When Tim and Lori Horsley went looking for a microwave oven recently, their first stop was the Sears, Roebuck & Co. (S
) store in the Westfield Shoppingtown mall in Hobart, Ind. But when Sears didn't have what they wanted, the couple went to a nearby Lowe's (LOW
), where they bought a $179 Roper over-the-range microwave. That was $40 less than the cheapest model at Sears--which wasn't in stock anyway. Next time around, the Horsleys say, they will head straight to Lowe's Cos. "There's a lot more to choose from," says Tim, a 33-year-old production worker at a local Ford Motor Co. plant.
Those are ominous words for Sears. Led by its trusted Kenmore brand, Sears has dominated the major home appliance market for decades. Last year, Sears sold an estimated $7 billion worth of microwaves, washers and dryers, ranges, and refrigerators--22% of Sears' $31.5 billion in sales. Those appliances have been a major source of profits for the ailing retailer. Indeed, CEO Alan J. Lacy is counting on those profits while he figures out how to reposition Sears' struggling apparel business.
But recent figures show a sharp decline in Sears' market share for major home appliances. More nimble competitors, especially home improvement giants Lowe's and Home Depot Inc. (HD
), are winning customers with better locations, better service, and often better prices.
Without strong sales from home appliances, the Sears turnaround effort will be put through the wringer. The retailer's other important moneymaker, the credit-card business, is already under pressure. The company said last October that it expected a rise in bad loans in its credit-card portfolio--an announcement that sent its stock skidding 37% since then, to about $21.40 per share. And it is still too soon to judge the success of the Lands' End Inc. catalog deal.
According to market research firm Stevenson Co., Sears' market share in appliances dropped almost three percentage points in the last year, from 41.4% to 38.5%, by units sold. Meanwhile, both Lowe's and Home Depot gained more than two points, to 13.7% and 6.4%, respectively. Former Sears employees say the last time appliance sales were this weak was in 1993, after the company ended catalog sales and closed 113 stores in a major restructuring. Now, says Eric Bosshard, an analyst at Midwest Research, "Sears is getting bludgeoned."
The impact, moreover, extends far beyond store sales. Sears has long derived most of its profit from finance income on its Sears credit cards. Last year, such income accounted for nearly 60% of Sears' $2.5 billion in total operating profit. Appliance sales are crucial to the credit business because a higher percentage of those purchases is made on Sears cards than other items. No Sears executive would comment for this story, but former employees say that appliances sales account for nearly 40% of Sears' credit-card receivables. That means a big chunk of Sears' credit profits are linked to appliances. In addition, Sears gets much of its service income from extended appliance-repair contracts. Consequently, appliance sales are critical to Sears' most important profit centers. "It's the heart of the enterprise," says a retail analyst at an investment fund company.
But Sears' rapidly expanding rivals are zapping its hold on the market. Sears has only 870 stores. Home Depot has 1,500 and will open 200 more this year, while Lowe's has 860 stores and will open another 80. In addition, the home centers' freestanding locations are more convenient than Sears' mall stores. For instance, in Westfield Shoppingtown, where the Horsleys first stopped, Sears' appliance department is tucked away on the second floor next to an apparel section. Across the street at Lowe's, appliances are in the main line of sight as shoppers enter.
Lowe's and Home Depot also have an edge because their big-box stores are cheaper to operate than the Sears department-store format. This should give the home centers a pricing advantage over the long term, even though current appliance prices are roughly comparable among the three chains. Says Aswath Damodaran, a finance professor at New York University's Stern School of Business: "I don't see how Sears can fight for market share and be profitable at the same time."
Both Lowe's and Home Depot also offer customers a better deal in related services. The rivals offer cheaper service contracts and charge less to deliver. Lowe's delivers the next day, a feat Sears matches in only 65% of its stores, because more goods are kept in warehouses. Lowe's and Home Depot have more items stocked in the store, so shoppers can take purchases home the same day.
To fight back, Sears is expanding its stores' appliance departments, allowing it to carry more items that shoppers can tote home the same day, says a spokeswoman. Sears has also boosted advertising on its Kenmore brand, spending 44% more in the first 10 months of 2002 than in the year before. Still, with competitors gaining momentum, Sears' appliance business could be entering the spin cycle.
By Robert Berner in Hobart, Ind.
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