November 18, 2004|By Susan Chandler | Susan Chandler,CHICAGO TRIBUNE
Kmart Holding Corp.'s proposal to acquire Sears, Roebuck and Co. for $11 billion might be wowing Wall Street, but it doesn't do anything to solve the serious problems afflicting two of the country's largest retailers, retail and business strategy experts say.
Kmart's retail business is shrinking at a double-digit annual rate. Sears is only slightly better off, closing in on its fourth straight year of sales declines. Neither company has articulated a strategy for attracting shoppers in a retail world increasingly dominated by discount juggernauts Wal-Mart Stores Inc. and Target Corp.
"If I put Kmart and Sears together, I'm putting together two broken business models," said Adam Hartung, managing partner in Spark Partners, a business strategy firm in Long Grove, Ill. "You put a bad heart and a bad liver together, and you don't get a healthy body."
George Whalin, president of Retail Management Consultants in San Marcos, Calif., agreed, saying, "I suppose it's good for the real estate guys and stock speculators. But it's certainly not better for retail. And it's certainly not better for customers."
Kmart Chairman Edward S. Lampert, the investor whose hedge fund owns 53 percent of Kmart and almost 15 percent of Sears, talked yesterday about the potential synergies of combining two large retail companies.
Kmart's exclusive Martha Stewart line of housewares would be sold in Sears stores, for example, and Kmart would be able to sell Sears' popular Kenmore appliances and Craftsman tools.
Some under-performing Kmart stores can be converted to a new format known as Sears Grand, which combines Sears' most popular categories with impulse items such as snack food and soda.
But such short-term tactics can solve neither Kmart's nor Sears' problems, many retail experts agree.
"Martha Stewart didn't turn around Kmart, and it won't turn around Sears," said ErikGordon, a marketing professor at the John Hopkins University.
The Kmart deal would help Sears expand its presence outside shopping malls at a faster rate, he said, but that doesn't address the issue either.
"Unless you're buying a car battery, monkey wrench or dryer, you don't think of Sears," Gordon said. "It wasn't the mall that was hurting Sears. Sears hasn't figured out how to reinvent itself.
The basic problem for Sears and Kmart is that they aren't compelling places to shop anymore, retail experts agree.
Home Depot Inc. and Lowe's Cos. Inc. are eating away at Sears' longstanding dominance in the appliance and hardware business, while Best Buy and Circuit City dominate the sale of consumer electronics.
Wal-Mart, the world's largest retailer, is also the country's largest toy retailer and largest seller of jewelry, both former strongholds of Sears. Kmart filed for bankruptcy protection in January 2002 as it lost ground to Wal-Mart's low prices and more efficient organization.
But the Sears-Kmart deal wasn't put together as a way to remedy that, marketing experts say. It's a financial deal like many of the takeovers during the 1980s, when companies were acquired for their over-financed pension plans or because they had undervalued subsidiaries.
Investors are betting that Lampert's plan is similar, to unlock the underlying value of the real estate of Sears and Kmart's more than 3,500 stores. Sears was an even more attractive takeover target because it is sitting on nearly $3 billion in cash from the sale of its credit card business last year.
"It's a sharp financial deal from a sharp financial guy that has nothing to do with retailing," said Gordon, the Hopkins professor. "It's all about the real estate. It's all about the cash and the efficiencies, which means people get fired."
Sears and Kmart could reap billions by selling store properties and leasing them back, said Willard R. Bishop Jr., president of Willard Bishop Consulting in Barrington, Ill.
"It doesn't have to be about breaking up the company," Bishop said. "They could take all the real estate owned, sell it and lease it back for 20 years and have a tremendous windfall. There's a lot of investment money looking for a home."
Others think Lampert's treatment will be a lot more drastic and harmful for Sears' long-term future. At Kmart, he has slashed capital spending and cut back on inventory, moves unlikely to help a retailer thrive. He might decide to close as many as a third of the combined company's more than 1,000 stores, some experts said.
The stock prices of Sears and Kmart soared yesterday, but big mergers fail more often than they succeed.
"When we look at deals on a transaction basis, big transactions fail to create shareholder value three times out of four," said David Harding, a partner with Bain & Co.'s Boston office who co-wrote the recent book Mastering the Merger.
Merged companies are distracted and inward-looking for at least two years after the deal, a period in which they often lose more ground to more focused competitors, he said.
Their earnings suffer because of the high cost of integrating computer systems and consolidating buying and distribution operations, not to mention severance packages for laid-off employees.
Such costs create "negative synergies" in the early months of a merger, Harding said. And if Kmart and Sears continue to operate as separate entities, it will be hard to overcome that and create efficiencies.
"They need to be maniacally focused on putting these companies together," he said. "What you don't want to become is a zombie," a half-merged company that can't reap the promised benefits.
One thing the merger might do is give Lampert a way to leave Kmart, retail analysts said.
He will be able to close under-performing Kmart stores and sell the real estate or convert them to Sears stores.
"My guess is Kmart will go away in the next three or four years," said Whalin, "I've wondered why it existed at all."
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