Sears Makes "Grand" Plans

In today's ultra-competitive retail landscape, no player is more vulnerable than Sears Holdings Corporation. Sears operates the Kmart chain in addition to its namesake stores.

Financial whiz Eddie Lampert brought Kmart out of bankruptcy and turned into a Wall Street darling by shuttering scores of "underperforming" stores and selling off real estate. Last year, Mr. Lampert's Kmart Holdings Corp. acquired Sears, Roebuck & Co. but assumed the Sears name and its headquarters in Illinois. Wall Street analyists applauded the move, hoping that Mr. Lampert would consolidate the two operations by closing even more stores and "unlocking" the value of Sears' extensive real estate.

The management at Sears Holdings has maintained that the merger was about more than real estate and stock prices. Prior to the merger, both Kmart and Sears, Roebuck & Co. were struggling retailers with uncertain futures. Sears had fallen from its perch as the nation's largest retailer; with most of its stores in major malls, it was having trouble competing with the likes of Federated Department Stores and JCPenney. Kmart suffered from outdated stores, a poor reputation, and ruthless competition in the "big-box" sector (Target and Wal-Mart). Mr. Lampert and his team of executives pledged to turn the stores around.

Before the merger, Sears began an "off-mall" push. The company recognized that it couldn't grow if it continued to rely on stores in malls, as very few malls have been built in the last decade. Its solution was the Sears Grand concept: freestanding "big-box" stores containing upwards of 200,000 square feet. The Sears Grand stores included food, health and beauty items, household cleaning supplies, greeting cards, and other items not found in Sears mall stores. Sears felt this new concept represented a better way to compete with the likes of Wal-Mart and Target.

When Sears was acquired by Kmart, it had only opened a handful of the "off-mall" Sears Grand stores. The management of the combined company decided to accelerate the "off-mall" push by converting Kmart stores into another new format, Sears Essentials. The company confidently announced that 400 Kmart stores would become Sears Essentials units by 2007.

Sears Essentials stores, about half the size of the Sears Grand units, were intended to combine the strengths of Sears (hardware, appliances, electronics) with the strengths of Kmart (food, pharmacy, health and beauty items). The stores weren't extensively remodeled, nor were they heavily advertised. Results from the first 50 Sears Essentials stores have been mixed, forcing Mr. Lampert and his team to re-evaluate the concept.

By operating three seperate formats (mall stores, Essentials stores, and Grand stores), Sears was running the risk of "muddying" its brand. Furthermore, the Essentials stores weren't significantly different than the Kmarts they replaced; if Sears wanted to attract new customers to its "off-mall" units, it had to offer a totally new shopping experience. It was a mistake to not remodel the stores more thoroughly.

This week Sears announced that it was dropping the Essentials format and would market all its "off-mall" locations as Sears Grand. The smaller units will carry all the product lines as the larger ones, just in a more limited assortment. Several Kmart stores will be completely remodeled and converted to Sears Grand in the coming months. The former Kmarts that are operating as Sears Essentials will also be converted to Sears Grand and be given another makeover. This shift in strategy gives the "off-mall" push a better chance of long-term success.

If Sears Grand proves to be a successful format, expect the remaining Kmart stores to be converted in the next 5 years.

Previously on P.U.
Is Sears Stumbling? (11/2/2005)