November 19, 2004

Where America Shops Meets Where America Shoplifts

By Evan Schuman, eWEEK

Opinion: The IT integration struggle is just one hurdle for the huge Sears-Kmart merger, but Evan Schuman suggests it nicely mirrors the rest.

There's no shortage of legitimate reasons why the Sears-Kmart merger will not cause anyone in Bentonville, Ark., to lose much sleep.

But most of the arguments boil down to two points. One: Historically, big mergers rarely succeed. Two: Adding weak plus weak doesn't equal strong. (A third point is that Wall Street loved the move, sending both stocks soaring. If that's not the ultimate kiss of death...)

The IT integration struggle these two firms are going to shortly tackle is a good metaphor for the bigger picture.

What kind of reputation do these two firms have for IT sophistication? Not good.

One industry consultant who has recently worked for both Kmart and Sears was also not optimistic.

"They're both technology train wrecks," said the consultant, who wisely asked that we not use his name. Kmart, he said, has continued to "allow technology to dictate how it would run, and that's the opposite of what you need to do. They've failed miserably."

When asked about Kmart's position that it has turned a corner and improved IT operations, the consultant was not impressed. "Companies like that don't change that quickly. Kmart doesn't know how to use technology to be innovative," he said.

Like others, he felt slightly more favorably inclined to Sears, but had sharp criticism for a lack of internal integration. "They use completely separate systems. There is no coherent merchandising philosophy that I can see. Different groups do their own thing."

Some IT operations are just terrible. Orders are routinely lost, security is non-existent, systems routinely crash, database results are flawed, and equipment is out-of-date and useless. By most accounts, neither retailer had IT operations that fit into the "terrible" category, although—until recently—Kmart's operations came quite close.

Other IT operations are leading-edge and fine-tuned to perfection. In the retail world, Wal-Mart and BestBuy are good examples of companies that pay attention to their IT operations and let it show.

Then you have the most popular category: the adequates. Nothing about these players is leading-edge, and their C-levels and board members—and Wall Street—rarely sing IT's praises. But sales are recorded, backups happen, virus definitions are kept current, and the lackluster database analytical packages generally function, albeit at an unexciting level. This crowded category is where you find today's IT operations at Sears and Kmart.

There's nothing wrong with being in the adequate/mediocre category, unless you happen to be in an extremely competitive space and your chief rival happens to be in the "leading-edge" category. In that case, you fall back on the earlier issue: Can adding weak plus weak equal strong?

There are certainly examples where it can indeed equal strong, such as when the weaknesses and strengths of each player complement the other. A global manufacturer that is weak in Europe and Asia but strong in North America may have a difficult time competing worldwide, and a global manufacturer that is weak in North America but strong in Europe and Asia may have similar planetary challenges. But if they merged, their problems could cancel each other out.

The industry is waiting to hear that jigsaw puzzle fit argument. The combined firm will be much larger, giving it the ability to pressure suppliers on price, but that's not much of a competitive advantage when your rival has the same weapon but it's a lot bigger.

The announcement thus far hasn't been winning much support among Sears' and Kmart's retail colleagues. On Thursday, the results of a survey from RetailWire—a popular retail news analysis and discussion forum organization—was not encouraging.

One-third of those surveyed agreed with the statement: "The deal's a stinker, bad plus worse equals the worst." A slightly larger percentage (35 percent) selected "The only thing I'm certain of is more stores will be sold," and an additional 11 percent said, "Nothing is really going to change." Five percent said "not sure" and a mere 11 percent agreed that the combined Sears-Kmart team will be "a retailer to be reckoned with."

The head of the union representing many employees of the two companies did not seem to feel empowered by the merger. "A predatory business model that sends wages spiraling across several industries, exploits workers by failing to provide decent pay and destroys responsible competition should be eliminated, not emulated," said Andy Stern, president of the Service Employees International Union. "Corporate bottom-feeding may lure consumers with low prices, but it's far from a bargain for the American economy."

He could have at least said "congratulations" first.

The respected analyst firm called The Yankee Group also issued a report on Thursday that was less than optimistic.

The combined company "must align the capabilities and goals of merchandising, the supply chain and IT. Neither retailer has proven capable of doing it. Those failures don't bode well for the future. The litmus test for effective alignment has to be Wal-Mart," wrote Yankee Group analyst John Fontanella.

To be fair, some of the criticisms of Kmart's IT operations are for some programs that have been fixed. Still, we can't ignore history.

"Kmart's systems, up until a very short time ago, were extremely archaic," said Debby Garbato, who serves as editor in chief of a monthly retail magazine called Retail Merchandiser. "For example, they had apparel on a separate replenishment system than other products, and their in-stocks were way down, all because they were really behind the times."

Kmart was given some credit for being one of the first to support self-checkout, but the company recently started backing away and shutting down self-checkout, at least in certain key locations, said Neil McCarthy, the CIO for the 550-store WaWa convenience store retail chain.

"I know that Kmart's IT has struggled. They were trying the self-service thing, and they yanked all that," McCarthy said. "Sears is a little more on the ball."

That's probably the perfect way to put it: "a little more on the ball" than Kmart. That's the kind of honest compliment people used to receive on the Dean Martin Celebrity Roasts.

Sears' IT operational history is certainly less depressing than Kmart's, but it's hardly exciting. It has periodically toyed with some cutting-edge efforts, particularly in the Web arena, such as allowing customers to try to schedule service visits. That's tame by today's standards, but it was impressive a few years ago.

The only truly cutting-edge retail player in the Sears camp is recent acquisitionee Lands' End, which pioneered the virtual fitting room back in '99.

Sears has never fared well with its clothing offerings, but Lands' End brought it the technology to make it feasible. Beyond the e-commerce efforts, Sears integrated the Lands' End apparel fulfilling technology, which is no easy feat.

"Apparel is a stock nightmare. You have a million sizes and a million colors. You're talking SKU management that is unbelievable. And in three months, all of the styles will change," Retail Merchandiser's Garbato said.

Sears, on the other hand, was used to stocking things like hammers and automobile gear. "Take car parts. That part's going to be there unchanged for years."

So these Lands' End folk are now part of the Sears IT team, at least until the layoff fairies pay them a visit.

Even if we assume that the best and brightest won't be laid off, Sears and Kmart are likely to lose many of them during the weeks and months of transition, as everyone knows that there will be massive layoffs but nobody knows where. It doesn't take a fortune teller to predict that some top talent is going to run off to find more stable surroundings. Perhaps those open arms will belong to Target or Wal-Mart.

Yankee's Fontanella urges observers not to play down the importance of the IT component. "On the scale that [the combined companies] will operate, technology is essential. The [combined] company must become more technically adventurous as it drives for differentiation," he said.

"Unlike the direction that Kmart took four years ago—which almost resulted in the destruction of the company—technology must be viewed as the enabler for business success, not the cause," Fontanella said. "Store format, operating procedures and target demographics differ widely within the new entity, which makes swift and decisive action to align goals and capabilities all the more critical."

That's true. Both of these retailers do have significant differences. The target audiences alone tempt the cynical suggestion that this is a case of Where American Shops meeting Where America Shoplifts.

But they also have much in common. They are major retailers with world-class brands that have been beaten up to second-tier players. It's not the synergies one ideally wants, but it's a start.