Sears Kmart Merger Essay Writer

“People assume that Eddie’s got some magic formula,” said Gary Balter, an analyst with Credit Suisse. “If you’re Sears, you’ve got a problem because you’re trying to sell a product in a dilapidated building,” he said. And Kmart stores are “about a quarter the sales productivity of Wal-Mart,” he said. “How do you compete?”

When Mr. Lampert combined Kmart and Sears in an $11.9 billion deal that went through in 2005, many of the same analysts considered it a smart move.

Mr. Lampert, who became the majority owner of Kmart after it went into bankruptcy, said then that he wanted to combine the best of both, putting brands like Kenmore and Craftsman into Kmarts, and building Sears’s presence outside of malls by turning some stand-alone Kmart stores into Sears stores. Some attractive store locations, particularly in urban areas, led analysts to believe he could sell those to competitors for premium prices.

But the sudden consumer pullback in 2008 led to lots of empty retail space, at less expensive prices than Mr. Lampert’s. Today, Mr. Balter said, Sears Holdings still has some showcase spots, in high-end, high-traffic areas like Bergen County, N.J.; South Coast Plaza in Costa Mesa, Calif.; and in Manhattan and Bridgehampton, N.Y.

But much of the remaining real estate in older, decrepit malls is a problem, Mr. Balter said. “Of the 2000, there’s 1,500 that you don’t want to be in, that nobody’s going to buy,” he said. (It also has a growing division of about 1,600 specialty stores, like small hardware stores and outlets. ) The better locations “are where Sears and Kmart are making their money — if you sell those, what are you going to be left with?” Mr. Balter said.

Mr. Lampert has also not invested much in the stores themselves, analysts said. In 2009, capital spending only amounted to 0.82 percent of sales. That is about half of Macy’s spending, at 1.51 percent of sales, and a fraction of the spending at Target, Wal-Mart, J. C. Penney and even publicly traded dollar stores, all of which are at 2 percent and above.

In an interview, David Friedman, Sears Holdings’s new senior vice president and president of marketing, played down the importance of appearance.

“The customer’s experience is made up of lots of pieces,” he said. “The in-store experience is one of those that matters a lot, and we believe that the physical plant is one piece of it, but we believe the associates and the products drive the in-store experience.” Sears Holdings is experimenting with new layouts and fixtures and will introduce those more widely if they are shown to improve sales. And Tom Aiello, a Sears spokesman, said in an e-mail that brightness and cleanliness were priorities, and noted that customer-satisfaction scores had risen this year.

The stores’ products pose another challenge.

Sears has long commanded the appliance world, but Home Depot and Lowes are formidable up-and-comers. In 2009, Sears still led the group with a little more than $7.1 billion in major appliance sales, according to This Week in Consumer Electronics magazine and the Stevenson Company. But its appliance sales fell 8.2 percent that year. Lowes came in second, with $4.5 billion, up 3.8 percent, and Home Depot was in third with $3.4 billion, a 4.3 percent decline.

“That’s increased the competition for sure,” Mr. Friedman said, but he added that Sears’s employees and price-matching gave it an advantage. Sears is also now selling some exclusive brands outside its stores. Craftsman tools, for instance, are available at some Ace Hardware stores.

It is also trying to figure out apparel sales. In its high-performing stores, it has been able to sublease space to the teenage retailer Forever 21, and it is trying to lease other spaces to other brands.

New exclusive brands, like a fashion line by the Disney star Selena Gomez at Kmart, and ones by the British brands Next and French Connection, are the latest efforts to lure shoppers.

“When you have things that are more on trend,” Mr. Friedman said, “aligned with people that are more compelling, they’re more willing to take a separate trip to your store.”

But exclusives may not hold the same cachet anymore. Kmart may have signed Selena Gomez, but Target has Demi Lovato, Wal-Mart has Miley Cyrus, Kohl’s has Britney Spears and so on.

Transforming Sears or Kmart into fashion destinations will be difficult, said Jason Asaeda, a retail analyst at Standard & Poor’s.

Mr. Friedman said that customers were “more willing to purchase fashion at a Sears than at a mass merchant,” and described Kmart’s fashion efforts as having a “very good response.”

Aside from working on appliance and apparel, Sears seems to be putting the most weight behind its promotions and Internet efforts.

Through a program called AdYourWay, shoppers can choose an item online and direct the site to notify them when it reaches a certain price, or ask the site to recommend products. Mygofer lets people shop online for basics like eggs or bread along with tools or gifts, and pick up those items in a store the same day. Sears Holdings has several mobile applications to help people choose gifts or order items. Earlier this year, it formally announced Sears Marketplace, where more than 18 million products were available via third-party sellers. And a single login and profile can be used across all Sears Holdings sites, like LandsEnd.com or TheGreatIndoors.com.

Analysts said that while they were impressed with the company’s forays online, they did not see the Web sites as a cure-all. The retailer is also trying to lure shoppers with promotions. It extended its popular layaway program this year, and is also running no-interest offers on the Sears credit card and buy-now-pay-later plans with monthly payments. It began a rewards program at Kmart last year and Sears this year, offering points for buying and activities like writing reviews online. It is also offering holiday-season promotions, like offering Black Friday-level pricing on weekends beginning in October, and keeping Sears and Kmart stores open on Thanksgiving day.

For longtime shoppers like Linda Formicola, the rewards are a nice bonus, but it is Sears’s history and good discounts that bring her in.

“We’ve been shopping at Sears since I can remember,” said Ms. Formicola, 43, of Franklinville, N.J. Her husband is a mechanic, so he picks up tools there while she looks at clothes and supplies. “If stuff’s on sale, it’s pretty much the same price as you’d buy at a Wal-Mart,” she said, adding she believed the quality was better at Sears.

Bill Dreher, an analyst with Deutsche Bank, acknowledged that the company had maintained some loyalty among shoppers, but said he was puzzled about its future. While an asset mix including brands like Kenmore and Lands’ End, real estate holdings and the successful Sears Canada division may be valuable, retailing magic seems to be lacking in Mr. Lampert’s vision, he said.

“He’s got this huge conglomerate of retailing which is really not doing very well right now, and frankly, if it weren’t for Sears Canada, would be in a real mess,” Mr. Dreher said. “He’s focused so much on reducing costs and driving cash flow, and not focusing on sales and market share.”

Cheryl Thomas-Gorny, a mother of three in McRae, Ark., may not be concerned with Mr. Lampert’s market share strategy, but shoppers like her contribute to Sears’s diminishing popularity and sales. Although she said she sometimes shopped at Kmart, she criticized the quality of its goods, and said she often found the employees disagreeable.

“Honestly, I’d rather go to Target,” she said.

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According to the CEOs of Sears, Roebuck and Kmart Holding, their plan to merge into a giant $55 billion retail company will produce stronger brands, greater efficiencies in operations and higher returns than either company could achieve standing alone.



Not everyone sees the wisdom of the deal, however. “Here you have two retailers who are doing badly right now and who don’t really see a clear way to pull themselves out of the downward spiral,” says Wharton marketing professor Stephen J. Hoch, who heads the school’s Jay H. Baker Retailing Initiative. “It’s hard to fathom how combining them is suddenly going to produce a new entity that will do better. That’s tough to do, especially because the competition, including Wal-Mart and Target, isn’t exactly standing still.”



According to marketing professor Barbara Kahn, “The rationale for this merger clearly has to be operations efficiencies, including the ability to compete more effectively against Wal-Mart, which is the leader in that area. If this is the goal of the merger, then it makes sense,” she says. “But that isn’t enough, in and of itself, for success. Sears has been struggling for a long time, as has Kmart. Two struggling companies coming together potentially make a bigger struggling company. At the same time, if the merger is done strategically and wisely, it will provide the scale” for the new company to go head-to-head with its toughest rivals.



The merger, announced November 17, will create the third largest retailer in the U.S., behind number-one Wal-Mart and number-two Home Depot. The combined company, to be called Sears Holding, will push Target into fourth place.



The merger announcement caps an interesting two years for Kmart, which in 2002 filed for bankruptcy protection, then 16 months later emerged from bankruptcy and experienced a strong rebound, at least on the stock market. Kmart CEO Edward Lampert is expected to be chairman of the new company, to be joined “in the office of the chairman by Alan J. Lacy, current chairman and chief executive officer of Sears, and Aylwin B. Lewis, current president and chief executive officer of Kmart,” according to the Sears web site. “Lacy will be vice chairman and chief executive officer of Sears Holdings; Lewis will be president of Sears Holdings and chief executive officer of Kmart and Sears Retail.”



Since bringing Kmart out of bankruptcy, Lampert, who owns 53% of Kmart and 14.5% of Sears, has closed down inefficient stores, laid off employees, raised prices and sold some locations to other retailers, including Sears, says Hoch. The real estate question is an interesting one, he adds. Sears stores tend to be located in malls and Kmarts outside of malls. “Kmarts are in declining urban areas, not in the premium kinds of spaces in the non-urban areas that Wal-Mart and Target have. Sears has a bunch of mall locations but they don’t need that many” going forward, which strongly suggests that the new company could quickly shed some of its combined 3,500 retail stores. The company itself says it plans to accelerate Sears’ off-mall growth strategy.



Hoch also speculates that Lampert, with his huge equity stake in Kmart and smaller one in Sears through ESL Investments, his private investment fund, may have plans to break apart and sell the assets. For example, “he could try to get as much money as he could for Lands’ End – the clothing label that Sears bought for $2 billion which has proven to be a disappointing acquisition. I think this merger could be about the financial management of these assets, which obviously the investors feel aren’t being valued by the market as highly as they should be. It wouldn’t be the first time something like this is broken up and parceled out to people who find the parts more attractive. By merging into one entity, these two companies have more degrees of freedom in terms of dividing it up.”



If this is true, the announced merger might probably be more about wheeling and dealing on Wall Street than about combining two stores which, while once the number one and two retailers, are now past their prime, Hoch says. “It’s possible, but tough, to reverse that slide. Imagine a Wal-Mart and a Kmart right next door to each other. Would anyone go into the Kmart? In the old days Sears was the place to shop; you can still shop there but there are many other places that are probably more convenient. Not only are Sears stores situated in mall environments – and malls themselves are not doing as well as they once were – but they are not located in premium space. In addition, they have to operate in a lot of different categories against stores that are more specialized, like Best Buy, Home Depot, a huge number of apparel manufacturers and even paint stores. Competition is coming at Sears from different angles. So as a department store, it has to fight a whole bunch of fires that aren’t even related to one another.”



As for consumers, Hoch says they can probably expect higher prices, at least for now. “That would maximize profits in the short-term, since higher prices go right to the bottom line. It makes no sense, at least now, to drive the business in terms of better prices.”



Kahn suggests that consumers may in fact benefit from the merger if “it gives the combined company better cost efficiencies, which usually get reflected in a lower price strategy. If the new company can compete effectively against Wal-Mart, it would also be good for consumers because it would increase competition.” And it’s not just consumers who would benefit, but small businesses as well, she adds. Wal-Mart has such buying power that for most small companies “it’s Wal-Mart or nothing, a situation that has led to the demise of Toys ‘r Us and many small manufacturers. Wal-Mart calls all the shots, and that kind of power is ultimately not good for a competitive marketplace.”


However, both Sears and Kmart have struggled to attract customers over the past two years. “The continued decline in same store sales shows that neither company has been successful in driving repeat customer traffic to their stores,” says William Cody, the Jay H. Baker Retailing Initiative’s managing director. “Exploiting operational synergies between the two companies will certainly reduce costs, but unless they can develop and execute a merchandise strategy that resonates with consumers, this deal will not recapture the power of either brand.”

Both Kmart and Sears bring visible strengths – and brands – into the deal. Kmart is strong in home furnishings and apparel, including such lines as Thalia Sodi, Jaclyn Smith, Joe Boxer, Martha Stewart Everyday, Route 66 and Sesame Street. Sears is well-known for its appliances – it is still the biggest appliance retailer in the U.S. – and also for tools, lawn and garden products, home electronics, and automotive repair and maintenance. Key brands include Kenmore, Craftsman and DieHard.


The new company will be based at Sears headquarters outside of Chicago, and will continue to use both names on its stores. The merger is expected to be completed by the end of March, pending shareholder approval. Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share. Sears, Roebuck shareholders will have the right to elect $50.00 in cash or 0.5 shares of Sears Holdings (valued at $50.61 based on the Nov. 16 closing price of Kmart shares) for each Sears, Roebuck share. The current value of the transaction to Sears, Roebuck shareholders is approximately $11 billion.


According to Sears’s web site, “Kmart has made great progress over the past 18 months … in terms of profitability and product offerings. We believe the combination of Kmart and Sears will create a true leader in the retail industry … and will further enhance our capabilities to better serve customers by improving in-store execution and ultimately transforming the customer’s in-store experience.”

The merger is expected to generate $500 million of annualized cost and revenue synergies by the end of the third year after closing, the web site claims. The companies also expect to realize approximately $200 million by capitalizing on cross-selling opportunities between Kmart and Sears’ proprietary brands and by converting a substantial number of off-mall Kmart stores to the Sears nameplate in addition to the 50 Kmart stores Sears acquired earlier this year. Additional annual cost savings of over $300 million are expected through improved purchasing, supply chain, administrative and other operational efficiencies.

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