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Sears, Kmart See Post-Merger Synergies In CE

11/18/2004 08:48:00 AM Eastern

New York — Sears chairman Alan Lacy cited consumer electronics as one of several key product categories that stand to benefit from the proposed merger of his retail chain with Kmart.

“Kmart has more merchandising expertise in DVDs [software] and gaming while Sears is better at bigger ticket items like TVs,” he said at an analyst/press conference, held here following the companies’ blockbuster merger announcement yesterday.

But the merchandising synergies will not extend to major appliances, according to Lacy, who told TWICE that white goods will not be added to the Kmart mix.

Indeed, most of the benefits of assimilation, including real estate, brand portfolios and skill sets, would seemingly accrue to Sears as it pursues its off-the-mall growth strategy via the new Sears Grand format — suggesting the possibility that the Kmart nameplate could go the way of the Blue Light Special.

Recently named Kmart CEO Aylwin Lewis told TWICE that it was “too soon to determine” whether the two chains would maintain separate, dedicated buying and merchandising groups, or whether the proposed parent company, Sears Holdings Corp., would consolidate those functions into one organization. Calls to Tasso Koken and Ray Brown, chief CE merchants at Sears and Kmart, respectively, were not returned at press time.

“The first mission,” Lewis said, “is to get through Christmas. Then we will work with the office of the chairman” — comprised of himself, Lacy and Kmart’s chairman Edward Lampert — “to see how we will make it all work.”

Lewis added that a separate transition team had also been created to help integrate Sears — the nation’s fourth-largest retailer behind Wal-Mart, Home Depot and Target — and No. 7 Kmart, which also trails Lowe’s and Best Buy.

The combined entity, to be based at Sears’ headquarters in Hoffman Estates, Ill, would become the third-largest retailer, with $55 billion in annual revenues and 3,450 stores. The merger would realize some $500 million in cost savings and “revenue synergies” from store conversions and shared brand portfolios over three years, Lacy said.

No vendors, CE or otherwise, had been informed of the merger prior to yesterday’s announcement, Lacy noted. Indeed, speaking to the “astounding” speed at which the deal came together, Lewis said he himself had only been notified two weeks prior.

Industry reaction to the news was mixed. “They have different merchandising philosophies,” said Joe Clayton, president/CEO of Sirius Satellite. “The major challenge will be to address their different customer base(s). They will probably have to amalgamate their operations ... and maybe come up with a different merchandising strategy.”

Don Patrican, executive VP of Maxell Corp. of America, described the deal as “a very exciting development on several levels. These are a couple of retailers with very talented senior executives who have been struggling in recent years to find their competitive stance in the marketplace. Now, with their combined strengths, they will have the resources to allow them to focus on success.

“We expect the combination to have a major consumer electronics presence,” Patrician continued. “Although there will be some additional trimming of stores, they will have a critical mass of tremendous store locations to meet consumer needs and help suppliers reach their distribution goals.

“Our understanding is that the buying function will be centralized in Chicago giving them a stronger appeal to their suppliers with respect to their buying power,” Patrician said. “In addition, their new significantly larger size will give them new competitive strength and effectiveness in the retail landscape.”

Without knowing the specifics of the merger plan, Whirlpool would only speculate that the merger could “accelerate Sears’ off-mall growth strategy, which will be beneficial to Sears,” said a spokesman. “And whatever is beneficial to Sears, which is our largest retail partner, is beneficial to Whirlpool.”

David Cartwright, president/CEO of Anaheim, Calif.-based Mobile Edge, a maker of portable storage bags, noted, “The size and efficiencies that the combined companies will gain will certainly give the new company advantages that neither of the companies alone could ever hope for.”

He added, “If they are able to define early on where the new company's areas of focus will be, and if they seriously consider technology categories that might compete with CompUSA and Best Buy, and if they are able to bring in management that knows how to succeed in these areas,” they can succeed in CE. “But that's a lot of ‘ifs.’”

Retail analysts largely lauded the move (as did Wall Street, which sent the chains’ shares soaring yesterday), although they questioned whether either entity has the management talent to execute such a complex consolidation.

But Banc of America Securities analyst Aram Rubinson wondered whether the merger made sense at all. “An operational merger does not create strategic enhancements,” he observed in a research note. “Long term, we expect the combination will not solve their core competitive shortcomings. After all, we have never seen two struggling companies merge into one good company.” — Additional reporting by Steve Smith and Jeff Malester