Skepticism Persists on Kmart-Sears Merger
Tuesday November 23, 2:35 pm ET
By Anne D'Innocenzio and Herbert G. Mccann, AP Business Writers
AP Centerpiece: Skepticism Persists in Kmart-Sears Merger, but New Audience Possible
CHICAGO (AP) -- It didn't take long for skepticism to set in after Kmart Holding Corp. and Sears, Roebuck and Co. announced their $11 billion takeover -- Kmart's stock has fallen nearly 16 percent amid growing doubts that the marriage of two laggard retailers can succeed.
But one statistic stands out as evidence why the deal may prove to be a masterstroke for Kmart chairman Edward Lampert, the 42-year-old hedge fund manager who engineered the merger: 48 percent of Americans who shop at Sears and other mall retailers never set foot in the stores of discount retailers like Kmart, Wal-Mart or Target.
That means merchandise with strong brand equity now sold exclusively at Kmart -- including Joe Boxer and Jaclyn Smith clothing and the Martha Stewart line of linens and kitchenware -- can easily be marketed to a whole new audience of potential customers in Sears stores, according to analyst Marshal Cohen of the market-research firm NPD Group.
Similarly, sales of Sears' Craftsman tools and other branded goods may soar if the number of customers grows at remodeled Kmart stores where those products are introduced and at Kmarts that are converted to Sears' new off-mall format called Sears Grand, which also offers grocery and convenience items.
The number of these stores was scheduled to jump from three to 60 next year, and now should accelerate into the hundreds after the takeover, which is expected to close in March.
Marni Murphy, 33, of Bryn Mawr, Pa., would appear to be exactly the target customer for these changes.
"It might make it easier if they bring some of the things at Sears to Kmart and vice versa. Make it one-stop shopping," she said. "You're running around -- I have two kids -- you just want to go to one place."
But Amy Crooks, 31 of Newton, Iowa, was more puzzled about the combination.
"I was really surprised about the merger," she said. "I didn't put the two together. I kind of think of them as dinosaurs. They have been around so long."
Ultimately, the fate of the two struggling chains will depend on how successfully they expand their base of consumers, who have plenty of alternative choices on where to shop.
True, the combination is expected to generate $500 million a year in cost savings within three years. But to survive in the long term, the new giant called Sears Holdings Corp., with $55 billion in sales and 3,500 stores, will have to come up with a merchandising formula that will woo customers away from competitors like Target Inc. and Wal-Mart Stores Inc., the nation's largest retailer, which generated $256.3 billion in sales last year at more than 4,800 stores.
Burt Flickinger III, managing partner at Strategic Resource Group, a New York-based industry consulting group, estimates it will take three years for the new merchandising strategy to be executed.
But he said, "They don't have three years," given the fierce competition.
Both retail brands are broken in different ways. Kmart has had a hard time keeping its shelves stocked with essential items, suffers from messy stores and is caught between cheap chic discounter Target and everyday low-price operator Wal-Mart. Sears' biggest problem is that it still struggles with a lack of a unified marketing and merchandising strategy for its appliances and apparel.
Britt Beemer, chairman of America's Research Group, based in Charleston, S.C., expects poor-performing brands and labels that cannibalize each other to be eliminated. At the same time, he expects the new company will keep both Lucy Pereda clothing, named after a Latina fashion designer and lifestyle expert that's exclusive to Sears, and Kmart's Thalia Sodi label, named after the Hispanic pop star, since they target the fast-growing Hispanic market.
Tim Calkins, a former marketing manager at Kraft and now a clinical professor of marketing at the Northwestern University's Kellogg School of Management, sees problems ahead for Lands' End, a brand Sears bought in 2002 in the hopes it would become the marquee clothing offering at its 870 mall stores. Analysts say the price of Lands End products make it a bad fit for Kmart.
"Lands End doesn't make a lot of sense for either Sears or Kmart," Calkins said, noting the brand has a reputation of exceptional customer service, friendly and helpful. "You don't get that at either Sears or Kmart."
Consumers haven't gone out of their way to buy Lands' Ends at Sears stores. Sold through catalogs before and after its purchase by Sears, mall shoppers accustomed to buying Lands' End seem unwilling to change.
That could mean big changes for Lands' End and several other tough calls for Lampert and Sears CEO Alan Lacy if the combined company is to achieve Lampert's goal of a 10 percent operating profit margin, a level generated by such retailers as Gap Inc.
Another question is how Lampert and his team will react to Whirlpool Corp.'s plan to raise its wholesale prices effective Jan. 2 because of higher costs of steel and other raw materials.
Whirlpool, a Sears supplier since 1916, got more than $2 billion, or 18 percent of its revenue last year, from its sales to Sears of clothes washers, dryers and major kitchen appliances under the Kenmore brand. Kmart does not carry Whirlpool products.
"I think the retailers understand the increases in prices in raw materials that all manufacturers are facing and I think these retailers realize that modest 5 to 10 percent increases won't have a significant impact on sales," said Whirlpool spokesman Stephen Duthie.
Shares of Sears and Martha Stewart Living Omnimedia Inc. also have pulled back since the announcement of the takeover. But not all analysts are downbeat about their prospects.
"For Martha Stewart, it's got to be the best thing that ever happened to them," said George Whalin, president and founding partner of Retail Management Consultants, a San Marcos, Calif.-based firm that offers services for retailers and consumer-products manufacturers. "It just gives them dramatically more distribution and far more store fronts and a much more credible retailer. When you put a brand like that at Sears, you give it instant credibility."
Associated Press writers James Prichard in Grand Rapids, Mich., Michelle Spitzer in Des Moines, Iowa, and Jennifer N. Kay in Philadelphia contributed to this report.
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