In the early 1980s, Sears and Kmart were American retail giants, with gobs of money, huge portfolios of real estate and loyal customer bases that should have made them fast-growing fulfillers of Americans' insatiable demand for more stuff.
Since then, almost everything has gone wrong for the two companies. American retail has been transformed in the past 20 years, and two of the biggest losers in that transformation were Sears and Kmart.
Now Sears, Roebuck and Co. and Kmart Holding Corp., which announced an $11 billion merger agreement yesterday, are hoping that by joining together, they can overcome the decades of strategic missteps that have turned the two former retail innovators into also-rans.
Had it played its cards right, retail analysts say, Kmart could have been the dominant global retailer that Wal-Mart Stores Inc. has become -- instead of a company emerging from bankruptcy with an uncertain future. Sears, meanwhile, with its century-long history as a stalwart of American capitalism, was too trapped by its business model selling goods at huge malls to adapt to consumers who, by the 1980s, wanted products cheaper, quicker and closer to home.
The result: In 2003, Sears and Kmart had a combined $71 billion in net sales -- $5 billion less than in 1988. In that time, Wal-Mart's net sales rose from $16 billion to $230 billion.
"When you fight from a defensive mode, you're never going to win," said Gary Ruffing, a retail consultant with BBK Ltd. in Southfield, Mich., who was an executive of Kmart for 30 years ending in 2001. "To win in retail you have to be the aggressor, the one with the new idea and new concepts. Neither Kmart nor Sears did that. Neither company made the right moves to reposition themselves with where customers were going."
The two companies' histories are quite different, but they share some common threads. Sears, Roebuck was founded when Richard W. Sears and Alvah C. Roebuck teamed up to make watches in 1887. They eventually transformed American retail by selling virtually everything that could be bought to rural Americans by mail-order catalogue.
The company successfully adapted to the next retail waves, starting to build department stores in the late 1920s and in the middle of the 20th century anchoring regional malls all over the country.
By the 1980s, though, the limits of that strategy were becoming apparent. Americans started spending more of their retail dollars at discounters, like Kmart, that operated out of "big box" stores that were more convenient to drive to and easier to get in and out of. Sears continues to have strong lines of business selling Craftsman tools, home appliances and other products for which consumers expect strong service. But for more routine household goods and clothing, customers have come to prefer either the deep discounts at big boxes or higher quality at more upscale department stores and specialty shops.
"More women work today and they have less time to shop, and so the frequency of visits to regional malls has been declining," said John C. Melaniphy III, executive president of retail consultancy Melaniphy & Associates in Chicago. "Consumers who used to shop at Sears have the option of Wal-Mart and Target. The consumers are voting with their feet and dollars."
The impact on Sears's growth is apparent. In 1970, there were 870 Sears stores, a Kmart executive said in a conference call with investors yesterday. After 34 years of opening and closing stores and strong U.S. economic growth, the number of stores is unchanged.
Kmart's history is nearly as long. Sebastian S. Kresge founded the S.S. Kresge Co. in 1899 as one of the first discount retailers, opening five-and-dime stores throughout the nation. In 1962, the company launched a new concept: a huge store on a single level that included all manner of general merchandise, priced at bargain basement prices. The restyled Kmart began a rapid expansion, pioneering the discount general merchandise store -- with its trademark "blue light specials" to indicate special bargains. Kmart had some other bright spots, too, cementing an early alliance with Martha Stewart as a spokeswoman in 1987 -- though with Stewart now in prison, even that arrangement has been tarnished.
Some of Kmart's problems came about because of its age. Many of its stores opened in the 1960s and '70s. By the 1990s, they seemed old and dingy, their lights too dim and their ceilings too low, said retail analysts. Newly built Wal-Marts and Targets offered brighter, more inviting places to shop.
Starting in the 1980s, Wal-Mart invested its capital in improving its distribution technology, opening new stores aggressively, and making sure every store was clean and well-run. Kmart made the fateful decision to turn its attention elsewhere, deploying its capital to buy Walden Book Co., Sports Authority, OfficeMax and other retailers.
"Wal-Mart saw their business as streamlining distribution and gaining power over suppliers," said Bill Chidley, chief creative officer of Design Forum LLC, a retail design consulting firm that has worked for Kmart at times. "Kmart was chasing all kinds of diverse businesses, thinking that was where the big payday would be."
Kmart itself languished, and filed for Chapter 11 bankruptcy protection in 2002. It emerged from bankruptcy last year and, its debt burden reduced and many unprofitable stores closed, began to accumulate cash.
Now, combined, the companies will try to overcome their past mistakes. "Kmart became tainted as being old and drab and out of step," said Ruffing, the former Kmart executive. "Once you're in that position, it's very hard to change customers' minds."