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Sears New Format Is Essential To Kmart Absorption

After months of speculation about following November's $11 billion Kmart/Sears merger, Sears on Monday launched a new format called Sears Essential, which it says will combine the best of both stores.

A total of 25 Sears Essential stores will be opened by the end of the year in former Kmart and Wal-Mart locations. Sears purchased 50 Kmarts and six vacant Wal-Marts for $576 million last year before the merger was announced.

While no other stores have been announced, many analysts agree that Sears Holdings Corp. will use the new format and Kmart real estate to expand Sears.

"From the get-go, it (the merger) was a Sears play," says Lois Huff, senior vice president of Retail Forward. "Kmart is the vehicle and Sears is the message."

The smaller Essential store will let Sears speed up expansion plans. Sears first tried to expand off-mall in 2003 with the Grand concept. However, the Grand's large size, 165,000 to 200,000 square feet, limits its expansion.

The Essentials' size ranges from 85,000 to 110,000 square feet. It is designed to be a neighborhood center, rather than a regional draw or mall anchor. Essential will offer Sears' mainstays such as appliances, lawn and garden, tools and home fashions as well as convenience items typical to Kmart like health and beauty, pet supplies and boxed and canned food goods. Products sold at Essential can vary depending upon the neighborhood, said a spokeswoman for Sears.

Sears Essentials will retain some features of the Grand concept including a one-level racetrack design, exit cashiering and centralized customer service.

The company also plans to continue expanding its Grand concept. However, only four new stores have been announced this year for a total of eight.

What this will mean for the Kmart brand remains uncertain. "We believe this could mark the beginning of the end of the Kmart brand as Sears continues to transition locations to the Sears Essential format after the merger continues," said UBS analyst Gary Balter in a report.

Huff said Kmart's best sites will be taken over by Sears in the future. The remaining stores, largely in downmarket areas, could either be closed or repositioned as value centers. "I do not see Kmart continuing in its current form," says Huff.

--David Koch

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