Sears/Kmart Battles Business Model Relevance
Earlier this year, Sears Holdings announced it will shutter three percent of its stores, or 120 stores. Sears also reported same store sales decrease of 5.2%- 4.4 percent at Kmart stores and 6 percent at Sears. According to the company:
“Kmart’s quarter-to-date comparable store sales decline reflects decreases in the consumer electronics and apparel categories and lower layaway sales. Sears Domestic’s quarter-to-date sales decline was primarily driven by the consumer electronics and home appliance categories, with more than half of the decline in Sears Domestic occurring in consumer electronics. Sears’s apparel sales were flat and Lands’ End in Sears’s stores was up mid-single digits.”
Closing these stores, according to the company, will “generate $140 to $170 million of cash as the net inventory in these stores is sold and they expect to generate additional proceeds from the sale or sublease of the related real estate.”
The short-term impact of these maneuvers may be positive, but the Sears business model is struggling mightily. Despite powerful brands at their disposal such as Kenmore and Craftsman, Sears seems somewhat irrelevant.
There are several powerful trends which Sears seems to be fighting:
- Decreasing relevance of full-scale malls
- Declining demographics for Kmart locations
- Discount retailing business model continues to hurt mall operators such as Sears
- The Kmart business model seems destined to be an also-ran discounter to Target and Wal-Mart
- Subdued home-building and remodeling suppressing appliance sales
- Online retailing cutting into the market share of brick and mortar retailers
It seems that the sum of the parts is greater than the value of the whole. Sears is reputed to have valuable real estate holdings. The Craftsman and Kenmore brands could be quite valuable to the right buyers. It doesn’t make sense for Sears to continue to mount operating losses and further erode the asset base of the company. Instead, the company might consider an orderly wind-down. This might look like:
- Close stores sitting on valuable ground and sell the property
- Operate leased stores until the end of the lease or buy out of leases for highly unprofitable stores
- Find a buyer for Craftsman. Candidates might include tool companies such as: Stanley, Snap-On, or Makita. Other buyers wanting to leverage the brand could include: NASCAR, Dungaree, Ford, Chevy, Harley Davidson, John Deere, The Speed Channel, or dozens of others.
- Find a buyer for Kenmore. This might prove trickier than selling Craftsman. On the one hand, Kenmore is just a house brand built by Whirlpool and other appliance-makers. On the other hand, Kenmore is a powerhouse retail brand. The issue is that the probable buyers are the same companies that make the product. Let’s assume that these companies would not pay a premium price for Kenmore. However, up and coming Korean or Chinese appliance companies might pay a hefty premium for instant access to top tier status.
- Make Sears and/or Kmart an online brand only
The last five years has seen too little dramatic action to innovate the Sears business model. The incremental approach is not working for Sears. It’s time for disruptive innovation, not adjustments. If Sears cannot show signs of growth, it’s time to salvage the still valuable assets and deploy them at a higher and better use.
Here is a nice analysis of what Sears did wrong over the years. https://www.citylab.com/life/2017/10/sears-was-the-amazon-of-its-timeuntil-it-made-preventable-mistakes/542043/
