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Annette Hacker, manager, (515) 294-3720

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Kevin Brown, News Service, (515) 294-8986

Annette Hacker, News Service, (515) 294-3720

Iowa State sources offer expertise, perspective on Sears/Kmart merger

AMES, Iowa -- Iowa State University experts can provide perspective on the Nov. 17 announcement that Kmart Holdings Corp., Troy, Mich., is buying Sears, Roebuck & Co., Hoffman Estates, Ill., for $11 billion. The merger will create the third-largest retailer with $55 billion in annual revenues. Both the Kmart and Sears brand names will be maintained. Headquarters for the new firm will be in Chicago. The merger is expected to be completed in March 2005.

The merger offers both challenges and opportunities for the new company. Iowa State experts offer the following views:

Battle for market share; need by both to revamp image

Sanjeev Agarwal, professor of marketing, at Iowa State's College of Business, said both Kmart and Sears have struggled for years with declining market share and customer loyalty. He said the two are "tired brands in dire need of a revamped image." Both Kmart and Sears, he said, view Target as the role model. Target is successful in "upscale discounting," a strategy the new combined firm will attempt to follow. Kmart's upscale clothing lines -- Joe Boxer and Martha Stewart -- and Sears' name-brand electronics, home appliance, automotive and hardware products will combine to offer customers competitive and appealing product lines, he predicted. Beyond the right product mix, Agarwal said the combined company must reduce overhead and increase location coverage. The larger size of the merged company will help on both fronts. The biggest challenge in what he sees as a "win-win" for both brands is "how they can renew their image and lead trendy customers to forget that their parents and grandparents shopped at these places."

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Trend is to "off mall" shopping; purchasing synergies may result

Cynthia Jeffrey, associate professor of accounting at Iowa State, said the trend in retailing has been to "off mall" locations. Jeffrey said this is due partly to the expense of constructing malls and the common costs shared by tenants. "Sears, once an anchor in almost every mall, has been moving away from this model. This merger accelerates that trend," she said. While both Kmart and Sears stores will continue to operate, the expectation is that some Kmart stores will be converted to off-mall Sears Grand stores, similar to a prototype in Gurnee, Ill. These stores sell grocery and convenience items and have been well received by consumers. An expansion of product lines at each company to build on the strengths of the other may improve competitive positions for both Sears and Kmart. "Some Martha Stewart products already are available in Sears Canada stores, so an extension of this product line is likely," Jeffrey said. Two threats immediately for the merged firms: debt will be more expensive because bond-rating firms are downgrading Sears' credit-worthiness, and the power and growth of Web shopping are weak areas for both firms. "Neither Sears nor Kmart have strong Internet sales," she said. " and have seen significant growth in sales but this merger is not likely to improve the Internet presence for Kmart or Sears."

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Merger is one of real estate interests; do two weak firms equal one viable one?

Virginia Blackburn, associate professor of management at Iowa State, said the combination of Sears and Kmart is more a "merger of real estate than retailers." Kmart, she said, is worth more as a real estate entity than as a retailer. Sears also owns valuable property but not in non-mall locations. Neither firm has been performing well and each has unique issues. Kmart is losing the discounter market to Wal-Mart on the low end and Target at the higher end. Sears is suffering from a general decline in mall shopping where "attendance has been declining dramatically for many years," Blackburn said. Both firms are "saving themselves through acquisition," relying on the location strength of Kmart and the strong brand names at Sears. There also will be purchasing advantages that will allow the two to put pressure on suppliers to keep prices low. But, "do two weak companies coming together equal a strong surviving firm?" Blackburn asks. Another consequence, she said, is that "many lower wage workers will be put out of work by this merger, all in the name of consumers saving a few pennies on items such as laundry soap or hamburger."

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Impact on small business muted; customer identification a must for success

Jon Ryan, director of the Iowa Small Business Development Center, an outreach unit of Iowa State's College of Business, said the impact of the merged company on small retailers will be muted. "Small retailers have long adjusted to dealing with big box retailers, whether in general sales such as Target and Wal-Mart, or category killers, like Lowe's and Toys 'R' Us," he said. Small businesses focus on the things the big guys can't or won't do, such as provide products targeted at unique buying habits, special needs or geographic nuances. Services like free delivery, special handling, custom orders, etc., also set small businesses apart from big retailers. "That there is now a not really new big retailer won't really mean much in competitive terms," Ryan said. To be successful, he said the new company must "craft a more effective message, offer competitive pricing, stronger advertising messages and better all-around management." The big question for the new company to answer is: "Who are our customers?" The short answer, Ryan said, "is they don't know."

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