Two-For-One Sale

Sho

ppers Venturing into the new supersize Sears Grand concept store in Rancho Cucamonga, Calif., off the old Route 66, can be forgiven for double-checking the name on the façade. Perhaps it's the barbecue grills on sale outside the entrance, an echo of Home Depot's parking-lot bonanzas, or the reams of DVDs, CDs and books that make you think you've stumbled into Wal-Mart. Maybe it's the colorful signs hanging from the industrial, sky-high ceiling, festooned with cheeky slogans like IT'S THE LITTLE THINGS THAT COUNT, which remind one of the king of cheap chic, Target. Then again it could be the 10-ft.-wide aisles and end-cap displays with towering boxes of bulk sodas, detergent and paper towels that look straight out of Costco, or the smarter, casual clothes that smack of Kohl's. Sure, this Sears store still has its standard array of Kenmore appliances, Craftsman power tools and DieHard batteries, but there's also a wine section and an eye-care shop. Most important, there isn't a musty, aging shopping mall anywhere in sight.

If Sears' odd amalgam of its rivals' successful retailing strategies seems a bit disorienting, consumers may have to get used to it. Until now, the Grand store has been just a small-scale experiment to lure shoppers in more often and stop Sears from being squeezed by discounters on the low end and big-box specialty retailers on the high end. Think of it as the wider side of Sears. But in the wake of last week's $11 billion megamerger with floundering discounter Kmart, the Sears Grand could be the foundation of an extreme and long-overdue makeover. By melding the Sears savvy in selling so-called hard goods like dishwashers, lawn mowers and flat-panel TVs with Kmart's upmarket "soft" brands like Martha Stewart Everyday, Jaclyn Smith and Joe Boxer, the sales pitch goes, the two perennial retail losers just might create a winning formula. On the other hand, by combining two badly managed retail dinosaurs into one, wags say, the companies may simply save themselves some bankruptcy fees when they inevitably go extinct.

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Notwithstanding all the talk about scale, $300 million in annual cost savings and sizable purchasing power, the merger isn't so much an attempt to take on a behemoth like Wal-Mart as it is to survive in spite of it. Even with a combined $55 billion in annual sales, Sears and Kmart will be just one-fifth the size of Wal-Mart, which "is so overwhelming in terms of market share, logistics and efficiency that going up against them would be futile," as Michael Appel, managing director of Quest Turnaround Advisers, puts it.

For the moment, at least, Sears and Kmart will operate as separate chains under one corporate umbrella, Sears Holdings, and each will probably offer a smattering of the other's trademark brands. But all indications are that as time goes by, Sears, the more productive store operator and the more respected brand, will subsume Kmart and try to carve out a successful niche as a middle-market power retailer focused on fashion and the home, with more attitude and style than JCPenney could ever hope to have. "We are the trade up," Sears CEO Alan Lacy said almost defiantly at the announcement of the deal. "We sell better things than Wal-Mart and Target. We've got better brands [and] better service."

The shotgun marriage between Sears and Kmart is the brainchild of Kmart chairman and maverick investor Edward Lampert. A billionaire finance whiz who counts David Geffen and Michael Dell as clients and Warren Buffett as his idol, Lampert took control of Kmart when it came out of bankruptcy 18 months ago. Since then Lampert, 42, who also happened to be Sears' largest single shareholder through his ESL Investments, has turned Kmart into a cash cow, albeit a shrinking one. Although critics describe his moves as short-term fixes, he reduced inventory, slashed costs, limited discounts and sold off some of Kmart's lucrative real estate to the likes of Home Depot and, yes, even Sears.