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MERGER RAISES BIG QUESTIONS
SEARS-KMART DEAL PUZZLES AREA SHOPPERS, MALL AND PLAZA OWNERS

Managers and owners of local malls were uncertain about the impact of the merger between retailing titans Kmart and Sears announced Wednesday, but consumers can expect to see little immediate change. Both chains will operate separately.

However, the merger rocks an already tumultuous local retail environment that has seen the exit of Ames Department Stores, the closure of several Kmart stores, the building of several Wal-Mart Supercenters and the pending arrival of Wisconsin-based Kohl's Corp.

Kmart Holding Corp. announced that it would buy Sears, Roebuck & Co. in an $11 billion deal that combines two legends of retailing, both of which date back to the late 1800s. The new company, Sears Holdings Corp., will be the nation's No. 3 retailer with $55 billion in annual revenues, and will have nearly 3,500 stores. The merger is expected to be completed in March.

Michael J. Bovalino, CEO of Pyramid Management Group in Syracuse, owner of the Walden Galleria in Cheektowaga which has a Sears store, called the merger "fascinating."

"It is too early to tell what the impact will be on our company," said Bovalino, whose firm also owns Shops of Seneca in West Seneca, where Kmart has a store. "However, we've had good relationships with both Kmart and Sears in the past and expect them to continue."

The new company plans to keep the two businesses and brands separate for now, although Sears' Craftsman tools and Kenmore appliances may be available at Kmart, and consumers could find the Martha Stewart line at Sears in the future.

"In joining forces, we'll be able to do a lot of things that we weren't able to do individually," said Sears spokeswoman Corinne Gudovic. "We think this is great for the company and great for our customers."

But that didn't excite shoppers at the stores, who were skeptical of the deal's logic, and doubted it would attract them.

"I don't see why they want to do it," said Stanley McCarty, as he was leaving the Kmart on Walden Avenue in Cheektowaga. McCarty said he shops at Kmart for clothing and auto department items. "I don't care for Sears too much," he said.

Both Sears and Kmart are strong in the Buffalo Niagara region. Sears ranked second among department stores, with 61 percent of adult shoppers visiting a store within the past three months, according to a 2003 Scarborough Reports study. That was behind only J.C. Penney Co. There are six Sears stores locally.

Kmart ranked third, behind Wal-Mart Stores and Target Corp., with 62 percent of adults shoppers visiting a Kmart store within the past three months. There are six Kmart stores in Western New York, after the company closed or sold several as part of a restructuring.

But experts question if the merger will improve either firm.

"Is Sears going to invest to make Kmart a successful retailer again? Do they even have the expertise to work in that discount segment?" wondered David M. Szymanski, director of the Center for Retailing Studies at Texas A&M University, and a Buffalo native. "This is finally the end of Kmart as a separate brand and separate retailer."

Big retailers have been struggling in recent years as sales have fallen at traditional department stores like Sears while consumers shopped instead at discounters Wal-Mart and Target. For its part, Kmart has been unable to find a workable strategy to compete even as a discounter, forcing it into bankruptcy in January 2002. It eventually emerged in May 2003 after cutting 57,000 jobs and closing 599 stores.

Pressures on such companies have led to mergers in the past, but such combinations in the retail industry have had mixed success in the past, experts said.

"The historical track record for that kind of thing is pretty poor. Right off the bat, you're starting with one foot in the hole," said David Harding, partner at the Boston office of retail consulting firm Bain & Co.

Nevertheless, Wall Street touted the merger Wednesday. And some analysts agreed that the deal made sense financially, letting the companies slash back-office costs and pool their purchasing power.

But the companies have very different retailing strategies, raising questions about what kind of company will be created, and where its focus will be, especially since neither company has done well recently.

Experts locally and nationally were skeptical about whether the deal could even help the two struggling retailers compete and survive against the likes of Wal-Mart and Target.

"From a financial metrics perspective, it's very intelligent. From a retail perspective, I think the deal is terrible," said Howard L. Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates in New York. "In three years, I don't think there will be a Kmart. In seven years, there won't be a Sears. I think you've doomed Sears and doomed Kmart."

Szymanski even questioned whether the deal was motivated more by the value of the companies' real estate than the value of their actual businesses.

Sears is more known for operating as a large anchor store in malls, while Kmart has opted for strip-mall and stand-alone locations outside of malls. But Sears has been pushing its new Sears Grand concept outside of malls, and the companies plan to convert a number of Kmart stores to Sears to accelerate that effort. Sears also bought 50 Kmart stores earlier this year.

Still, Gudovic said Wednesday that the company has no plans to pull out of mall locations, known as "full-line" stores. "We're very much committed to those full-line stores," she said. "This is a growth opportunity for us. We're looking to grow our store base, not cut it away."

Locally, real estate brokers say the area may not see much more in the way of store closings or sales, since there's very little overlap between the companies and Kmart already has dispatched several underperforming stores in the area. The exception would be if the new company decided the property itself was more valuable than the store's business, and someone were willing to pay for it.

"When management feels that real estate profits are better than operating profits, things'll happen," said Arthur Judelsohn, senior executive director of Pyramid Brokerage Co. of Buffalo, which is not related to Pyramid Management.

Also, the deal could prevent some Kmart stores from becoming vacant if Kmart failed to survive on its own. "It's going to absorb what could have been some potentially dark space," said Michael C. Clark, director of retail services for brokerage CB Richard Ellis in Buffalo.

Some managers of area malls that contain Sears stores said it was too soon to say what the deal might mean, but they say the stores in their malls perform well and draw customers.

Larry Rose, general manager of the Summit Park Mall in the Town of Wheatfield, said he expects it will lead to expanded Sears' merchandise, which already has a loyal following.

On the other side, Rex Burgher, senior vice president of development at Benderson Development Co., which owns two Kmart locations in Buffalo and Cheektowaga, said the firm hasn't talked with Kmart yet. One store is across from the Galleria, where a Sears store is located, but the one on Hertel Avenue is not near a Sears.

And Joseph Wahl, general manager of the Boulevard Mall in Amherst, said he believes both chains will benefit through greater buying power, which will hopefully lead to lower prices for customers, he said.

But consumers aren't moved. One factor, Davidowitz said, is that the people who shop at Kmart are different than those who go to Sears. Kmart's customer base is more low-income and older, he said, while Sears' is middle America.

At the Walden Galleria, Sears shopper Kristina Schutt of Lockport said her family goes to Sears for appliances. Kmart no longer has a store where she lives, but Schutt said she doesn't often go to large discount chains like Kmart and its competitors anyway. "I'm really not that kind of shopper," she said.

e-mail: jepstein@buffnews.com and mglynn@buffnews.com

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