Sears, Kmart Merger to Create Huge Retail IT Operation

Updated: The new retailer will be the nation's third largest with $55 billion in projected annual revenues and almost 3,500 stores.

When Kmart and Sears announced on Wednesday their plans to merge and create the nations third-largest retailer, it shook the retail technology world.

Although it will take months for the two retail leaders to merge their almost 3,500 stores with a projected $55 billion in annual revenue, the combined operation will have the ability to significantly influence retail technology trends.

The only two retailers that will be larger will be Wal-Mart and Home Depot.

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Before the merger, though, neither retailer had been a dominant force in any segment of retail technology. Analysts suggest that is not likely to change soon, as the combined company will have its hands full just maintaining operations.

"We have not viewed either organization as being lead IT organizations," said Stephen Smith, a vice president and research director at Gartner. With some mergers, "one side has got a great IT organization and it will tremendously help the other. I dont think thats the case for either company here."

Although the combined entity would certainly have the size and number of stores to dominant retail IT trends, thats not likely to happen for quite some time, if at all, Smith said. "Historically, mergers and consolidations tend to slow down deployments and operational efforts," he said.

Ideally, IT mergers can help a company develop a strong competitive advantage, whether its from improved time to market, better customer insights or developing a more efficient supply chain to lower prices. But with the Sears and Kmart merger, its more likely the two will be so occupied with integrating the two without losing sales or inventory data that they wont have the time or the wherewithal for much else.

"They are going to spend a lot of time trying to figure out how to get to a single platform and to just make the engine run. They are going to be appropriately focused on keeping both operations running. It is not going to allow them to drive or even pursue competitive advantage" for quite some time, Smith said.

Another analyst, Frost & Sullivan IT research director Rufus Connell, agreed.

"In my opinion, they will spend the better part of a year to get everything integrated. When youre behind in a race, you need to be driving faster than the competition, not stopping to bolt the engine back onto the transmission," Connell said. "Sears and Kmart will have to overcome huge challenges not to fall even farther behind Wal-Mart in terms of efficiencies."

Frosts Connell said the pairs integration struggle logically extends from challenges they have faced individually.

"Both Sears and Kmart have been hurting for some time now," he said. "The reason theyve been having trouble is that Wal-Mart has been outcompeting them from an inventory and information-management perspective.

"Wal-Mart has built a lower cost structure, a more efficient infrastructure. Now, Kmart and Sears will be faced with a huge integration challenge."

In a brief written report, AMR Researchs Scott Langdoc echoed Connells concerns, but was more blunt: "Kmart has been trying to establish a new approach to IT after some spectacular project failures and bankruptcy disruptions, while Sears has aggressively embarked on a number of initiatives in store systems, replenishment, merchandise planning, and markdown price optimization."

The AMR Research Vice President added that the timing of this announcement is critical. "The merger comes at a critical time in the ongoing retail technology initiatives of Sears and Kmart," Langdoc wrote. "Assessing the options for synergy in technology while not slowing down IT investments will be difficult."

Next Page: Potential operational efficiencies.