Kmart and Sears merge
Two of America's top retailers announced they will merge. General merchandisers Sears and Kmart combined will make the #3 US retailer overall, and #2 vendor of general merchandise. Both companies have been suffering in recent years, as rivals Wal-Mart and Target have gained market share. While Kmart finances have been looking up lately (they came out of bankruptcy), that's partly due to ruthless policy of dropping money-losing stores. Both store chains have reputation of dowdiness, so the new company will have quite a challenge to stop losing share to the big two.
The surprise announcement amounts to an $11.5 billion deal, if agreed to be stockholders and regulators. The combined stores have $64 billion in sales. Sears has around 2,300 locations in the US while Kmart has about 1,400. By contrast, Wal-Mart has revenues of $256 billion from around 4,800 stores. Home Depot, the number #2 retailer and competitor in areas like tools an appliances, has $49 billion in sales. Target with 1,275 stores has $48 billion.
One area where Sears is still #1 is in appliance sales, though it has seen its share eaten away at by big box retailers Best Buy, Lowe's, and Home Depot. The hope is that Sears stores, which are in malls, can also branch out through the usually free-standing Kmart locations.
Another area where the combined company will gain some advantage will be in beating down cots, partly through eliminating competing stores, but especially by beating up on suppliers that Wal-Mart and Target do. In an article in the San Jose Mercury News ("Suppliers Worry About Kmart-Sears Merger" , 11/17/04), manufacturers who have gutting easier treatment from the smaller companies indicated that they are worried about just that issue. That's especially an issue for the smaller suppliers, according to the article.
[W]hereas several companies may be making drills for Sears and Kmart now, in the future the combined company may seek a single source.
"Say today Sears has three suppliers of (something) and Kmart has three. Combining them you don't get six," [ a consultant] said. "If I was No. 4 or 5, I would be concerned. If I was one of the top three I'd be thrilled."
In the end, the biggest losers form the mergers may be competing smaller general retailers (Target, J. C. Penney, Kohl's) and smaller appliance stores. The result may be more bankruptcies or more mergers. In any case, it is pretty clear that further consolidation is on the way.
For the new Sears/Kmart company, even being #2 in general merchandise may not be enough, since it will still be competing against a no-holds barred #1 in Wal-Mart and a very adept and growing #3 in Target. One principle this illustrates is that as industries consolidate, they tend to converge. The new Sears/Kmart will doubtless start looking and acting a lot more like Wal-Mart, in the same way Target has.
