily “omni-channel “, which is all about making it possible for consumers to use the digital and physical selling environments in concert. Target’s new CEO, Brian Cornell, has made omni-channel shopping a top priority. And Walmart has recently implemented a new e-Commerce site that is focused on allowing shoppers to shop the way they want to shop, with its “Site to store ” and free shipping options. Although these moves may be immediately focused on blunting the Amazon threat, they have the long term potential of bringing the retailers more in line with what consumers expect a 21^st Century shopping experience to be – convenient for them.

But there’s still that nagging big-ugly box problem to contend with. If I’d thought about it, I should have just ordered all my Elmo gifts online instead of trudging through that tired old Sears store. In fact, my daughter just laughed at me when I told her I’d gone there: “Why did you do that? “, she asked. I blurted out the first thing that came to my mind: “so I could wrap them myself! ” Right.