Sears, Kmart Merger Could Prove Bad News for Papers

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By: Mark Fitzgerald and Jennifer Saba

Wall Street is calling Wednesday’s $11 billion merger of Sears and Kmart a blockbuster deal — but will it be just a bust for newspapers?

“In terms of advertising, it’s one less circular,” said Ed Nakfoor, a retail consultant based in Kmart’s hometown of Birmingham, Mich. “You’ve got to find a replacement — and I don’t know if there is a replacement for someone like Kmart.”

Kmart has been one of the newspaper industry’s best customers, though a declining one in recent years, notes Paul Ginocchio in media equity research at Deutsche Bank Securities. Last year, he said, Kmart spent $163 million in 2003 on measured media, of which 56% went to newspapers. In 2000, by contrast, Kmart spent $352 million in advertising, with 49% going to newspapers.

Nakfoor is among many analysts who believe that despite assurances that the Sears and Kmart names will remain on their individual stores, it’s just a matter of time before Kmart goes away.

“My belief is, there’s no place for Kmart at the table, so I think this just kind of speeds up the process,” he said. He noted that when big department-store operators such as Dayton Hudson and Macy’s took over regional stores, they kept those names alive for a while, but in almost all cases eventually converted them. In this merger of unequals, it is the Sears franchise that will prevail, analysts say.

Goldman Sachs is more bearish, recommending that investors cash out of Sears or liquidate their holdings. The investment firm issued a note today that said it doesn’t believe that “combining two failed retailers will make a viable challenger to Wal-Mart” nor does the firm believe that “adding Sears appliances to Kmarts or Joe Boxer apparel to Sears will turn either company around.”

Edward Atorino, an analyst with Fulcrum Global Partners, said the merger could mean “short-term difficulties for some newspapers” as stores are closed as a result of consolidation.

But he added that newspapers also have reason to be optimistic that as the new company takes aim at Wal-Mart, the world’s number-one retailer — and a marketing behemoth that famously shuns newspaper advertising.

“Ultimately, it could be a plus,” Atorino said. “A new mega-store would have to advertise in the early stages to establish itself. … If they are going to go against Wal-Mart, they will have to position themselves as an alternative [and] … communicate why people should go to this new mega-store. That may require a lot of advertising. The question is, will it be TV, cable, radio? I presume newspapers will play a pretty good role.”

The Newspaper Association of America’s vice president of advertising, Mort Goldstrom, says newspapers should be cheered by the deal, though he acknowledged that’s a minority view right now.

“I think when all the dust settles, it won’t be as bad as some people are thinking now,” he said Goldstrom. Publishers should remember that only two years ago, many believed Kmart would never survive bankruptcy and that its advertising was going away forever, Goldstrom said.

“If you took the pessimistic view that Kmart was going out of business, this is a terrific scenario for newspapers,” he said.

With Sears getting Kmart’s soft goods and Kmart getting Sears’ hardware, the new stores could be stronger in the future. But even if the Kmart nameplate does disappear eventually, Goldstrom argued, newspapers will have bought time to prepare for the change.

Another reason to believe the Kmart name is going away is the dynamics of the deal with Sears, which seems as much motivated by Kmart’s huge property holdings as any desire to run the remaining stores.

“I believe the main reason that Sears bought Kmart was to use Kmart locations to grow Sears’ store count,” said DB Securities’ Ginocchio, who noted that this is increasingly hard to do with the nationwide slowdown in shopping-mall construction.

“I’ve often said that a lot retailers have been undone by their great real estate,” said retail consultant Nakfoor, “and Kmart is a great case in point.”

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