We know what. We know how. And we certainly know who. The only thing we don’t know is when. But sooner or later—and increasingly it’s sooner—Sears Holdings and its two operating retail divisions, Sears Roebuck and Kmart, will cease to exist as we know them.
And when that happens, the business of American retailing will change in the most profound way within several generations.
Two venerable nameplates—each at one time the largest retailer in the country—will forever be altered. And while shreds of their remnants may live on in one form or another, these two legendary entities will go the way of Montgomery Ward, Woolworth, Gimbels, and countless other retail ghosts haunting the memories of those who have been around too long.
But the scale and scope of this event will dwarf anything we’ve ever witnessed before on the retail landscape and it will impact the business in both some predictable and perhaps even more unforeseen ways.
So, taking out the retail crystal ball, let’s look at what we think could happen the day after Sears…files for bankruptcy.
Two for the Road
First and foremost, this will not mean the end of either the Sears or Kmart nameplates. If there’s one thing we’ve learned from recent shutterings of such brands as Filene’s Basement, Linens ’n Things, and even old Monkey Ward, it’s that old retail names don’t die…in fact they don’t even fade away. While it is likely that most full-line, mall-based Sears stores will go away, its network of smaller, neighborhood stores and franchises will continue. Some will even expand and many will downright prosper, building on the cornerstones of the legacy brands of Kenmore, Craftsman, and DieHard.
Small town America will be the final resting place of the Sears Roebuck name. Kmart is a different story. While it too has much equity with shoppers, its stores have become so downtrodden and thoroughly trashed that it is unlikely they will survive intact. Like their Sears sisters they have become largely irrelevant to a generation of shoppers that has learned to find its needs elsewhere. But the Kmart name will live on. It will no doubt morph into a quasi dollar/closeout/crap store, smaller in store size and ironically situated down the strip center from their former anchors. The blue lights will stay on but the merchandise inside will bear no resemblance whatsoever to what once was.
There will be winners and there will be losers. Without Sears at one end of most major shopping malls around the country, it stands to reason that the other anchors will have the most to benefit. That should make J.C. Penney the biggest winner. Its customer profile in the mall most closely aligns with Sears; many of those shoppers will learn to make a right rather than a left when they enter the mall and head for the red Penney sign.
It’s no coincidence that Penney announced it would test major appliances this year in selected stores. While mall shoppers aren’t necessarily the best demographic for refrigerators and washing machines, those who want them will soon find them at Penney.
The other moderate anchors in the mall—Macy’s, Dillard’s, Belk, and Bon-Ton—will pick up some share but it will be minimal. As with many retail collapses, most of the business will recede into a merchandising black hole, never to be seen again. Other winners will be Home Depot and Lowes, which stand to gain the most from Sears’ departure in home hard goods like major appliances, kitchen and bath, and garden. That process is well on its way, it will only accelerate as the void emerges.
On the other side of the house, it will be similar fate for much of Kmart’s business…but perhaps less so. In strip centers where Kmart was co-located with so-called power anchors like Best Buy, TJX nameplates including Home Goods and Gap, those neighbors will see some quick pick-ups of business. Newer apparel players like H&M, Uniqlo and even Primark will see new customers looking for the faddish fashions Kmart was still able to muster up in its final days.
But again, much of the $30 billion in retail sales Sears Holdings represented will be dispersed in small pieces, vaporized into the retail ether and otherwise cease to exist. Retail business is more ephemeral than anybody will ever admit.
As mentioned, shoppers will still be able to buy the Sears powerhouse brand. Sears Holdings has seen to that already by moving the rights to those brands into a separate corporate entity. The licensing out of Kenmore, Craftsman, and DieHard is already well on its way, which of course is a brilliant move for ownership but part of the self-fulfilling prophecy. But as with other once benchmark brands in their fields—Westinghouse or Frigidaire for instance—they will lose their well-earned stature and eventually be reduced to stickers on generic products. And the Kmart brands? Other than licensed labels and celebrity rentals, it’s hard to cite one that has any meaning to anybody anymore. Only the store name itself resonates and that is destined to be the next RadioShack, a name over a store with little relationship to its former existence.
Real Estate Operators
Even though the overall store count for the two chains is way down from the over 3000 individual doors it once operated, there are still more than 1700 remaining open for business.
Again, ownership’s financial wizardry has transferred several hundred of the best of these into Real Estate Investment Trusts (REITs) it will still control after the bankruptcy. But depending on the math, at least 1200 individual leases will fall back into the hands of mall and strip center owners…and their hands will be full. Nobody is clamoring for mall anchor stores or 120,000-square-foot strip-center locations.
The latter will no doubt be cut up into smaller units and many will fill up with those retailers that are still expanding, particularly European chains looking to escape their reliance on their home territories. But there will be probably be hundreds of additional new dead strip centers built for which there is absolutely no demand.
Not to worry, we won’t have to run any benefits for strip center operators.
The shopping mall owners will have a slightly tougher time. They too will end up dividing those multi-floor Sears anchors, but there are only so many retailers who want to expand into regional malls. What will happen instead is an acceleration of the process of these locations being transformed for non-retail purposes. Day care centers, technical schools, medical facilities, and workout centers will take many of them, further redefining the role shopping centers play in the American social scene.
But even that will have its limits. So, as with strip centers, some of these malls will be emptied out and bulldozed. The world will survive.
It will be a sad, if fleeting, moment for most of America—at least those who aren’t on the Sears Holding payroll—when the company files for bankruptcy. We saw the same thing when Woolworth went out and people fondly remembered the grilled cheese sandwiches and notions departments. That didn’t last all that long.
Consumers will still be able to buy those legendary brands. They will still be able to find stores with the Sears and Kmart names over the front doors. And, let’s face it; there isn’t exactly a shortage of alternatives out there. Mostly, though, what will be the lasting impression is how quickly the lasting impression of Sears and Kmart will fade.
And Finally, There’s Eddie
The casual observer would say the most devastated person in America when Sears Holdings goes belly up will be its CEO, primary owner and creator, Edward S. Lampert.
You know the expression, laughing all the way to the bank? Fast Eddie has been doing that for more than ten years. The amount of cash he has pulled out of this company—through special dividends, stock buybacks, asset sales, and other financial transactions that are diabolical (and entirely legal) in their brilliance—may never be known.
But he won’t even be done with the chapter 11 filing. He will still own the key brands through a separate corporation. He will still own the best real estate through his REITs. No doubt, we’ll discover other assets have been stripped out and are no longer part of the parent company. Eddie will have a good story to tell when Sears files, all about competition and vendors who didn’t support the store, and knowing him, he’ll even find ways to blame low oil prices, the Federal Reserve, and North Korea for its demise.
But you can’t say Eddie didn’t warn you. There, in clear wording, he laid it out in the company’s last annual report: “Affiliates of our Chairman and Chief Executive Officer, whose interests may be different than your interests, exert substantial influence over our Company.”
Sears and Kmart may be gone, but Eddie will live on to see another day.