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It's been more than a dozen years since Sears Holdings (NASDAQ: SHLD) was created through the takeover of Sears by Kmart. Unfortunately, the plan to bolster the ailing chains' profitability through greater scale didn't succeed for very long. Sears Holdings never recovered from the Great Recession, and in recent years, sales have been plunging as the company pays the price for years of underinvestment.
Last weekend, Sears Holdings unveiled its latest turnaround initiative, opening a small-format Kmart inside a Sears store in Brooklyn. It also plans to test small-format Sears stores inside some Kmart locations. Mixing the Sears and Kmart store formats in the same locations could help shore up sales, albeit at the cost of greater supply chain complexity. However, this project isn't likely to keep Sears alive in the face of its ongoing cash burn and massive liabilities.
Sears Holdings tries a new strategy
The new small-format Kmart that opened in Brooklyn takes up just 10,000 square feet on the lower floor of the Sears store there, versus nearly 100,000 square feet for a full-sized Kmart. It focuses on selling everyday household essentials like groceries, cleaning supplies, health products, and cosmetics.
The idea is to try bringing new product categories into Sears stores. The manager of the Kmart section said that customers had been coming into the Sears store looking for some of these products and had to be turned away previously, according to CNBC.
Today, Sears stores don't carry some product categories featured at Kmart. Image source: Sears Holdings.
In addition to making more sales to people who were already coming to Sears, the addition of a Kmart with household basics could also help drive more customer traffic to the store, since these items need to be purchased relatively frequently.
Sears Holdings also plans to pilot Sears appliance shops in a few Kmart locations later this year. While Kmart already stocks a limited selection of entry-level appliances, the Sears shops are expected to carry a full range of appliances in order to appeal to a broader range of shoppers.
Echoes of J.C. Penney
There are clear parallels between Sears Holdings' initiative to add small-format Kmarts to some Sears stores (and vice-versa) and J.C. Penney's (NYSE: JCP) 2016 decision to (re)introduce appliance sections in many of its stores.
First, both moves were inspired by customers not finding items they were looking for. As noted above, customers were coming into the Sears in Brooklyn looking for household items that the store didn't sell. As for J.C. Penney, the company discovered that appliances were the No. 1 product category that consumers searched for on J.C. Penney's website but couldn't buy.