TCS Daily


Attention Internet Shoppers!

By Dominic Basulto - December 1, 2004 12:00 AM

When news broke that Kmart was planning to acquire Sears for $11 billion, many viewed the deal as nothing more than the last-gasp effort by two stumbling retailers to mount some sort of final challenge to Wal-Mart, the undisputed leader of the traditional retail space. After all, Kmart had only emerged from bankruptcy 18 months ago and Sears hasn't been a true market leader in nearly 40 years. Was it really realistic that the combined Sears Holdings juggernaut (2,353 stores and $60 billion in annual sales) could ever pull close to Wal-Mart? Certainly, it's hard to bet against the Boys from Bentonville: Wal-Mart posts $60 billion in sales each quarter and is opening 5 new stores a week. There is one way, though, that Kmart and Sears could narrow the gap: quickly overtake Wal-Mart in the online retail space.

With online retail sales growing at a 25% annual clip -- more than twice the sales growth rate of the fastest-growing traditional retailers -- an expanded Internet presence could enable Sears Holdings to overtake Wal-Mart sooner than might be expected. If Sears Holdings grows twice as fast as Wal-Mart over an extended time period, it could pull even with Wal-Mart sometime within the next 10 years. Admittedly, that's a big if -- but even Wal-Mart executives concede that their same-store sales are only growing at low single-digit rates. Without a doubt, the key to the company's impressive 10-15% annual sales growth has been opening new stores at an unprecedented pace, not in generating sales from existing stores. With one or two additional acquisitions and a real focus on squeezing out sales from each available square foot of its brick-and-mortar stores, Sears could become a legitimate rival once it embraces the selling power of the Internet.

Sears and Kmart have already started to assemble the pieces for a beefed-up Internet retail presence. Just days before the merger was announced, Kmart announced that its retail Web site was back up and running. For its part, Sears already has an award-winning Web site (Sears.com) that has been ranked as one of the Top 10 Internet "mass merchant" retailing sites by InternetRetailer.com. The two companies also have assembled a stable of high-margin proprietary brands, including Craftsman, Diehard, Kenmore and, yes, Martha Stewart Everyday. In a best case scenario, the two companies can leverage these brands with the online retailing expertise of LandsEnd.com (which Sears acquired in 2002) to create true destination shopping sites on the Web. In a hint of what may come, Web traffic at Sears.com spiked by 35% in October.

In addition, Sears.com has already rolled out a host of new back-end features and service offerings, like the ability to order items online and pick them up at any full-line store. Sears Customer Direct even refers to the company's nearly 900 stores as "order fulfillment centers." While Sears has a long way to go before it can rival the back-end supply chain logistics of Wal-Mart, there are at least signs that Sears will work to squeeze out supplier inefficiencies through new Web-based supply chain solutions.

It is unclear what kinds of strategic options that Eddie Lampert, the Wall Street hedge fund manager who architected the $11 billion deal, will consider as he sizes up the competition from Wal-Mart. Certainly, the idea of an Internet-centric strategy is not the only option. Business Week, for example, has suggested using Kmart shares as acquisition currency for a raft of new retail-related deals involving companies like AutoZone or AutoNation.

If nothing else, the threat of a Sears-Kmart Internet giant could spur Wal-Mart to dedicate more resources to its four-year-old Internet subsidiary, Walmart.com. In the days before Thanksgiving, in fact, CBS Marketwatch.com analyst Bambi Francisco hinted that Wal-Mart was finally "dipping its little toe in." While Walmart.com is currently growing faster than rivals such as Sears.com and Target.com, it still trails the two titans of online sales -- eBay and Amazon. To achieve true retail dominance, it only makes sense that Wal-Mart will look for ways to build out its online presence.

Currently, 100 million shoppers visit Wal-Mart's 3,100 brick-and-mortar stores, while only 8 million shoppers log on to Walmart.com -- an imbalance that store executives could attempt to address. In just the past six months, for example, Wal-Mart has launched a new digital music store to rival Apple's and a new online DVD rental service to compete with Netflix. The company has also added an online apparel store in the hopes of reaching Internet consumers. In October, traffic spiked by 47% as Wal-Mart reported 17 million unique visitors.

If Wal-Mart enters the Internet retail category in size, it's safe to bet that one big winner will be the consumer. Ahead of the big holiday shopping season, in fact, Walmart.com announced its first ever Web holiday sale, with discounts on 50 different products, ranging from toys to cashmere sweaters. There could be more price competition on the way -- as well as more product categories, more features and more services -- once Wal-Mart decides to bet more of its chips on Internet retail. Whereas Kmart once popularized the shopping catchphrase "Attention Kmart shoppers!" the new Sears Holdings-Wal-Mart rivalry could soon popularize a new catchphrase: "Attention Internet shoppers!"

The author writes frequently on technology, business and venture capital.


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