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Sunday, November 21, 2004

Kmart's Acquisition of Sears: It Will Take More than Scale to Unseat Wal-Mart

New entity will have $55 billion in combined revenue but must overcome significant barriers to succeed The rumored acquisition of Sears, Roebuck and Co. by Kmart Holding Corporation came to fruition today. The newly established entity, Sears Holding Corp.—the third-largest retailer in the United States—will trail only Home Depot and number-one retailer Wal-Mart Stores. On paper, the acquisition looks like an ideal marriage. By combining supply chains and aggregating its purchasing power, management estimates at least $300 million in savings. But this new scale would not be googd enough to unseat Walmart says this Yankee viewpoint. Excerpts:

Scale Requires Alignment: With 3,500 stores, it’s easy to be blinded by the massive scale of the newly formed retailer. However, significant barriers must be overcome before this acquisition can be called a success. Sears Holding Corp. must align the capabilities and goals of merchandising, the supply chain and IT. Neither retailer has proven capable of doing it. Those failures don’t bode well for the future.The litmus test for effective alignment has to be Wal-Mart.

With mostly organic growth and the constant Always low prices. Always. mantra, Wal-Mart has created and maintained a culture that eliminates business process ambiguity. One only has to look at how Wal-Mart introduces new technology to see the power in alignment of goals and objectives. New technology must meet the deceptively simple criteria of lowering cost and improving service. Once past that, every level of the organization the technology touches—from headquarters personnel to store associate—has the responsibility to test the technology in an applied setting. If approved, the technology is mainstreamed and use is mandatory. The newly created Sears Holding Corp. doesn’t have the common culture typical of an organically grown company. Store format, operating procedures and target demographics differ widely within the new entity, which makes swift and decisive action to align goals and capabilities all the more critical.

Merchandising Is King :The decisions Sears Holding Corp. makes in this area will have a great effect on the performance of the supply chain.An integrated merchandising strategy—with goals based not only on revenue but also on margin—is essential to fast-tracking the alignment process and addressing the concerns of downstream business functions. Naturally enough, Sears Holding Corp. must build supply-chain capabilities around efficiency. However, those capabilities also must be responsive to the merchandiser’s ongoing need for speed and flexibility.

Lastly, on the scale that Sears Holding Corp. will operate, technology is essential. The company must become more technically adventurous as it drives for differentiation. Unlike the direction that Kmart took 4 years ago—which almost resulted in the destruction of the company—technology must be viewed as the enabler for business success, not the cause. We think the odds are against Sears Holding Corp. working. One thing is certain: It’s time to challenge conventional retailing wisdom and start building an integrated blueprint for the future.
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