Brand Mix

Edward Lampert, Chairman of Sears Holdings, is thinking about whether to start selling Sears' proprietary brands such as Diehard, Craftsman and Kenmore through other retail outlets. In his annual letter to shareholders he floated this idea, something that's been discussed for years but always rejected because of the anticipated impact on sales at Sears stores.

This time around it looks like it really might happen. Sears just reorganized and created a new business unit dedicated solely to these brands. And, last year, in a highly innovative financial move, Sears created $1.8 billion of securities based on their strength and brand equity.

This is certainly a "zag" when everyone else is zigging. Most retailers have been working hard in recent years to introduce proprietary brands or at least spruce up their Private Label offerings. Their thinking has been that they need to differentiate what's sold in their stores to increase store loyalty and make sure it's not all about price.

So, is Lampert crazy or smart?

Smart:
1) Sears needs the revenue: Its 4th quarter earnings report showed a 48% fall in profits from accelerating sales declines. No doubt that selling these strong brands in other outlets would increase sales.
2) These brands are not living up to their potential: Craftsman, Kenmore and DieHard are all stronger brands than Sears itself (Source: Brand Asset Valuator) and they are held back by their limited distribution. Lampert points out in his letter that Diehard has great consumer recognition but "lags dramatically" in market share.
3) Selling these brands outside Sears could give them a dose of healthy competition: Sheltered within the walls of Sears, it's likely that these brands, strong as they are, are not fully optimized. Exposing them to open competition could force them to be both more innovative and more efficient.
4) Sears itself would have to shape up: Sears would no longer be able to depend on these brands for a good part of its sales and revenue. It would have to radically improve to survive.

Crazy:
1) It could kill the Sears stores: This is the reason it has never been done before. These strong brands are magnets for store traffic pulling consumers in who otherwise would have no reason to go.
2) It would weaken the Sears brand: These strong, exclusive brands help differentiate Sears from its competitors.
3) Selling to other retailers is not a core competency: Sears has no experience selling products outside of its stores. It would need to find people comfortable sitting in, for example, the Bentonville sales cell block pitching its products. The boot would very much be on the other foot.
4) Potential margin decline: To gain distribution and be competitive in side-by-side shopping, there could be price pressure that would result in a margin decline.

I started writing this post with the intention of being strongly against this idea of selling the brands outside Sears. But, now I'm done with my list, I'm not so sure. It certainly could be a killer for the Sears stores themselves but maybe it would be just the jolt they need to shape up. Meanwhile, these strong product brands would certainly have the chance to become true national powerhouses.

Now, I don't know. What do you think?

Links:
1) Letter to shareholders: Edward Lampert, Sears Holdings
2) Sears considers selling signature brands in other venues: Chicago Tribune
3) The New Alchemy at Sears: BusinessWeek
4) Brand Asset Valuator: Description