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Kmart, Sears union is no blue-light special
Sharing brands and cutting labor costs might improve the bottom line, but it's unlikely the struggling companies can create a retailer strong enough to battle Wal-Mart.
By Robert Walberg
Spring is the season of optimism. Flowers will soon be blooming, the trees will turn green, the weather will warm up and Cubs fans everywhere will hope that this is the year their beloved team wins the World Series. Yep, this is the time of year when you know that better days are ahead. Maybe that's why Kmart (KMRT, news, msgs) and Sears (S, news, msgs) chose now to have shareholders approve the merger of their struggling franchises.
You have to be an eternal optimist to think that combining two weak companies will make a strong one. Collectively, Kmart and Sears have seen same-store sales drop steadily for the past several years as both failed to establish an identity that consistently resonated with customers.
How, then, are we to assume that by combining forces, Kmart and Sears will discover the formula for recapturing lost market share from Wal-Mart (WMT, news, msgs) ) or Target (TGT, news, msgs)? Management is trying to convince investors that together the companies will benefit from a lower cost structure and shared branding.
The problem with this logic is that not many people were interested in the brands of either company to begin with, otherwise same-store sales wouldn't be declining. And those lower costs, while good in the long run, mean considerable pain and potential turmoil at first.
Consider the good folks at Sears. While the shareholders are hoping beyond hope that in approving the deal with Kmart they'll find lightning in a bottle, a large number of Sears employees are likely to get zapped.
Creating unhappy workers
There's no doubt that Sears needs to get leaner. Analysts say it spends twice as much on each sale as Wal-Mart. But slashing jobs and reducing benefits (Sears currently offers better benefits than Kmart) rarely creates a happy work environment.
Now, I'm not a financial wizard like Edward Lampert, the hedge-fund manager who helped Kmart out of bankruptcy and engineered the deal. But it doesn't take a genius to know that anxious, disgruntled workers don't make the best impression on customers. And if the new company wants to win back customers from Wal-Mart, Target, Kohl's (KSS, news, msgs), etc., it's going to need to emphasize customer service like never before.
Funny thing is, you don't hear much about focusing on service or restructuring stores to better promote brand merchandise or even improving the combined company's product mix in an effort to grow sales and earnings. This should be the emphasis of management as it prepares to unite the two declining franchises.
Instead, Kmart and Sears are serving investors and analysts a steady diet of Wall Street speak, cost cuts, synergies, blah, blah, blah. It might be good for the stocks over the short term, but without a defined vision of how to improve the product mix, store flows and customer service, management is simply prolonging the inevitable extinction of both companies, and lining its pockets in the meantime.
In all fairness, management is pointing to the new Sears Grand concept and the planned transformation of about 400 Kmart stores into Sears Essential stores as ways the merger will revitalize the brands. The Grand stores are big-box stores designed to compete directly with Wal-Mart and Target, while the Essential stores are midsized units featuring home and family, lawn and garden, clothes and even food.
Old brands on new shelves
Sears has tried several ways to breathe life into its franchise in recent years, moving away from the large, mall-based department store model, to smaller, more targeted stores within strip malls. It has done so by breaking out its hardware and electronics units. But both units have failed to deliver because of intense competition from bigger, more well-defined companies such as Home Depot (HD, news, msgs), Lowes (LOW, news, msgs), Best Buy (BBY, news, msgs) and Circuit City (CC, news, msgs).
Now with its Essential and Grand concepts, Sears goes head to head with Wal-Mart, Target, etc. Are we to believe that a new, reinvigorated Sears, sharing Kmart brands, will somehow succeed where Kmart failed? Well, yes, at least if you buy into the nonsense being spewed out of the sales team of Lampert and Sears CEO Alan Lacy.
But before you put on the rose-colored glasses they're handing you, consider that Sears has failed to successfully incorporate the Lands End brand that it paid handsomely for a few years back and is now rumored to be looking for a buyer, at a much lower price. Now if Sears can't get consumers to buy some of the best merchandise in its stores, why should we assume that it'll suddenly find magic and be able to sell Martha Stewart home products?
Similarly, will Kmart, which has had the benefit of the Martha Stewart Living brand for several years and still couldnt sustain any sales momentum, somehow be reborn because it offers Craftsman tools? It doesn't make much sense, does it?
The cold, hard reality is that Sears and Kmart are damaged brands looking to a merger to turn around their sagging fortunes. Unfortunately, the only fortunes likely to be won will be by upper management, not by shareholders. The combined company still lacks a defined vision that would enable it to compete and win against some of the more entrenched brands in retailing.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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