Big Box Business Continues to Expand
The dramatic rise of chain stores and decline of local businesses has been an ongoing trend in recent years. Big box developers provide an increase in jobs and a boost of tax revenue. They account for a large majority of greenhouse growers' supplies. However, opponents say the big box stores forces the closing of small businesses, add traffic, lower wages and add noise to residential areas. Nevertheless, it is apparent that the industry has been directly impacted by big box businesses. Here, GPN examines the recent developments of the big-box phenomenon number of changes that has been going on with the big-box stores.
Kmart Sells to Home Depot
Kmart is selling up to 24 stores to Home Depot for as much as $365 million, or more than $15.2 million per store. The official number of stores, locations and total purchase price will be determined within the next 60 days, according to officials at Kmart. Home Depot will take those days to work with landlords and municipalities to determine which stores are the most viable to be converted to Home Depot stores in 2005, according to the Atlanta Journal-Constitution. According to the Home Depot's chairman and chief executive, Bob Nardelli, the chain will open 185 stores this year.
According to the Associated Press, Kmart stores will be converted as quickly as possible after they are transferred to Home Depot. "We will take advantage of opportunities to create value that includes the sale of existing stores, or the acquisition of new stores and businesses," said Julian C. Day, president and chief executive of Kmart Holding Corp. "The reality is that we're taking action on many different fronts simultaneously, all with the goal of making Kmart a great retail company once again."
Kmart Sells to Sears?
There have been many speculations that Kmart would sell some of its stores to Sears, Roebuck and Co., but Kmart executives repeatedly decline to discuss the speculation. Sears, Roebuck and Co. stock rose 5.5 percent, while Kmart stock rose 7 percent Tuesday, June 8. According to the Detroit Free Press, Edward Lampert of ESL Investments, Inc. was buying a controlling share in Kmart a year ago, at the same time he was buying a large stake in Sears. Lampert is the majority owner of Kmart Holding Corp., and, with 14 percent, he is the largest single shareholder of Sears, Roebuck and Co.
"There are rumors that Sears is in talks to perhaps purchase stores or have some other type of involvement with Kmart," said Art Hogan, chief market analyst at Jefferies & Co. in the Detroit Free Press. "A lot of buzz after Home Depot's success story with transactions from Kmart. In the Chicago Tribune, Hogan added, "There are several different levels to the chatter, like Sears may purchase some interest in Kmart or purchase [stores] from Kmart," and he suggested the latter deal is more likely.
According to the Chicago Tribune, Sears wants to expand its network of off-mall stores. It currently only has five Sears Grand stores open throughout the United States, but sees the potential for up to 500. Howard Davidowitz of the retail consulting firm Davidowitz & Associates, said, "Kmart is hopeless. Sears has a tremendous amount of work to do, but it's not hopeless. If Sears were to buy Kmart, what it would get with that money is a terrible business that can never compete."
Home Depot Expands to China
In the hopes of becoming Asia's largest home-improvement chain, Home Depot, Inc. is planning to expand into China. According to the Philadelphia Inquirer, Home Depot has not released how many stores it plans for China or when the first store will open, but Bill E. Patterson has been named as the store's president of Asia. "We have studied China for some time," he said. "It's got a great capability in terms of a growing economy. We think it's the right time for us to assess those opportunities we see."
According to the Atlanta Journal-Constitution, stores in China would be the first Home Depot in Asia, whose international presence is in Mexico and Canada. The chain made a failed attempt to expand in South America in the late 1990s. "China is an explosive period," said Nardelli. "It represents a significant opportunity to get in early and get in on that growth."
Home Depot was focusing on China's estimated $50 billion home-improvement sector because it is fragmented with limited competition, according to Reuters. The store opened two purchasing offices in China in 2002 to expand sales of imported products, and it currently has 50 employees in China. The store estimated the China home-improvement market at $50 billion a year. According to the Atlanta Journal-Constitution, China has few large-format home-improvement stores. B&Q, whose stores are modeled after Home Depot, is the primary home-improvement retailer in China.
Lowe's Expands Nationwide
Lowe's is in the midst of the most aggressive expansion plans in its 58-year history, according to the Lexington Herald-Leader. The second-largest home-improvement retailer has been opening an average of two new superstores a week since the end of May. In May, Lowe's opened and announced that it would locate new stores in Alaska, California, Colorado, Florida, Georgia, Minnesota, Missouri, Montana, New Jersey and Texas.
At the International Council of Shopping Centers convention in Las Vegas in the last week in May, Robert Tillman, CEO and chairman of Lowe's, announced, "Many people ask how many stores will we open. We haven't even come close to storing half of America today." Tillman also suggested that Lowe's might become an anchor store for shopping malls, according to the Las Vegas Sun.
Target Sells Marshall Field's
In an effort to focus on its core discount business, Target Corp. announced the sale of 62 Marshall Field's department-store chains and nine Mervyn's stores to May Department Stores, parent company to stores like Lord & Taylor, Filene's and Famous-Barr, for $3.2 billion. Target shares rose 1.3 percent, while shares of May slipped $.07. Target will use the money to repurchase $3 billion worth of stock over the next 2-3 years, according to the Associate Press.
"This is a banner day for May," said Gene Kahn, chief executive for May Department Stores in STL Today. "All of us here are truly excited about the potential of this acquisition, and we think it will reward the share owners handsomely." Bidding for Field's started in March. May outbid rival Federated Department Stores, Inc., owner of Macy's Department Store.
The decision to sell Marshall Field's "though not easy, reflects our long-term commitment to create substantial value for our shareholders over time, combined with our responsibility to our team members, our guests and the communities we serve, said Target CEO Bob Ulrich in the Star Tribune.
Target's 1,250-store discount chain accounts for about 90 percent of the company's $43 billion in annual sales, far exceeding the contributions of the Marshall Field's and Mervyn's divisions, according to the Pioneer Press. The slip in sales and profits that Marshal Field's and Mervyn's have had in the past several years prompted Target to initiate the selling possibilities in March 2004. "Target is not capital constrained," said Ulrich. "We are adding 8- to 10-percent net new square footage per year. We don't see that changing. We have the ability to double our number of stores and triple our square footage in the next 10 years."
May Department Stores is buying a majority of the assets of Marshall Field's, including 62 stores, three distribution centers and approximately $600 million of Marshall Field's credit-card receivables. Most financial analysts were expecting a price of $1.8 billion to $2.2 billion, instead of the $3.2 billion that Target made, according to Merrill Lynch analyst Stacy Turnof in Business Week. May's offer worked out to be 14 times the earnings before interest, taxes and depreciation, well above the 8.4 multiple that department stores usually trade at.
According to the Star Tribune, May is keeping the Field's nameplate, all the stores in eight Midwestern states and the entire 25,000-person workforce. President Linda Ahlers will continue to run the company.
The nine Mervyn's stores, however, will be closed by the end of July, and those employees will lose their jobs. It is unclear what May will do with the discount stores. "Some of those quality locations are being studied for use in our Marshall Field's business...or will be redeveloped to enhance shopping centers where they're located," said Kahn in STL Today.
Shoppers will see little changes in Marshall Field's. "Any changes that we make, we will give a lot of thought to," said Kahn in the Star Tribune. "From our point of view, this is a strategic acquisition of a dynamic company. And we're making a long-term commitment."
The transaction should be complete in the second or third quarter of 2004. Kahn said two-thirds of the deal will be financed through long-term borrowing and the rest through cash and short-term borrowing, according to STL Today. After completing the deal, May Department Stores expects to save $85 million in 2005, $140 million in 2006 and $180 million annually thereafter.