Sears Kmart in 2005, Sears

Sears Kmart In 2005, Sears and Kmart consummated their merger, bringing together two former retailing powers. The move had been forced by changes in the technological and competitive environment that had resulted in substantial changes in the retail industry. Old-school, mall-based department stores were falling out of favor and both Kmart and Sears were losing market share. After the merger, the combined entity was the eighth-largest retailer in the United States. However, since the first full fiscal year together in 2006, revenues and profits at Kmart Sears have declined.

This paper will analyze the company to determine the major problems it faces, then identify potential solutions to those problems. The retailing industry is generally unfavorable. The power of buyers is high. They are not price-takers, and must often be enticed with discounts. The products are not well-differentiated, there are many substitutes and buyers have ample information. The power of suppliers is moderate. Suppliers need the volume Sears Kmart offers, but they can often go to other competitors as there are low switching costs.

Suppliers are not concentrated, so they lose power because of that. Barriers to entry are high. The industry is at or over capacity. Large retailers rely heavily on economies of scale. There are high capital requirements in the industry and the learning curve with respect to merchandising and distribution is steep. There is high threat of substitutes. Buyers are inclined to substitute one retailer for another as there are no switching costs and only lukewarm brand loyalty.

Threats to Sears Kmart business include online retailers and retailers from other sectors or more specialized niches that market the same products. There is always a price-performance tradeoff for retail customers, which means Sears Kmart must offer a stronger value proposition than their competitors. The degree of rivalry is high. There are significant exit barriers, as many industry firms own substantial amounts of real estate and inventory. The industry is presently characterized by overcapacity.

There is high diversity of rivals, but in any given niche or segment there are dozens of competitors. Sears Kmart has a few strengths that they can leverage. One is that they own two of the most iconic brand names in retailing. There is instant brand recognition among consumers. Additionally, Sears Kmart has a good real estate situation. They typically have anchor positions at top malls, which can help to drive traffic. The company has many weaknesses however.

Many stores are outdated in design, and simply do not meet the needs of today's consumer (Duprey, 2008). As a result, the company has suffered consistent year-over-year same store sales declines (Ibid). This has resulted in poor financial performance -- declining revenues and declining profits. The firm's strong brands have lost some of their meaning to consumers as well -- the company is stuck between being a discounter and a high end retailer.

According to Michael Porter's generic strategies, this results in a company being unable to gain any competitive advantage, eventually resulting in its downfall (QuickMBA, 2007). The main opportunity for Sears Kmart right now is to restore the company to its former level of success. They need to improve the brand image, choose a long-term strategy, overhaul their stores and restore profitability. They still have customers, but they are losing them consistently.

The company has taken steps in recent months to leverage the combined power of the two names, increasing marketing and product line synergies (Guy, 2009). There are many threats. Online retailers are a threat, as are high-end specialists. A more important threat comes from discount retailers. They are able to dramatically undercut an operator like Sears Kmart. Firms like Target and Wal-Mart have substantially more buying power, better distribution networks, lower cost structures and more clearly defined brand identities than either Sears or Kmart.

Discount clubs are another threat, as operators like Costco move into product lines normally carried by department stores such as Sears. The value chain at Sears Kmart is focused mainly on the latter stages. The company has solid inbound logistics and operations, but the bulk of its value is with respect to marketing and service. These are the key sales drivers for Sears Kmart. Product mix and store location are among the most important ways in which Sears Kmart adds value.

Marketing efforts bring customers to stores; merchandising efforts induce them to buy more. Sears Kmart also places more emphasis on service that the discount companies with whom they compete. The recent difficulties experienced by Sears Kmart is a function of their falling behind their competitors with respect to some of these key value chain elements; and the fact that the value chain in the industry has shifted towards inbound logistics and distribution. Financially, Sears Kmart remains profitable, but their ongoing success is in jeopardy due poor trends.

Revenue in fiscal 2009 was 11.78% lower than in 2006. Net profit was down 92%. The company has not been able to reduce costs as fast as they have lost sales. Sears Kmart is relatively liquid, although their quick ratio has deteriorated as they've used their excess cash to buy back shares to prop up share prices (Duprey, 2008). Inventory and receivables turnovers have remained relatively steady, though they don't compare well to the industry. The capital structure has remained stable.

The company's gross margin is in line with the industry, but other margins are worse. Returns on equity, assets and capital are relatively poor. The financials reveal that this company's operations are stable, but that they are not as strong operationally as other firms in the industry.

Based on this analysis, I have determined that the two major problems facing Sears Kmart right now are declining sales and their lack of a strong competitive position - they have no competitive advantage and are therefore unable to focus on specific operational areas in which to improve. My recommendations to Sears Kmart are as follows. The company needs to reposition its brands.

Their brands are one of their greatest strengths, but at present consumers are unclear as to the meaning of the brands -- they are not quite discount but they are not high end either. Sears Kmart's traditional strengths have been in marketing and service, rather than distribution. In fact, it would be difficult to beat Wal-Mart and Target on the logistics/distribution part of the value chain. Therefore, Sears Kmart needs to build its brands upward.

The Kmart brand may need to be phased out under this scenario -- it has little future as a true discounter but that brand cannot be moved to anything even close to upscale. The Sears brand can, however. The company needs to establish a clear competitive position as the higher-end department store. This will allow it to focus its investments on its comparative advantages in the value chain. The other recommendation is to invest in the shopping experience, rather than buying back shares.

The firm is squandering its strong cash position, which was $4.44 billion in 2006 but is just $1.173 billion now. This cash has gone into defending the share price but this does not address the key issues with respect to the shopping experience. The Sears shopping experience no longer appeals to consumers. Sears should focus its spending on areas that will actually improve company performance, such as upgrading the stores, increasing the quality of the product mix, and improving the creativity of its promotional mix.

In general, Sears Kmart has strong brands that have languished in recent years. The company is.