Attention Shoppers - We've Got Real Estate
by Peter G. Miller
The merger of Sears and Kmart at first sounds like the combination of two old-time retailers, but the real story concerns bricks, mortar and changing shopping patterns. To start at the beginning, until the Civil War where you lived was where you shopped. Even in the biggest cities your choice of goods and services was limited to the nearest merchants. In 1863, the rules changed when the Postal Service established free city delivery -- but only for 49 metro areas. Free city delivery meant that if you lived in the right spot you could get goods from merchants delivered to your home. The result was that the supply and price monopoly held by local merchants was effectively broken in major cities. Most of the country did not live in major cities, however. It was not until 1896 that free rural delivery was established and with it the creation of a vast national marketplace. One of the first people who recognized this new reality was Montgomery Ward, a savvy retailer who created a one-page mail order "catalog" in 1872. By 1893 Sears Roebuck was selling catalog goods nationwide from warehouses in Chicago on a scale no local store could duplicate. "In 1897, says the Postal Service, "after one year of rural delivery, Sears boasted it was selling four suits and a watch every minute, a revolver every two minutes, and a buggy every 10 minutes." "The significance of Sears's strategy is best seen in the prevailing prices of goods before his firm made a dent in the consumer market," according to Thomas V. DiBacco, author of Made in the U.S.A.: The History of American Business. "Men's suits cost $10 before Sears, but only $5 in his catalog. In 1897 bicycles ran anywhere from $75 to $100 in retail stores. When Sears first sold them, the price was affordable. According to an 1898 magazine, Sears sends a 'bicycle Catalogue free to anyone who asks for it, and, we are told, shipping several hundred bicycles every day to every state, direct to the riders at $5 to $19.75, on free trial before paying. If Sears, Roebuck & Co. continue to wage their bicycle war throughout the season it will be a boon to all those who want bicycles, but a sad blow to bicycle dealers and manufacturers.'" What is today known as Kmart was founded in 1899 as S.S. Kresge in Detroit. The company peaked in the 1990s when it had more than 2,000 Kmart, Borders, Sports Authority, Office Max and Walden book outlets. Unfortunately for both Sears and Kmart, Sam Walton's stores grew from rural outposts to suburban centers and by the 1990s Wal-Mart was bigger than either of the traditional retail leaders. Other major competitors now include Target, CostCo, Home Depot, Lowe's, Federated Department Stores (Macy's et al), Kohl's, Toys-R-Us and Circuit City. In recent years both Sears and Kmart have changed. In 2002, Kmart entered into a Chapter 11 bankruptcy and ended bankruptcy in 2003. For the third quarter of 2004 Kmart had profits of $553 million. In 2004, Kmart sold up to 54 stores to Sears for $621 million and up to 24 stores to Home Depot for $365 million. Sears, meanwhile, discontinued its famous catalog in 1993, reversed course and bought cataloger Land's End in 2002 and then sold its credit operations in 2003. Wal-Mart during the same period simply expanded to the point where it's now the world's largest retailer with fiscal 2004 net sales of $256.3 billion. While these huge retailers were changing with the times, the ground beneath them was becoming increasingly valuable. Many of their locations are in mature areas where buildings of such size and their related acreage, parking and road access are no longer available. Major department stores are either owned outright or leased. In either case, the value of such properties and leases is enormous -- and often undervalued. In the case of buildings and facilities owned outright, "improvements" may have been depreciated over a period of many years and must now be carried on the books at a fraction of their marketplace worth. As to leases, rates and terms negotiated decades ago are routinely undervalued today. That means many stores effectively have cheap, below-market rents. Seen another way, such leases often have years to run and are thus an asset to the retailer, an asset that can be sold or leveraged by converting a property to a new use. The combination of Sears and Kmart means inevitably that some stores will be closed and that assets undervalued and locked-away for decades can now be released. But if the merger goes through and stores are sold off or combined, what will happen to the nearly 400,000 employees now associated with the combined companies? As part of its 2002 bankruptcy, Kmart shuttered 600 stores and laid-off 57,000 workers. Will laid-off employees be able to find local replacement jobs with equal pay and benefits? If no, that's surely not good for workers -- or the economy. | 
