Kmart and Sears – What’s the Strategy

Emory University has an interesting article about the merger of Kmart and Sears.

The merger of Kmart and Sears—which was announced on November 17 and is expected to be completed in the first quarter of 2005—was positioned as a way to rejuvenate a pair of tired brands that have lost ground to "big box" retailers like Wal-Mart. A press release announcing the transaction set the tone with Kmart's 42-year-old chairman Edward S. Lampert noting that, "The combination of Kmart and Sears is extremely compelling for our customers, associates and shareholders as it will create a powerful leader in the retail industry" with "significant opportunities for improved scale and operating efficiencies." Lampert's ESL Investments hedge fund controls Kmart and is the largest shareholder of Sears, with a stake reported to be about 15%.

In a conference call held on the day of the announcement, Lampert noted that, scale is "very important to compete effectively," and went on to explain that mergers can offer an opportunity to "service the customer base with products and services, while driving significant efficiencies and productivity out of the back office."

Unfortunately, these two companies need more than some cost savings and increased back office productivity. Many people have speculated that it's purely a financial play; that Lampert wants the cash flow and real estate. But he talks like he is dedicated to turning the merged companies into a retail power. I'm skeptical because I think retail is a tough industry to be in right now. Of course, Lampert has an impressive record so maybe he will surprise me and extend his golden touch to this deal as well.