Kmart, Sears expect merger to improve IT

Kmart Holding Corp. and Sears, Roebuck and Co. claimed that the planned merger they announced last week will broaden their U.S. retail presence and make their procurement, marketing, IT and supply chain management operations more efficient.

But the marriage could require a daunting amount of IT work, depending on the degree to which the retailers decide to go to common systems, said several retail technology analysts.

One key part of the strategic plan, for instance, calls for many of Kmart’s retail locations to be converted to Sears stores as the latter operation tries to branch out from its base in shopping malls.

Sears previously agreed to buy 50 stores from Kmart, and Sears CEO Alan Lacy, who will be vice-chairman and CEO of the new Sears Holdings Corp., said this week that “several hundred” Kmart stores could be switched over altogether.

But the conversion could require “dramatic” IT changes, said Stephen Smith, an analyst at Gartner Inc. “We could find that they’re more compatible than is often the case (with retailers), but there is a big risk that this will be far more challenging than they’re promoting today,” he said.

Not surprisingly, the two companies have accumulated plenty of different systems. At the store level, Kmart in 2001 announced that it was buying IBM Corp. SurePOS 700 cash registers running the vendor’s point-of-sale operating system.

Earlier this year, Sears said it planned to install newer SurePOS machines running 360Commerce Inc.’s POS software on Microsoft Corp.’s Windows XP Embedded operating system.

But the greatest challenge won’t lie with the in-store IT systems, according to John Fontanella, an analyst at The Yankee Group in Boston. He said the real problem will be with back-office applications at headquarters, including the merchandising, inventory planning and supply chain software. “From a process perspective, if you’re going to start saving money, you’ve got to standardize on one distribution network,” Fontanella said.

Kmart and Sears, which expect to complete the stock-swap transaction by March, declined to comment on their future IT plans. A spokesman for Sears said only that the two companies will “do a thorough analysis of both organizations and determine the best path toward integration.” When it merged with Lands’ End Inc. in 2002, Sears decided not to combine IT operations.

Sears has been more aggressive then Kmart in pursuing new IT initiatives during the past two years. Last spring, Sears CIO Gerald Kelly Jr. orchestrated a 10-year, US$1.6 billion IT outsourcing deal with Computer Sciences Corp. And during the third quarter, Sears signed a licensing deal with JDA Software Group Inc. for an integrated set of tools to assist with merchandise management as well as planning and forecasting.

Kmart this week launched a redesigned Web site that its e-commerce team built with Fry Inc. But other than that, major IT initiatives have been sparse for Karen Austin, who became Kmart’s CIO in April 2002. “We were in bankruptcy for a lot of Karen’s tenure,” a Kmart spokeswoman said. She added that Kmart is “getting back to business” after emerging from bankruptcy protection in May.

Long-standing IT woes contributed to Kmart’s business problems. The company tried to reverse years of constrained IT spending with a two-year, $1.4 billion investment in May 2000. But by the time it filed for bankruptcy protection in January 2002, Kmart found itself without a CIO and struggling to fix its supply chain system and replace an extensively modified warehouse management system.

“Kmart has really been in survival mode,” said Rob Garf, an analyst at AMR Research Inc. He and other analysts said it would make sense for the retailers to head in the IT direction of Sears. “The combined entity needs to continue the momentum that Sears has gained over the last couple of years,” Garf said. “It’s important for them not to slow that process down.”

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