AKRON (Dec. 8, 2004) — Real estate has emerged as one of the prime considerations at the center of Kmart Corp.'s acquisition of Sears, Roebuck and Co.
The same factor may be at the heart of what effect, if any, the merger will have on the retail tire and auto service businesses of competing in-dependent tire dealers.
The two big-box retailers announced the $11 billion deal Nov. 17. The agreement will create a combined company, Sears Holdings Corp., with about $55 billion in annual revenues and 3,500 stores. Though presented as a merger, Kmart emerges as the buyer since its stockholders get one share of the new company for each Kmart share while Sears shareholders will elect for either $50 in cash or a half share in the new company per Sears share.
Still, the deal seems to focus on growth of the Sears name. A “substantial number” of Kmart stores will be converted to the Sears nameplate, the companies said.
“I think that the opportunity for Kmart to become Sears stores is far greater,” said the deal's architect, Edward Lampert, Kmart chairman and majority shareholder who also owns 15 percent of Sears stock. “I don't really think there is much (of) an opportunity for Kmart to go into malls.”
For this reason, many industry watchers believe the deal—which creates the third largest retailer behind No. 1 Wal-Mart Stores Inc. and No. 2 Home Depot Inc.—is primarily a real estate deal. Especially considering the fledgling Sears Grand format—an off-mall, stand-alone store—Kmart's many locations in big-box shopping centers provide ample opportunities. Sears has opened four Sears Grand stores in the past 14 months. Observers also speculate about possible sales of Sears' 870 mall locations, which are valued at $5 billion to $7 billion.
“I am totally convinced it's just a real estate deal,” Carole Pechi, a retail real estate attorney at Holland & Knight L.L.P. in Chicago, told Crain's Chicago Business, a sister publication of Tire Business.
Real estate may be the key for the tire business as well. In 2002, Penske Auto Centers Inc. closed all 562 of its tire stores in Kmart outlets, leaving a spatial void that has largely not been filled. Kmart said more than 500 former Penske sites still sit empty. But a Kmart spokesman declined to speculate whether Sears' auto centers or a third party may fill some of those vacancies, noting more details should be clear after the deal is approved by the end of March.
A Sears spokesman also said it's too early to know what role the retailer's auto centers will play in the redesigned company, though he added the centers are an important part of Sears' business. Sears Grand stores are expected to have an auto center component.
“Sears Grand has really taken all the best that Sears had to offer and adding to that everyday and convenience transactional items” such as food and music, he said.
Steve Wilson, president of U.S. Autocare in Southfield, Mich., will watch that development carefully. His 11 Big O Tires Inc. franchise stores are connected to Kmart stores—four are freestanding and seven are joined. The Rochester Hills Big O store will close by the end of February since that Kmart store was among a batch of 54 the retailer sold to Sears earlier this year. That Big O outlet will be replaced with another opening in Sterling Heights, Mich., in March.
Mr. Wilson, a former Kmart executive, said he views the Kmart/Sears deal as a positive move for the retailers and his business.
“People say, 'Well, it's two has-beens merging together and they're still only the third largest company,'” he said. “But when you take a look at what Sears does well and what Kmart does well and the brands that Sears brings and the real estate Kmart has, I think it's a win-win, and honestly we're looking forward to it.”
Even since the announcement, he's noticed an uptick in traffic in the Kmart stores, he added. His stores posted the best month in company history in October and records for volume on the Friday and Saturday after Thanksgiving.
The only ambiguity for U.S. Autocare would be whether his shops could stay if any of the Kmart stores where they're located become Sears stores. If they can stay, he said, “it's nothing but a positive for us.”
Jay Huff, president of Brooks-Huff Tire & Auto Centers in Baltimore, said he's not expecting any impact from the merger. His more pressing competitive concern, he said, is the onslaught from Tire Kingdom Inc., which now owns Merchants Inc. and National Tire & Battery locations in the area, and Monro Muffler Brake Inc., which owns Mr. Tire and Donald B. Rice Tire Co. in metro Baltimore. Both companies have combined advertising for all those stores, Mr. Huff said.
“Those are the things that I would say are affecting the retail automotive service market in the Baltimore metro area,” he told Tire Business. “The Kmart and Sears (deal) to me doesn't make one iota of difference.”
He added that a Sears Auto Center down the road from one of his four shops often sends customers with complex service needs to him. Mr. Huff said Sears also has not been very aggressive in tire retailing.
“I don't look for them to get out of that automotive end, but I also don't look for them to get more aggressive in it,” he said.
Kerry Gross, owner of single-outlet Gross Tire Center Inc. in Williamsport, Pa., said he also isn't overly concerned about renewed competition from a combined Sears and Kmart. He said many tire dealers are easily intimidated by Sears, but he's found a good way to compete: Any customer who mentions Sears' lower advertised price is shown a list of the add-on charges the retailer carries, he said. With those factored in, Gross Tire's all-inclusive prices are competitive.
“They're not giving stuff away,” he said of Sears.
Again the only question mark for him is the empty Penske space sitting in a Kmart about five miles down the road.
Crain News Service contributed to this report.