Sears Kmart Strategy Sears Roebuck and Co

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					Sears, Roebuck, and Co. and K-Mart
       Competitive Strategy




         February 25, 2005


             Team 6:
         Amanda Finkelstein
           Jen Interliggi
           Steve Morris
           Sean Thinnes
Team 6                                                                              2


                      Sears and K-Mart Competitive Strategy

Kmart Holding Corporation and Sears, Roebuck and Co. signed a definitive
merger agreement on November 17, 2004 that will combine Sears and Kmart
into a major new retail company. Sears will become the nation’s third largest
retailer. We looked at the future of the industry and the competencies of the two
companies in order to come up with a strategy that will bring it success. We also
looked at the competitors in the retail industry to see where Sears should position
itself.

We believe that Sears should implement a differentiation strategy that will bring
them a distinct brand name with focused product sectors. Sears can do this by
using the following recommendations:

        Targeting the growing “tween” and Generation Y markets
        Improving customer service within the stores
        Focusing the product lines on home appliances, home furnishings, home
         improvement/garden, jewelry, and clothing
        Improving the IT sector by creating a specific direction, improving
         customer databases, implementing seamless integration, and investing in
         RFID
        Preparing for globalization by establishing global leaders, global marketing
         plans, and global product lines
        Establishing specific global locations, especially in developing countries
         where there is much room for growth
        Expanding e-commerce through online marketing, online incentives,
         partnering with Amazon.com, and developing global websites
        Building new stores in lifestyle centers and cities
        Improving its relationship with suppliers to help reduce costs

These recommendations will help Sears develop a unique brand name and will
bring a wide variety of customers into its store. In terms of financing, Sears will
need to make some large investments to ensure it stays competitive in the future.
However, with K-Mart selling off many stores each year, it will provide cash for
Sears to invest in itself.


Target Market and Consumer Oriented Goals/Recommendations
Overall, Sears captures a sizeable portion of the middle class to upper middle
class segment with the array of product lines and overall atmosphere of the
shopping experience. Its attempt to broaden demographics have lead them to
establish a specific brand called Lucy Pereda, which is the first Hispanic focused
brand connected with women looking for fashionable career wear. Another step
that has been taken recently is the focus of clothing the whole family under one
brand. The new Lands’ End line carried in stores provides convenience and
comfort for the entire family.
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Markets to Explore and Capture
With the steps that Sears has taken and the market that it currently concentrates
in, these are current trends and recommendations to consider implementing with
the new merger:

        “Tweens”- Tweens are classified as 9-12 year olds that account for about
         $260 billion in U.S. spending. To break that down even more; $11 billion
         comes from what they spend, $176 billion from what their parents spend
         on them, and $74 billion is influenced by them (ex. where they go to eat
         with their parents). With such a tremendous buying power held by this
         demographic group, marketers have now started to take advantage of
         gearing their focus on these individuals. As our society rapidly becomes
         more materialistic, this buying power amongst tweens will increase. Sears
         should focus its efforts to bring this demographic into the stores. Sears’
         strategy should consist of having an area within its store that is geared
         toward this age group, carrying the latest trends in clothing and style.
         Sears can improve marketing to this segment by using new promotions
         such as email and text message advertisements. In addition, Sears can
         gain endorsements by using young celebrities who influence this genre.

        Generation Y- Born roughly between 1980 and 2000, they are the
         offspring of the baby boomers and the leading edge of this group has
         already graduated from college while the youngest are exploring pop
         culture and media. Generation Y has an average of $100 a week in
         disposable income and they spend around $150 billion a year. With that
         said, marketers should not overlook this demographic either. For Sears to
         capitalize through this generation, they must realize that the recent
         graduates are starting their lives out in the real world and settling into
         apartments and homes. This is an opportunity for Sears to successfully
         attract sales within its appliance department by gearing commercials of
         appliances towards young couples. As for the younger portion of the
         generation, it is imperative to reach them on a different level. Buying
         decisions are based on peer recommendations. Sears needs to be able
         to "balance the benefits of attracting the younger market against the
         difficulties of embracing alternative business principle" (Krotz). Sears
         could offer incentives such as a free vacation to the travel-loving
         generation in order to create awareness and bring people into the store.

Customer Service
Sears need to make sure its store environment leaves customers satisfied.
Enhancing the customer's overall experience is an important goal. This can be
achieved through taking steps to make the stores more presentable and
consumer friendly. Visible signage and point of sale displays are crucial for a
customer to feel welcome and comfortable. Price awareness is important to
customers and implementation of price checks on the selling floor is a useful tool
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to customers. This leads to the increase in need for technological developments.
Sears should capitalize on the opportunity to define itself in the retail market.

Product Lines
One important decision Sears has to make concerning its future is the product
lines on which to focus. With so much to offer, Sears has had trouble forming an
identity. This problem can be solved by excelling in certain areas as opposed to
performing average in many different areas. This will help Sears establish a solid
brand name. The product lines that Sears must concentrate upon in order to
grow in the future are home appliances, home furnishings, home
improvement/garden, jewelry, and clothing. By focusing on these sectors, Sears
will form an identity with potential growth.

        Home Appliances-Sears is, and has been, the leader in home appliance
         sales for over 70 years, and even owns the top-selling brand Kenmore. It
         carries all six top brands, which are Kenmore, Bosch, Frigidaire, General
         Electric, and Maytag. Home appliances such as refrigerators,
         dishwashers, and washers/dryers bring Sears a lot of profit from both the
         sales of the products and the extended warranties. Companies such as
         Lowe’s and Home Depot are beginning to gain larger shares of the home
         appliances market, so it is important for Sears to differentiate in order to
         keep these sales strong. The company has begun to do so by cutting
         prices and matching competitor prices. Sears also allows customers to
         take home half of the appliances sold on the day of purchase instead of
         waiting for delivery. This is a product line that Sears should concentrate
         on, since it has brought the company past success. Home appliances are
         a great piece to the foundation of Sears’ future.

        Home Furnishings-Sears carries a wide variety of home products, from
         trusted brands such as Kenmore, Circulon, KitchenAid, Sealy, and Serta.
         Additionally, Sears Home Center is one of the best online sources for
         furniture and products for outdoor living. The home furnishings segment
         of the retail industry saw large gains in 2003, which continued throughout
         2004. There is great opportunity for Sears to increase its share of the
         home furnishings market, evidenced by the fact that in the first year after
         purchasing a newly built home, owners spend an average of $8,905 to
         furnish, decorate and improve their investment. This leads to a large
         demand for home products such as furniture, bedding, bath, and lighting.
         Sears must make the consumer aware of its vast array of home products
         and the high-quality brands it offers through advertising and sales
         promotions.

        Home Improvement/Garden-Eighty-five percent of the homes in the U.S.
         were built prior to 1980, meaning they will need frequent maintenance.
         Some experts have projected that U.S. home improvement sales will
         reach $329.1 billion by 2009. This will translate to a 3.9% annual growth
Team 6                                                                               5


         rate. Sears owns The Great Indoors, stores that specialize in home
         remodeling and improvement. If they can build off these stores and
         expand to new markets, they will be able to gain a larger share of both the
         home improvement and the home furnishings markets. Sears has had
         much success with its line of Craftsmen tools and hardware, recently
         ranked the #1 brand by men in the U.S. for overall quality. They should
         increase the amount of time and money put into advertising for Craftsmen,
         to bring in consumers and become involved in this segment’s growth

        Jewelry-Retail jewelry sales have increased every year since 2001, and
         even saw the seventh highest sales increase among all retail segments in
         2003. Offering many different styles of jewelry, Sears should emphasize
         its line through in-store and out of store advertising and use the trend of
         increasing sales to gain new customers. With brands that people trust like
         Seiko, Citizen, and Bulova, as well as numerous gemstones, diamond
         fashions, and wedding bands Sears has much to offer the consumer.
         Sears can expand its jewelry segment by adding customization features to
         its selection, both online and in-store.

        Clothing-Sears has had a couple of missteps recently in regards to
         clothing, but still relies on the segment to bring in roughly $4.5 billion
         annually, approximately 12 percent of the company’s annual earnings.
         Shortages in inventory and dated styles have hurt Sears recently. The
         company believes that its newest line, Land’s End, and the label’s
         presence in stores will help clothing sales to pick up once again. Lands’
         End is a very successful brand, so if Sears is able to benefit from carrying
         this name, they will find much success. Along with Lands’ End, Sears
         carries Levi’s, Lee, Covington, and Structure, all popular brands. By
         spending advertising dollars on promoting and improving the image of its
         clothing sector, Sears has the potential to grow.

Technology
In order to compete with other companies within its industry, Sears must
successfully implement an effective and efficient IT system. Stephen Smith, a
research director with Gardner put it bluntly: With some mergers, "one side has
got a great IT organization and it will tremendously help the other. I don't think
that's the case for either company here." Therefore Sears must not only make
sure its IT system fits together with Kmart’s existing data sources, but also
consider the fact that the system must be improved in order to compete in the
retail market.

        Create direction - Sears currently uses a promotional planning capability,
         which is integrated with the inventory and demand planning processes.
         This helps improve customer service levels through the improvement of in-
         stock positions for planned promotions. Also, in October 2004 Sears
         signed on with JDA Management Solutions to manage its goods sold in
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         more than 2,300 stores. Sears must continue to optimize its planning
         techniques by using cutting-edge planning and forecasting software. This
         will not only help to ensure items are in stock, but will also allow for
         promotional periods to clear older inventory.

        Customer targeting – Sears must develop a robust customer targeting
         system that will help the company better forecast who its market will be
         and who will be more likely to purchase merchandise as a result of
         efficient marketing techniques. This will allow Sears to have merchandise
         that appeals to its consumers, which is especially difficult with clothing
         lines.

        Seamless integration – Apart from securing a competitive advantage from
         an IT standpoint, Sears must first ensure that the merged company has
         effectively come together rather than remain separate entities. IT can
         leverage this necessary task, but it must continue to be used
         appropriately. This means that all data housed in separate systems must
         be combined together; this will allow other technologies to more effectively
         forecast demand.

        RFID – Sears must adopt Radio Frequency Identification, or RFID. Wal-
         Mart has been pushing towards a mandate that now requires its largest
         suppliers to adhere to RFID guidelines. This will help Sears reduce direct
         labor and also keep better track of its inventory and product rotation
         schedule. This will involve heavy investment into hardware (readers) and
         software, but again, it is a technology that the biggest retailer in the world
         is embracing. Wal-Mart has been considered the industry leader with
         regards to IT. Sears must follow what Wal-Mart is doing from an
         operations standpoint. Although Sears doesn’t necessarily need to be an
         early adopter like Wal-Mart, they must follow the trends that continue to
         make Wal-Mart successful in order to remain competitive.

Globalization

Another area of growth for Sears to enter is the global sector. In the future,
globalization will be necessary to stay competitive. Globalization will introduce
Sears to a wide variety of new customers. Sears should start with Amazon.com
as a tool to expand its most popular segments to a global market. Sears needs
to start with smaller stores that sold its most popular segments and eventually
grow through online and global markets.

        Global Leaders- In order to open stores and operate websites, Sears will
         need to train global leaders and teams. It will need to hire a leader over
         all the global aspects as well as leaders in the selected countries. In order
         to do this, Sears should research and enlist qualified employees in training
         programs that teach these leaders to go beyond their own cultural norms.
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         These leaders and teams should be culturally sensitive, have a global
         perspective, be creative in adjusting for different countries, and have the
         ability to create a unified company with various global locations. By
         developing this leadership and global team, Sears will be prepared to
         enter the global market with a competency many other companies fail to
         acquire.

        Global Marketing- Sears will have to develop a universal brand image that
         allows for variations in marketing from country to country. The global
         marketing leaders will be able to adjust advertising according to what
         works best in the selected country. Having marketing directors in the
         various locations will help keep Sears competitive in each area. By
         remaining open and allowing for variations, Sears will be in good position
         to adjust for different markets.

        Global Products- Since Sears offers a wide variety of products, it will be
         able to adjust the product line according to what fits in for each culture.
         For example, a big department store may not be as successful in Europe
         as a slightly smaller store that offers Sears’ appliances and the most
         popular apparel lines. The product lines will differ from country to country
         depending on its geographical location and culture. With the established
         global leaders and teams, the appropriate decisions will be made for
         which products to sell in each of the different countries.

        Developing Countries- Sears and K-Mart can take advantage of the lack of
         competition in developing countries and begin to set up stores. In
         countries such as Argentina and India, competition would not be as fierce
         as in developed countries. If Sears captures these markets first, it will
         have the potential to be a pioneering brand and gain market share. In
         addition, Internet growth in these countries will help Sears with its online
         retailing. Sears could use its global leadership and technology to analyze
         developing countries for a potential market. Its marketing plan, with the
         appropriate adjustments, will be ready for each of these new markets.

Distribution Channels

As we move forward into the future, Sears and K-Mart need to take into careful
consideration the distribution channels that will be most successful. Two
distribution channels for the future would be e-commerce and lifestyle centers,
with movement away from the traditional mall location.

        E-commerce-Sears currently has a well-designed and efficient website. It
         is easy to navigate and has in-store pick up options for customers. Sears
         should take this asset and expand on it, as e-commerce has the largest
         growth potential for the future at a projected 19% in 2005. There are
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         several things that Sears should do to expand and improve this
         distribution channel.

            o Online Marketing-Sears has an attractive and easy-to-navigate
              website, an asset it needs to promote. One competitive advantage
              is that customers can order online and pick-up in the store on the
              most popular items, including the very profitable appliance sector.
              Sears should focus on advertising this competitive advantage. The
              marketing techniques used for the target demographics can be
              applied to specific advertisements regarding the Sears online
              sector. Sears could work on setting up a promotion online that
              entered customers into a contest to win a free vacation after
              purchasing online. Sears’ advantage to the young could involve
              promotional give-aways. The advantage to the older shoppers
              could be the free trip and a reward system that entitles customers
              to a prize or discount after spending online and earning a certain
              amount of points. This would bring customers online and will give
              Sears the opportunity to give these customers a good e-shopping
              experience.

            o Partner with Amazon.com-Another way for Sears to expand its
              online operations is to collaborate with Amazon.com for its
              appliance sector. The initial vendor fee would be recovered by the
              exposure and new markets offered. Amazon.com has a brand
              image of reliable online service and it has access to global markets.
              Sears can get all the benefits from Amazon.com while working on
              improving its own website and expanding globally.

            o Expand website beyond US and Canada-Sears needs to begin to
              enter the global market through its stores and websites. Expanding
              technology and operating websites in the US, Canada, Europe and
              other developing nations will give Sears new markets.

            o Online incentives-E-commerce will grow and continue to be a huge
              market in the future. Sears needs to be able to match competitor
              incentives and come up with a competitive advantage of its own.
              This means it needs to offer free or low cost shipping, fast delivery
              times, and an advanced customer database. It needs to offer
              incentives as small as having a customer database that will inform
              the customer if they have already ordered something.

        Lifestyle Centers-One way Sears could position its new brand image is by
         locating near the new lifestyle centers. This would give them the
         opportunity to differentiate themselves from Wal-Mart and take the
         opportunity to capitalize on the new way of shopping. Popularity of indoor
         shopping malls is decreasing since lifestyle centers performed better in
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         terms of sales per square footage and operating costs. By setting up
         stores in these lifestyle centers, Sears will have an advantage in the future
         over Wal-Mart and Target power centers that gained popularity during the
         1990s.

        Relationship with Suppliers-Sears needs to stay on top of technology and
         remain in good contact with suppliers in order to reduce supply chain
         costs through better logistics and management, reduce process costs by
         creating a standard IT practices, and increase revenues from timely
         delivery of new items. By focusing on the business-to-business
         marketplaces with its suppliers, Sears will gain many advantages. By
         continuing to use a consortium-backed marketplace like
         GlobalNetXchange, Sears will be able to use the marketplace to find
         competitive suppliers and it will be able to improve technology through the
         Internet so that suppliers and vendors will reduce supply chain transaction
         costs. This competency is something that Sears must continue with and
         leverage to help improve its technology and supply chain management.

Financial Analysis
In order for Sears to be successful in the future, it is going to have to make
financial investments to prepare for the long run. These investments will cost the
company a lot of money at first, but in the end will keep them operating.

        Advertising dollars- Sears will initially have to increase advertising dollars
         to cover promotions, incentives, commercials, and brand image. The
         reward system and the occasional free vacation incentive will be cheap
         when considering the return it will have by gaining and retaining
         customers. The money spent on commercials and endorsements to
         improve brand image will be the majority of the increase in advertising.
         This money, however, will come back to Sears over the years through the
         new “tween” market, the new online shoppers, and the new generation Y
         market that will begin shopping with Sears. The money spent to advertise
         on the focus product lines will be compensated with the lack of focus on
         the other lines. The $260 billion that “tweens” spend and the $150 billion
         that Generation Y spends create the need to invest in advertising dollars.

        Technology- Sears will be forced to spend a great deal of capital on
         funding its IT, but it is a necessary investment that will ensure smooth
         operation if implementing correctly. The new system will allow the
         company to more accurately track various data required to forecast
         demand, among other things. According to Retail Interactive, it is
         recommended that a company spend between 2-3% of sales on retail
         technology. The company will need to spend at least $7 million on retail
         technology. However, the combined Sears/Kmart will produce
         considerably more annual sales though this information is not publicly
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         available as a forecast. Consequently, the more than $4 million projected
         using 2003 numbers has been adjusted.

Value Description                                    Calculation

 A       Sears’ Annual Sales (2004)                  $41,124,000.00

         Estimate of the average life span of the
 B                                                   5 years
         entire retail information system

         Estimate of the percentage of sales the
 C       average retailer spends on information      2% = 2/100 = 0.02
         technology

                                Retail System Budget = A x B x C
                                                     = $41,124,000x 5 x 0.02
                                                     =$4,112,000
             Source: http://retailinteractive.ca/SSG/ri00720e.html

        Locations- Sears will greatly benefit from the selling of its retail space in
         enclosed malls and moving into lifestyle centers. The investment in the
         new buildings at these centers will help Sears grow in the expanding
         markets. Again, the initial investment in these buildings will be large but
         beneficial considering lifestyle centers produce 25 percent more sales per
         square foot than traditional malls. If Sears remained in the enclosed
         malls, they would lose money. Enclosed malls are declining with only 1130
         left compared to the past projection of 2500 malls for 2004.

        Globalization- By far, the largest and most time-consuming investment for
         Sears would be globalization. Sears will initially have to invest a lot of
         money in forming the appropriate leaders and teams for global activity. In
         addition, they will need to invest in global stores that will sell the most
         popular items. However, by investing the money and growing globally in
         Europe and developing countries, Sears will gain a large and new market
         share. According to Pablo Bréard, "Top-tier developing countries will
         continue to record robust growth in 2005, while the pace of activity in
         developed economies will moderate."(biz.yahoo) These markets will take
         time to grow, but the large amount of revenue each venture brings will
         make the investment worthwhile.

        Availability of Funds- The combined Sears/Kmart entity will have around
         $4.7 billion in cash according to Fitch analysts. Furthermore, Standard &
         Poors will give the credit rating of the combined company a double-b-plus,
         the highest speculative rating possible. One credit analyst from S & P
         noted that “the capital structure of the combined entity is neither overly
         leveraged nor overly conservative.” Considering the amount of cash
         available for investment and the comments of leading analysts, Sears
         should be able to successfully make the structural investments nec essary
         to remain competitive in the evolving retail industry.
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Conclusion
After analyzing the merger of Sears and Kmart and the future of the industry
along with the competencies of the two companies, we have devised a strategy
for the new merged company to excel in the retail industry. In order for Sears to
achieve success, it must differentiate itself from other retailers by building upon
its distinct brand image. The areas of focus have been outlined in the analysis
and we believe that the recommendations given will ensure success for Sears in
all future endeavors.
Team 6                                                                        12


                                  Resources
www.amazon.com
www.sears.com
Datamonitor Sears Roebuck and Co. Company Profile
http://www.ouwb.ohiou.edu/stinson/Simple%20Model.html
http://www.ouwb.ohiou.edu/stinson/Developing%20Strategy.html
http://www.mce.be/knowledge/400/27
http://home.hamptonroads.com/stories/story.cfm?story=75439&ran=119273
http://www.uwex.edu/ces/cced/lets/0103ltb.html
http://www.mckinsey.com/practices/retail/knowledge/articles/b2bforapparelretaile
rs.pdf
https://www.gnx.com/reg/index.jsp
http://seattlepi.nwsource.com/business/184357_retail31.html
http://www.anderson-realestate.com/asp/newsarticles.aspx?articleid=125
http://www.nahb.org/news_details.aspx?newsID=739
http://biz.yahoo.com/ic/profile/rthome_1539.html
http://www.mgt.smsu.edu/mgt487/compst.htm
http://retailindustry.about.com/cs/pub_technology/
http://www.chainstoreage.com/rtq/
http://www.eweek.com/article2/0,1759,1728755,00.asp
http://www.hiri.org/currentresearch.htm#dri00
http://biz.yahoo.com/cnw/050202/scotiabank_intl_views_1.html
http://biz.yahoo.com/ap/050203/sears_kmart_credit_rating_2.html

				
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