HOFFMAN ESTATES, Ill. (April 18, 2006) — Sears Holding Corp. is testing its Sears Auto Centers format in Kmart stores—a move that, if rolled out companywide, could double the size of Sears' auto-repair business and make use of hundreds of vacant repair shops at Kmart stores around the nation.
Some of the first Sears Auto Centers are expected to go into Kmart stores in the Detroit area, according to persons familiar with the plan. U.S. Auto Care L.L.C.'s Big O Tires Inc. franchise had been operating as many as 13 outlets in Kmart stores in the Detroit area since March 2003.
The Big O franchise in Detroit went into Chapter 11 bankruptcy reorganization in October and shuttered the outlets in March after Kmart told the Bankruptcy Court that it had another tenant for the spaces. Kmart declined to name the potential tenant in court filings, but persons familiar with the operation say Sears officials have been in Michigan looking to turn at least some of the former Big O locations into Sears Auto Centers.
Kmart has had a love-hate relationship with its auto repair business for decades, valuing the shopping traffic it brought to the store while customers waited for their cars to be serviced, but never quite figuring out how to run the business profitably. Kmart got out of the auto repair business in 2002, when Penske Auto Centers Inc.—which was operating 563 Kmart auto service outlets—shut them down after the discounter entered Chapter 11.
Sears has a long history with automobile businesses—from selling cars in its catalog in the 1900s to selling DieHard batteries today. Auto repair traditionally has been a big profit contributor to the retailer, but the business has struggled lately. Annual sales for the more than 850 Sears Auto Centers are estimated between $1.5 billion and $1.8 billion.
“It's been a very important part of Sears' business for a long time and a very profitable part of the business,” said George Whalin, CEO of Retail Management Consultants Inc., a San Marcos, Calif.-based retail consulting firm. “It's a natural extension. With their experience, it makes sense” to put Sears Auto Centers in Kmart stores.
Sears Chairman Edward Lampert, who engineered the combination of Sears and Kmart a year ago, knows the auto business well. Through his ESL Investments Inc. hedge fund, Mr. Lampert is the largest shareholder of two auto firms. He owns 29 percent of Florida-based AutoNation Inc., the largest U.S. auto retailer, and 22 percent of Tennessee-based AutoZone Inc., the nation's largest seller of auto parts. Mr. Lampert also is Sears' largest shareholder by far, with a 41 percent stake in the mass merchandiser.
If Mr. Lampert has any notions of combining the auto businesses, he's not saying. But he made clear at Sears' annual shareholders meeting last week that he wants to test a wide range of ideas before making any decisions about the company's future. Sears employees and shareholders alike need to be comfortable with “ambiguity,” he says. “The strategy is about, 'Let's try a lot of things and see what works,' “ Mr. Lampert said at the meeting.
The Hoffman Estates-based retailer disclosed in its annual report filed last month with the Securities and Exchange Commission (SEC) that it is testing the addition of Sears Auto Centers to Kmart stores.
A Sears spokesman wouldn't reveal locations or comment beyond the SEC filing.
The move comes as competition in the auto repair business intensifies. Wal-Mart Stores Inc. operates Tire & Lube Express centers in about 1,700 of its 3,100 stores. And Home Depot Inc. is starting to sell auto supplies at 10 stores in Florida as a pilot project.
In case the Sears Auto Center test doesn't go well, Sears has an alternative: Auto-Lab Franchise Management Corp. of Michigan has agreements to open centers at Kmart stores in six states and is eager for more, according to co-owner Bill Downs. Nine sites are slated for Illinois, including one at a Kmart in New Lenox that opened this year.