By Ryan Ori, Crain News Service
HOFFMAN ESTATES, Ill. (May 13, 2013) — Sears has a new strategy for its weakest stores: replace shoppers with servers.
The retail behemoth's vast North American real estate portfolio has languished in an increasingly e-commerce world. So it plans to convert some shuttered or underperforming stores into data centers, a symbol of the shift away from the brick-and-mortar and mail-order retail sales that it once dominated.
Parent Sears Holdings Corp. has formed a subsidiary, Ubiquity Critical Environments L.L.C., tasked with converting some of the more than 2,500 Sears and Kmart properties to data storage facilities with servers, chillers and backup generators. It also plans to top all of its buildings with telecommunications towers that would serve a wide range of needs, including, ironically, those of the e-commerce rivals that Sears is struggling to match.
First up: a Sears store along the Chicago Skyway that will close in July.
Under Chairman and CEO Edward Lampert, Hoffman Estates-based Sears has pushed hard to improve its technology, including a growing e-commerce operation in the Chicago Loop.
But the company continues hemorrhaging red ink as it struggles to articulate and execute a long-term strategy. To slow the bleeding amid 24 consecutive quarterly losses, Mr. Lampert has closed stores and liquidated assets. Recently, Sears hired Oakbrook Terrace, Ill.-based brokerage Mid-America Real Estate Corp. to find tenants for eight Sears and Kmart stores in the Chicago area.
Alternate uses for real estate won't, on their own, save a corporation that lost $930 million in fiscal 2012. But, if the plan is executed effectively, Sears could add much-needed income.
"I think they have found a creative way of adding to their revenue stream and their profitability," said Rick Kurtzbein, a research analyst who covers data centers at New York-based 451 Research LLC.
Mr. Kurtzbein pictures the large, free-standing Sears his family shopped at when he was growing up in Minneapolis. "It seemed like a concrete, fortified building that was an impressive structure," he said. "Using that one example, I could see that building being repurposed."
But he thinks the idea has limitations, saying "the viability of converting to data centers in shopping malls would be questionable at best."
Sears formed Ubiquity in March, led by Chief Operating Officer Sean Farney, who developed and managed Microsoft Corp.'s 120-megawatt data center in west suburban Northlake, Ill.
The subsidiary's name refers to the scope of Sears' portfolio: 71 percent of the U.S. population lives within 10 miles of one of the company's buildings. Mr. Farney, 43, was drawn to the challenge of executing a 21st-century plan at a 127-year-old company trying to find its way.
"It's visionary and out of the box," said Mr. Farney, who leads a staff of four. Mokena, Ill.-based Comdesco Group Inc. is consulting on the telecommunications towers and fiber networks, and New York-based real estate brokerage Newmark Grubb Knight Frank is seeking data center tenants for the 127,000-square-foot Sears set to close on Chicago's South Side.
Only properties in large data center markets such as Chicago and Dallas, on sites with the best access to power and fiber, will be suitable.
Sears' properties likely will serve lower-tier users with smaller budgets. Demand is high for data storage, particularly for small and midsized companies that don't need the top-tier facilities that serve banks, airlines and other businesses that can't afford to go offline even for a moment.
"The idea of building Tier 4, $1,500-a-square-foot, reinforced data centers that can survive a nuclear bomb, that's not what this would be," Comdesco CEO Laurance Lewis said.
Converting a 100,000-sq.-ft. store to a data center could make available about 5 megawatts of electricity dedicated to servers, industry experts say. Development costs can run $50 million to $60 million. Once operating, though, a 5-megawatt data center could produce $7 million to $10 million per year in rent.
Meanwhile, Ubiquity seeks deals with cellphone carriers such as Verizon Communications Inc. and AT&T Inc. to affix antennas to roofs of Sears and Kmart buildings.
"My gut reaction is it's going to be a tough sell," said Jeff Miller, president of the connected solutions group at Bloomingdale-based antenna maker and wireless network developer PCTEL Inc. "There may be some opportunistic wins they may get, but it will be tough as a stand-alone business. Maybe they're sitting on a gold mine and I don't know it."
Ubiquity's obstacle is an industry dominated by the likes of American Tower Corp., Crown Castle International and SBA Communications Corp., each of which controls tens of thousands of towers and rooftop rights and has long-established expertise and business relationships in the niche, Mr. Miller said. Instead, the upstart may be better off signing bulk deals with one of those industry leaders, an option Ubiquity is exploring.
The upside is a 280 million-sq.-ft. portfolio, with most stores in populated areas that need more bandwidth to handle data usage on smartphones.
"That's truly found money," Mr. Lewis said. "Unlike a data center, you're not putting in $50 million to $60 million to build it. The carrier comes out and puts in the tower, and you just collect the rent."
This report appeared in Crain's Chicago Business magazine, a sister publication of Tire Business.