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Will Sears Survive

Once America’s largest and most successful retailer, now Sears is being evaluated by some observers as a firm which might not survive. Bob Vereen reports…

The decline of this one-time retailing titan is an amazing – and sad – story and fears about its survival are increasing, though its troubles began long before Edward S. Lampert became chairman of Sears Holdings, the firm which now controls both Sears and Kmart.

Sears began more than a century ago as a mail order business, evolved into a dominant hardlines retailer, then was one of the first retailers to recognize the importance of giant shopping malls and became an anchor store in hundreds of mall locations. By then it had evolved into a full-fledged department. It remained the most powerful seller of appliances and tools under its private-brand trade names of Kenmore for appliances and Craftsman for hand and power tools, garden equipment and automotive supplies.

With more than 850 stores in major malls plus some 1,200 retail and franchised catalogue stores and offices in smaller communities, Sears became America’s largest retailer. But things began changing dramatically more than two decades ago when mass merchants like Wal*Mart, Kmart and Target attacked the company from the soft goods side and Home Depot and Lowes attacked it from the hardgoods standpoint.

Sears never sold products at a low margin, its goods were considered high quality and margins reflected that. Its Craftsman tools, for example, boasted a lifetime warranty. In mall locations, its retail prices reflected the cost of those locations, whereas Wal*Mart, Target, Kmart, plus Home Depot and Lowes, were operating in lower cost, stand-alone locations. Sears’ sale prices in its weekly advertising promoted significant markdowns, but always from a rather substantial base. Wal*Mart kept promoting its everyday low prices, as did Home Depot when it began. The results were obvious – customers began recognizing that Sears was a high priced store.

Male customers found mall locations were not the most convenient, compared to local hardware stores or the home center chains, which offered easier parking and closer locations. The hip crowd had choices like Gap, Banana Republic and several other agile style-oriented chains, while families could patronize chains like Kohls and a resurgent longtime competitor like JC Penney. It is reported that Sears’ move to replace branded apparel with new private label lines resulted in a 14% decline in apparel sales in 2005. Other Store Types Tested Over the last decade, Sears management has tried numerous new ventures, most of which proved eminently unsuccessful. It tested some large stand-alone specialty stores called The Great Indoors, then opened stand-alone giant stores called Sears Grand, and later a short-lived smaller concept called Sears Essentials. Sears Grand did not enjoy spectacular success but it is surviving in some locations, whereas Sears Essential failed. One of the first changes Lampert made to the business was to close them or convert them to the Sears Grand format. In another cost-cutting move, it’s reported that the transfer of Sears Essential units to the Sears Grand format is “on hold” until 2007. Some of the Great Indoors units also have been closed, but some are surviving.

Earlier, Sears’ efforts to build on its Craftsman, Weatherbeater and Easy Living paint strengths led it to open stand-alone Sears Hardware stores – units of around 15-20,000 sq ft. But the stores lacked retail excitement and merchandising flair, and dozens have closed during the last few years. Some years ago, it also purchased Orchard Supply Hardware, a very successful California-based chain of large hardware stores, which it tried to bring into the Midwest without success. Today, approximately 40% of the surviving Sears Hardware stores are devoted to appliances, and space allotted to hardware store basics has shrunk, making them less of a threat to hardware stores. These competitive problems have been gradually eroding the company’s market share over the past two decades, long before Lampert, a hedge fund manager and massive investor, entered the picture. When he assumed control of the company, he began imposing his own management concepts on the company. What he has been doing seems amazing to many other retailers and to retail analysts. While he is wringing hundreds of millions of dollars in savings from the combined Kmart-Sears company, most industry experts contend it is being done by impairing the long range competitive strengths of the company and its two retailing divisions. For example, Sears Holdings cut its marketing costs $226 million last year, with spending for Craftsman and Lands End (the mail order apparel business it bought) being slashed. Sears’ market share of major appliances has been steadily decreasing over the last few years. While it still holds #1 market share, it is fading in comparison Home Depot who now have more than 10% share.

Many investment analysts suspect that Lampert’s true game plan is to sell large amounts of the company’s real estate, however, the current real estate market is not favorable for this. When Lampert first attained control of Kmart, he sold a number of locations, some to Home Depot, and closed other under-performing locations. Retail experts feel that Sears’ 3 big brands, Craftsman, Kenmore and Lands’ End – which comprise more than 20% of revenue – could become faded memories if cuts continue. Lampert has put Kenmore appliances and Craftsman products into some Kmart stores, but the Kmart customer is not likely to buy those higher-priced lines. It’s true that Sears’ profitability has improved under Lampert’s management, but largely because of cost-cutting. Its same-store sales continue to decline, a very dangerous sign for any retailer. Several suppliers have recently reported declining sales.

Sears Grand Stores are one-story units similar to WalMart and Target

Sears Holding’s Kmart division is being cut back as well. Martha Stewart Living Omnimedia Inc, which has a contract to develop home goods for Kmart through to January 2010, recently signed a contract to develop products for rival Macy department stores. Its Martha Stewart Everyday products dropped 8% in sales at Kmart last year as Lampert cut ad spending 21% to $190 million.

Sears’ mall locations are no longer as prime as they once were. Couple that with an aging Kmart store base and hundreds of older stores in need of refurbishing, and you have two major problems that need solving. Sears Holding’s 2nd quarter 2006 results show an amazing 83% earnings gain (partially attributable to litigation gains) but significant same-store sale declines – 6.3% for Sears units and 0.6% for Kmart stores. Total sales were $12.8 billion for the quarter. Lampert is succeeding in increasing Sears Holdings earnings, but at what cost? He is curtailing marketing expenses and has been reluctant to make major upgrading investments in either retail division. He is exerting tremendous control over Sears’ merchandising activities and is reported to be the only one who can personally OK any new lines. Retail analysts insist that major changes are needed, but Lampert seems to feel that he can continue to increase profits by reducing expenses. But with lower sales generating fewer profit dollars, fixed expenses will become a higher percentage of sales, threatening net profits even more. If same-store sales continue to decline, will there be enough profit coming in to make needed investments? If marketing budgets are cut, will customers continue to shop for Sears’ famous brands?

Some industry observers remember Sears’ famous slogan: ‘Sears, Where America Shops’. Wags say it should now be changed to: ‘Sears, Where America used to Shop’.

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