Business Technology: Shhhh...: Kmart-Sears' Internal Memo

Kmart/Sears Internal Memorandum
FROM: Office of the Chairman (Edward Lampert, Alan Lacy, Alwyn Lewis)
TO: Kmart SVP & CIO Karen Austin and Sears SVP & CIO Gerald F. Kelly Jr.
RE: Your Technology Stuff

STATUS: CONFIDENTIAL!!!

As you both know, we three in the Office of the Chairman are big believers in the power of technology. We probably don't need to even mention this, but we wanted to extend ourselves on this point since we don't want you to misinterpret the fact that the only mention we made to your bits-and-bytes stuff in the 16-page, single-spaced transcript of our announcement of this merger to the world was a reference to how we feel that "in the areas of supply chain, IT, and administration, we also see some opportunity there" (link requires registration) to hack away at costs. Of course, the transcript doesn't specifically say "hack away at costs," but since we lumped that techy supply-chain and IT stuff in with the overall selling, general, and administrative expenses overheady stuff--do you know we poured $12 billion this year into SG&A??--our friends on Wall Street will expect that we will take that $12 billion premerger figure and come up with a significantly lower post-merger figure, which we're sure you understand and agree with.

So our point is that while all of us believe in the power of computers, the fact is that your computers fall under our SG&A heading, and that means that you'll have to find a way to spend a lot less on your computers in 2005 and 2006 (and perhaps beyond) than you spent on your computers in 2003 and 2004. And by saying this, we aren't saying that you spent too much on computers in either of those years, or that you'd be spending too much on them in 2005 and 2006 unless we told you not to spend too much; rather, it all comes down to a matter of we are who we are, and Kmart/Sears is a retailer and real-estate investment company, and you guys run our computer systems, and we don't really sell many computers, so don't take this the wrong way but when we say you're "overhead" it's not meant in a bad way but rather it's a signal that, as we're sure you understand, what was spent before must be spent less of in the future so that we can have more funds at our disposal for, how shall we say, strategic spending and investments. (Not, of course, that you're not "strategic"; rather, it's just that there's "strategic" and then there's "strategic," if you get our meaning.

Now, lest you think we believe that MIS-DP isn't strategic--and by saying that we don't want you to think that we think it isn't--let's get some of this competitive stuff out on the table so we can dismiss it. You will no doubt see that Wal-Mart's revenue of $256 billion is almost five times larger than the combined Kmart/Sears revenue of $55 billion, but you should not read anything into that. You will also no doubt see that various reports describe Wal-Mart as having a world-class computer system, but you also shouldn't put too much stock in that--after all, as the three of us said 29 times in our 60-minute call with Wall Street analysts, we have better stuff in our stores than Wal-Mart has in its stores, so that best-computer point is moot. And not that further proof is required, but we will toss this into the discussion as well: Kmart's stock price is higher than Wal-Mart's, and that should tell you all you need to know.

At the same time, you will probably also come across or hear from various techy types that Wal-Mart has established a world-class global sourcing system (as if we couldn't if we wanted to), and a world-class global supply-chain network (but we have better stuff in our stores than they do, so who gives a blue-light special about their customer-driven supply chain?), and that it is a global innovator in business-process optimization employing RFID (but since our stock price is higher than theirs, let's just say that stands for "Really Far-out Information Deployment!!"), and that the real key to Wal-Mart's success is that it is unmatched in knowing and giving customers what they want when they want it at the prices they want it--we're willing to concede that with revenue of $700,000,000 per day, Wal-Mart might actually have something there. But lest you forget, we've got that covered because we'll have two brands and two cultures to throw at customers, and it'll be a couple of years before those customers know if their store is going to be a Kmart or a Sears, so not to worry. And, as Edward told the analysts, "We're going to be managing to the potential, and we're not going to manage to try to generate sort of steady progress. It's going to be probably lumpy progress over time." That statement, we feel, will give investors, suppliers, analysts, and customers all the confidence they need to feel comfortable that we can compete with Wal-Mart.

Which brings us back to you two. We're not, of course, able to say yet what our combined IT strategy will be, but we don't think that should be a concern to either of you because this deal is really about branding and merchandising and store locations and parking lots and Jaclyn Smith and Craftsman and Martha Stewart and Lands' End--it's not about your computer stuff, or this logistics gobbledygook, or this supply-chain software (and boy oh boyzee are we sure of *that* after all the awful supply-chain things we tried at Kmart before Karen took over!)

(And Gerald, we know you started one of these supply-chain things at Sears a few months ago, but maybe it's best if we put that on hold for a while, eh?) But what we can say at this point is that one place where you might be able to help us is this little issue we've got with having our stores in places where we don't have customers, and having customers in places where we don't have stores. Or, as Edward told the financial analysts, (link requires registration) "...the Sears experience, the Sears service, and certainly the Sears products, they're every bit as good as any of its competition. The problem is they're not where the customers are, and that's the big opportunity. It's not that the retailer per se is weak, but if you have the greatest store and it's not near where the customers are, that's a problem." So if your computers can help us deliver on that, uh, "big opportunity," we'd be grateful.

One other place where your computer stuff might be able to help in some way is this matter of growing (do you have any software for that?). Here's part of the issue as Alan explained it to the analysts: "We had about 870 [Sears] stores in 1970. We have about 870 [Sears] stores today ... the growth of the big-box retailers has really been quite remarkable: about 8,000 of them out there in terms of our best-in-class retail competition, and they're adding stores to the tune of 700 or 800 per year." So I guess what we're saying is that while our store count hasn't budged in 34 years, these new competitors (who, by the way, probably distract themselves from their core business by spending a ton of money on computers) are adding each and every year almost as many new stores as we've had in total since Richard Nixon was president. Would your programmers have a program to help with this? Or would your help desk be able to help with this?

Well, Karen and Gerald, that's it for now. We hope this strategic overview will help you understand more fully our intense commitment to helping you succeed through cutting SG&--er, rather through using your MIS-DP stuff to help this merger work. Please feel confident that the Office of the Chairman will give all due consideration to your proposals for what's needed to compete with these other retailers who might have great computer stuff but don't have Craftsman screwdrivers *or* Martha Stewart sheets.

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Bob Evans received some very nice responses to his Nov. 15 column, Business Technology: A Thanksgiving Kiss To Our Reader-Partners. Here they are, "Response To Bob Evans' Nov. 15 Column," followed by his replies to the writers.