Sears looks for Lands’ End’s big push

When Lands’ End Inc. was struggling as a start-up direct merchant in the 1960s, it received timely help from a gentleman named Tom Filline, perhaps the leading direct merchandising expert of the day and the man who had run the entire mail-order operation of Sears, Roebuck and Co. “We’ll always owe a huge debt of gratitude to Tom,” says Lands’ End co-founder and former chairman Gary Comer. “He taught us how to merchandise product, how to structure lines, when to take chances. He was the priceless ingredient that happened to be in the right place, at the right time, when we needed him the most.”

Today those words from Lands’ End’s 25th anniversary yearbook could easily be flipped as coming from Sears and directed at Lands’ End executives. It has been more than three decades since the former boating products cataloger set sail in Chicago in the shadow of Sears, then the country’s largest retailer and leading direct merchant. Now Lands’ End has emerged as a key player in the multi-channel future—store, web and catalog—of the lumbering and now third-largest retailer.

The importance to its future that Sears places on Lands’ End is clear. Not only did Sears pay a hefty $1.9 billion in cash for Lands’ End, which posted $1.6 billion in 2001 revenue, but it placed the senior management of the Dodgeville, Wis.-based company in charge of all direct merchandising operations. Lands’ End CEO David F. Dyer now also is executive vice president of Sears Customer Direct, overseeing all online and catalog operations, and reporting directly to Sears CEO Alan J. Lacy. “That’s an acknowledgement that Lands’ End is further ahead in direct merchandising today than Sears,” says Neil Stern, partner with Chicago-based retail consultants McMillan/Doolittle. “It’s rare in an acquisition to see the acquired company maintaining a leading role.”

And, indeed, Sears needs Lands’ End’s expertise as never before. Now based in the Chicago suburb of Hoffman Estates, the 116-year-old company continues to strive for the appropriate image and product assortment to present to consumers. Several years ago it quit its position as the preeminent direct merchant after killing its anything-you-want retail catalog, and it has repositioned itself in fits and starts as a merchant of a unique selection of offerings.

Replicating success

But finding and building a new position has been difficult and costly. While Sears has striven for a new identity, many upscale shoppers turned to competitors such as J.C. Penney while consumers in search of bargains flocked to Wal-Mart and Target stores. And while Sears has remained primarily in large shopping malls, where it must compete directly against scores of specialty shops as well as rival department stores, retailers like Target Corp., Best Buy Co. Inc. and The Home Depot Inc. have taken the Wal-Mart route in setting up shop in smaller super-center strip malls, where they are the big gorilla and face little if any competition.

Sears has responded by focusing on an assortment of products that will bring it the most profitability. “What Sears has done differently from other retailers is focus on what they can sell at a higher profit margin,” says Duif Calvin, a San Francisco-based retail consultant.

The importance of those products is underscored in Sears’s financial reports. Sears reported that sales of appliances and tools rose at double-digit rates in September while companywide sales fell 3.1%. Sales in all categories but tools and appliances were down.

Those poorly performing categories included apparel, which industry analysts finger as a missing link in Sears’s effort to revive its merchandising. But now with Lands’ End in the family, Sears finally has a leading high-end apparel brand to fill out its product categories. And with Lands’ End’s highly recognized expertise in online technology and merchandising strategies, Sears is positioned to continue its efforts to move its in-store strengths to the web.

Some analysts expect Sears will try to replicate in apparel what it created in tools and appliances. While over the years Sears has cut out of its merchandise mix such items as bicycles and blankets, it built up key categories of tools and appliances by adding national brands to its popular house brands. In tools, its Craftsman brand is joined by national brands such as Crescent, Black & Decker and Cooper Tools. And in appliances, its Kenmore brand is joined by GE, Maytag, Whirlpool and others. In both tools and appliances, Sears can say that it is the only retailer offering these entire collections, because no one else sells Kenmore and Craftsman brands.

Although Sears won’t dress up apparel with a selection of brands as complete as in the other categories, it expects apparel lines to offer a comprehensive selection for its traditional customer base—anchored by Lands’ End at the high end. “Lands’ End is the Craftsman Tools of apparel,” Calvin says.

The next generation

With Lands’ End apparel and accessories going into 184 Sears stores this month in time for holiday shopping, Sears’s efforts to cross-merchandise Lands’ End with its new Covington apparel line—the new private label Sears has substituted for a slew of prior house brands—and other products, will be put to an early test. Analysts expects Lands’ End will fill only 15-20% of in-store space in apparel and related accessory departments because its higher prices—such as $128 for a wool-cashmere jacket, compared to a $69.99 wool Covington alternate—may not appeal to traditional Sears shoppers.

Despite the higher prices of Lands’ End’s clothing, Sears is taking a strategy of not being fashion-forward like rivals J.C Penney Co. Inc., R. H. Macy & Co. and, on the mass merchant side, Target. Instead, it has chosen to hang its apparel fortunes on the classic casual style of Lands’ End, which follows a strategy of offering a broad selection of practical, high-quality seasonal items most popular with adults who are more concerned about quality and comfort than in the latest attention-grabbing fashion.

Sears is further planning to broaden its base with a newly launched fine jewelry selection. It is focusing jewelry sales in a separate catalog, but coordinating the content with the web. While it has beefed up its jewelry offering on the web from 300 items to 1,000, it also is restricting the sale of higher priced items to the catalog. Customers can view them on the web, but they have to call the catalog center to order.

It may take a while, but Sears expects to eventually win over many of today’s young apparel shoppers once they move beyond fashion-forward to a mixture of comfort and quality offered by Lands’ End and Covington. And Sears may be counting on its strengths in tools and appliances, and to a lesser extent in auto services and electronics, as well as its strength in those areas on the web, to achieve that long-term goal. “The big question that Sears has faced for the last 20 years is how do they get the next generation?” Calvin says.

She and others note that Sears will have to maintain a strong connection with younger buyers for items like auto parts and consumer electronics where it has been successful reaching shoppers in their 20s. The hope now is that, while dodging in and out of Sears for car supplies and home entertainment products, young buyers will build an awareness of the retailer’s quality apparel that they’ll come back to in 10 years. Sears, meanwhile, will be adding them to its customer database. The same buying pattern could hold for tools and appliances as today’s 20-somethings become homeowners. “If young people come into Sears when they have a flat tire, they may not buy apparel, but when they get to the age of 32 and need a sweater, they’ll think of Sears—and Sears will already have their name,” Calvin says.

The key to the future

Sears’s emphasis on multi-channel retailing fits right into this expected evolution, since young buyers also tend to be the most comfortable using the web. And Sears has stated forcefully that the web is key to its future. “We know that tri-channel customers are more valuable than any others,” says Dennis Honan, vice president of Sears Customer Direct.

Sears decided early on in its web experience that the brand combinations that worked in stores could be winners on the web as well. While it initially offered toys and other products online, Sears focused on tools and appliances and prepared its online infrastructure and fulfillment operations to present them on the web in a way that enhanced the store experience. “Customers wanted online side-by-side comparisons, so we launched that,” Honan says. Sears also provided access on Sears.com to thousands of product schematics so do-it-yourselfers could find and order a particular part for fixing an appliance or other product.

Sears quickly found it had hit on a good strategy. It launched online sales of appliances in April 1999. “In the first day, we sold more appliances on Sears.com than we had expected to sell online in the entire month,” Honan says. He notes that Sears.com expects to be profitable this year.

Moreover, offering tools and appliances on the web is driving up store sales. Sears store personnel keep track of the number of store shoppers with web page print-outs of product specifications when buying an appliance. “One out of every 10 major appliance sales in-store are influenced by Sears.com,” Honan says.

This all fits in with Sears’s goal of making shopping easy for customers, regardless of which channel or combination of channels they choose for browsing, researching, buying or receiving products, Honan says. “It’s all about making Sears more convenient to shop, and making the web a stronger component of shopping convenience,” he says. “If you look at what we’ve done this year, it’s all about serving the needs of customers, and especially multi-channel customers.”

Backing up its strong brands in tools and appliances was an extensive back-end infrastructure, Honan adds. “We view our existing infrastructure, whether logistics, supply chain, or price management systems as kind of hidden jewels,” he says.

But online success with tools and appliances doesn’t necessarily translate into online success with other products, especially when they are as different as socket wrenches and merino sweaters. Although Sears was able to rely at least partly on existing infrastructure to support its move to offer appliance and tool products online—for example, its long-time expertise in delivering appliances to buyers’ homes—its online infrastructure is not as strong elsewhere, analysts say. “They don’t have the ability to deliver apparel effectively to consumers’ homes,” Stern says.

Integration issues

And some industry observers note that Sears lost and never regained its direct merchandising expertise after abandoning its Big Book catalog a decade ago. “It’s ironic that Sears, once the largest direct marketer, disbanded much of its direct marketing infrastructure,” Stern says. “Sears has been doing well online, but it had to cobble its infrastructure together.”

With Lands’ End, Sears gains state-of-the-art expertise in a complete direct marketing system, including customer database management, a call center in Dodgeville and a fulfillment center, also in Dodgeville. In addition, Lands’ End brings industry-leading web-site technology. It pioneered both the My Virtual Model online clothes fitting system and online custom-fitting technology for chinos and jeans.

How, when and if Sears will leverage Lands’ End’s extensive direct merchandising expertise, however, remains an open question. Sears has already placed a prominent link on Sears.com to direct shoppers to LandsEnd.com, where it’s accepting Sears credit cards for purchases. Beyond that, however, Sears says it will first focus on merging the Lands’ End brand with other apparel in Sears stores. As it did with tools and appliances, Sears can be expected to first build the in-store experience before making more changes online.

When it’s ready to take advantage of Lands’ End’s online expertise, Sears will have some issues to address, analysts say. One is whether Sears will integrate the Lands’ End web platform with Sears.com’s. Without some kind of integration, argues consultant Calvin, one potential problem will be having two shopping cart systems, making shopping in multiple categories difficult and potentially turning off customers seeking convenience in shopping.

The offline challenge

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Customers in this year’s holiday shopping season may overlook such problems due to the newness of the arrangement, but shoppers may eventually expect the convenience of purchasing in multiple categories with one shopping cart, she says.

A parallel in Sears’s online merchandising strategy can be found in Kenmore.com, where shoppers can research and pick out an appliance. But when the Kenmore.com shopper is ready to buy, she links back to a shopping cart at Sears.com.

Sears has no immediate plans to combine the Sears.com and
LandsEnd.com shopping carts, focusing for now on keeping LandsEnd.com a distinct Lands’ End site while leveraging the Lands’ End brand in Sears stores, the company says.

Some say that, since the two online operations are working just fine as they are, the more pressing issue is presenting the Lands’ End brand in Sears stores. In-store merchandising represents a new challenge for Lands’ End, which other than about 17 outlet centers has never had a store presence. It had been seeking a store strategy as a means of growth beyond web and catalog sales and now it has its chance to make it work.

“Lands’ End has done well in offering alternative shopping channels through the catalog and the ‘Net, or a combination of the two, and now we’ll see if it can fit in the third leg of Sears stores,” says Ulysses Yannas, a retail industry analyst with investment research firm Buckman, Buckman & Reid, New York.

The assortment challenge

The biggest issue that faces Lands’ End and Sears in the area of store merchandising is making sure that stores get the right product assortment. It’s one thing to stock a variety in a distribution center where aggregated demand comes from across the country. It’s a completely different issue to make sure that the Sears stores in Peoria and Port Ritchey get the right mixes for their local markets. Lands’ End has no experience in stocking stores, although it does have extensive knowledge about what sells when in which parts of the country that it could apply to stores.

“Lands’ End has tremendous experience in what sells by mail order and on the web, but not about what sells on the floor,” Calvin says. “They’ll have to experiment and see what sells off the racks.”

Similarly, if Lands’ End does succeed in bringing new customers to Sears, Sears may find product assortment a challenge since it has little experience in merchandising apparel to those customers. But at the same time, analysts note, Sears isn’t exactly a newcomer to apparel sales. “People say Sears can’t sell softlines, but it does sell a lot of apparel—over $8 billion every year,” says Stern of McMillan/Doolittle. “It’s not one of their strengths, but it’s not like they’re Home Depot and just put apparel in their stores.”

Sears executives acknowledge that product assortment will be a learning experience. They say that is why Sears is introducing Lands’ End clothing to a limited number of stores to start.

Experimentation

And so observers caution against deeming the Lands’ End acquisition a failure if the first year is less than sterling. “Great merchandisers don’t guess, they experiment. This first season will be not just introducing Lands’ End into the stores, but experimenting as well,” Calvin says.

Almost as big a question is quality. For one thing, analysts wonder, can Lands’ End maintain the quality of its products while its manufacturers boost their output to supply Sears’ stores?

Quality assurance was built into the planned launch in Sears stores, Karen Centner, vice president and general merchandising manager for e-commerce and international for Lands’ End, says. “The plan to ratchet up the store count from 184 this November to 870 next fall/winter was conceived to give our vendors the time needed to increase their manufacturing capacity while maintaining Lands’ End quality assurance standards,” she says. “It takes a very long time for a mill to produce fabrics that we like and for a manufacture to cut and sew or knit a garment that we like that meets our standards and quality specifications. We have a very large staff in our Quality Assurance Division that teaches our vendors about our quality requirements, and enforces them.”

But then once the product is in the store, can Sears maintain Lands’ End’s high quality image when it places merchandise next to the less expensive Covington brand? “That will be a challenge but Sears does have strong experience in marketing brands like Craftsman within the tools category,” Calvin says.

Even as Sears fits Lands’ End into its retailing strategy, it plans to leverage the upscale Lands’ End customer base to benefit its credit card program. While it’s re-developing its retail strategy, Sears has relied on financial services to keep the company afloat. Many times in the 1990s, the Sears credit card operation was the only profitable business. And even today, the $435 million profit in this year’s first six months represented 59% of operating income. Sears says it plans to market credit services to Lands’ End’s base. But Yannas of Buckman, Buckman & Reid warns that, in the current economy, even high-income consumers may be stretched financially and prone to delinquency.

Lands’ End clearly plays an important role in Sears’s future. And Sears leaves no doubt about the value it places on its new brand. Of the $1.9 billion purchase price, it allocated $836 million to goodwill for the benefit it expects from “leveraging Lands’ End’s brand name across the retail and credit business,” Sears said in a financial statement following the acquisition.

With a new upscale brand and its aggressive multi-channel strategy, it’s a fair bet that Sears will find ways to leverage across all channels the combined presence of its new jewelry and apparel lines along with its more traditional tools and appliances.

Sears, with a big boost from Land’s End, has set the table for a strategy that might impress even Tom Filline. “But it’s wait and see,” warns analyst Stern, “because now the customer has to vote on it.”

paul@verticalwebmedia.com

Wal-Mart takes a different tack from Sears

As Sears, Roebuck and Co. continues to find ways to leverage its online presence, now bolstered with the merchandising and technology expertise of Lands’ End, rival Wal-Mart Stores Inc. is traveling a different road where online and offline keep their distance. “Wal-Mart is not making the same inroads online,” says Ulysses Yannas, a retail analyst at New York-based investment research firm Buckman, Buckman & Reid.

While Sears has been working to make it easy for customers to shop, research and buy products any way they want, online or offline, Wal-Mart has been pushing whatever works best in each channel. The result: “WalMart.com is a different experience from going into a Wal-Mart store,” says Duif Calvin, a retail analyst based in San Francisco.

Wal-Mart offers a consistent brand experience in its different channels, but “they’ve not created a synergy between online and offline stores,” Calvin says.

Wal-Mart’s stores have a small department for books, for example, but WalMart.com is positioned as a competitor to online book giant Amazon.com. “People know that anything they can buy at Amazon, they can buy at WalMart.com a little cheaper,” Calvin says. “So those wary of Amazon can feel comfortable buying at WalMart.com.”

Perhaps the biggest void between the multi-channel strategies of Wal-Mart and Sears is in apparel. In a far different approach from the way Sears is building the upscale Lands’ End brand into its multi-channel apparel strategy, Wal-Mart has removed apparel from its web site and maintains a relatively unplanned approach to selling apparel in its stores.

Emphasizing lean, cost-efficient distribution over merchandising, Wal-Mart typically offers inconsistent selections of apparel in incomplete sets of sizes, Calvin says. That makes it difficult to promote apparel, because it could lead to customers not being able to find their size in a promoted item. And promotion is a key to successful selling online, she adds.

“It’s hard for Wal-Mart to merchandise one piece at a time,” she says. “It’s not like walking into a store and just picking out what’s there.”