Kmart, Sears Merger Could Boost Sears Grand Expansion

TROY, MI & HOFFMAN ESTATES, IL – Combine "Sears" and "Kmart" and you get "smart." And smart is what experts have already labeled the November 17 announcement that Kmart and Sears would merge in an $11 billion deal. The new company, Sears Holding Co., gives each retailer the best of both worlds in merchandise, talent and locations.

Sears, mainly a mall retailer, will move what it calls a "substantial number" of stores into Kmart's off mall locations. Non-converted Kmarts will continue to operate. Eddie Lampert, now chairman of the combined companies, would not divulge the number of conversions, but there will probably be more Sears than Kmarts.

"I don't see Kmart going into the mall," said Lampert. "The demographic is more Sears' than Kmart's. But this will be determined by opportunities. We could see greater rollout of Sears Grand."

Many Sears mall stores, he added, are very profitable, with Sears operating in the 870 best malls in America. Others will close when leases expire. In total, Sears Holding Co. encompasses nearly 3,500 locations and should generate $55 billion annually. The merger, which creates the nation's third largest retailer after Wal-Mart and Home Depot, is expected to close by March.

"If you can't make the store worth more than its real estate value, we'll monetize the real estate," said Lampert. "We'll probably continue to close and open stores. Over time, we should open more stores than we close. Throughout the transition period, we will have very strict return on capital requirements."

Alan Lacy, who headed Sears and is now vice chairman, c.e.o. of Sears Holding, said Sears has proven it can successfully operate off mall stores via its new Sears Grand hardgoods and consumables concept and through the 50 locations it bought from Kmart last summer. Sears also converted a former Wal-Mart in Illinois. "We want to accelerate our off mall growth strategy. The reinforcement from Sears Grand and the Kmart stores is a clear indication that off mall is the way to go."

Lampert conceded that both Sears and Kmart have had their problems. But each chain's problems are different. "It's not that the retailer [Sears] is weak, it's that not all stores are near where its customer shops. We want to bring Sears closer to the [off mall] places where Lowe's and Home Depot are. Sears has already remodeled stores without getting a great return on investment." Added Lacy, "our categories are ones that customers shop in an off mall environment."

Aylwin Lewis, a former fast food executive who was named ceo of Kmart a few weeks ago, said Kmart is not going to disappear. With $3 billion in cash on the Kmart side and several billion on the Sears side following the sale of Sears' credit card business and Lampert owning much of the stock, the new company is under no pressure to make an immediate decision or produce immediate results.

"Kmart is not going away," said Lewis, now president of Sears Holdings Corp. and ceo of Sears Retail. "We have an opportunity to let customers decide. We have the time and latitude to do the deal right." Lampert noted that 35 percent of the deal's financing is cash.

In product, Kmart brings a lot of well-developed and successful private names. These include Martha Stewart Everyday in home and Joe Boxer, Jaclyn Smith, and Thalia in apparel. Sears has never met its own expectations in apparel, although it now owns Lands' End. Kmart also brings expertise in pharmacy, packaged foods and HBC, areas Sears recently entered with Sears Grand. Sears brings the draw of major appliances, tools and other hardgoods.

Both retailers have been beefing up talent. First came Lampert, who has had a big ownerhship stake and leadership position with the two chains. Lewis, an expert in co-branding and execution, hails from YUM! brands. Over the past year, Kmart has also recruited design and merchandising executives from Gap and Pacific Sunwear. "Kmart can go in and get the best talent in the market where there are gaps," said Lewis. Lacy said Sears added 50 top executives over the past three years. Twenty were recruited from outside the company; the rest were promoted from within. "The organizational structure is largely in place."

As far as the transition goes, Lampert pointed to the experience of Lewis at blending brands and cultures. Throughout his career at Yum!, Lewis was known for his ability to successfully combine different fast food brands, to develop and train employees in new initiatives and to executive corporate strategies at the restaurant level.

"Kmart's associates are already battle tested," said Lampert. "They have had to deal with tremendous uncertainty. With Alwyn coming in with his experience of blending cultures, we have a tremendous opportunity. He is very good at solving problems."
-- Debby Garbato, Retail Merchandiser, a VNU Business Publication
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