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Friday, 7 May 2010

Can Craftsman, Diehard and Kenmore Come to the Rescue?

It is always engaging to observe the strategic role that trade marks play for a struggling company. A particularly notable example is the changing strategic role of trade marks owned by Sears, the giant U.S. retailer. The head trailer to a recent article, "Stuck with Sears", which appeared in the 5 April 2010 issue of Bloomberg BusinessWeek, sets the scene:

"Five years ago, when [Edward] Lampert merged Kmart and Sears into a mega-retail holding company, the hedge fund guru was hailed as the Next Warren Buffett, Sears Holdings was going to be a retail empire, a real estate play, and a new Berkshire Hathaway--a vessel for all the acquisitions Lampert would make. Then came the crash, putting those dreams on hold and leaving Lampert ... stuck with Sears. "
What is particularly relevant is the trade mark aspect of this tale. In a word, what can be done to right the "Sears once-venerated brand?" For generations, the Sears mark came to be identified as a trusted platform for the sale of products, either through its iconic catalogue or its seemingly omnipresent storefronts. The success of the Sears mark was a textbook example of how a retail service mark sucessfully transcended the individual branded items that were being sold under its the auspices.

Well, it turns out, not exactly. That is because, in addition to the house mark "Sears", the company had also successfully branded product lines sold in the stores, most notably under the labels of "Kenmore" (refrigerators), "Craftsman" (lawn mowers), and "Diehard" (with apologies to Bruce Willis, car batteries). The upshot was that the company managed to create both a powerful service mark brand, which at its zenith connoted both a positive customer experience, and a general sense of product quality, reliability and affordability. At the same time, the company also managed to create separate goodwill in various product labels.

The only major retailer that I can think of that approximated this was the UK retailer Marks & Spencer at its highpoint in the middle third of the 20th century. There, however, in contrast with Sears, virtually all M&S goods were sold under the "St Michael" label. (I am told that for a while "St Michael" had a sister brand, "St Margaret", which was used for certain female-directed products, that label was ultimately jettisoned in favour of the single "St Michael" brand.)

What does a creative marketing strategist do when confronted with a sinking retail services house mark, but potentially more valuable discrete product names? One answer is to offer these labelled products for sale through retailers other than Sears itself. There are both pros and cons to this move.

Pros--A further revenue stream for the company will be generated. As expressed by CEO Bruce Johnson,"We have great potential, unrealized potential to this point, with our major brands. But we're not going to do that recklessly and without thought."

Cons--Selling the branded products outside of the Sears family platform risks cannabilizing sales of these products at the Sears stores themselves. As Gary Balter, an analysist at Credit Suisse observed, "Kenmore is Sears. The moment they take that outside the store, they could lose a big, big part of their traffic." A more biting observation was made by Professor James Schrager of the University of Chicago Booth School of Business, who observed that "if he [Lampert] has a strategy other than cutting costs, I haven't seen it. What is their concept"?

I have to admit that my sense of things is closer to the "Con" side of the debate ledger. In this context, I have a couple of observations.

1. Can this move be the precursor to a move to jettison the Sears brand and retail platform, with the intention of emphasizing the value of the Sears real estate holdings and its successful product brands? Before you ask what I am drinking, consider that the "Sharper Image" here has enjoyed some success in recreating itself from a defunct retailer of upscale products "for the yuppie who has everything" to a brand whose products are being sold through third-party retailers. Whether or not intended, having developed successful product brands at least allows Sears the opportunity to consider such a strategy.

2. The current moves by Sears are not the first time during the Lampert era that it has taken unconventional moves regarding its trade marks. Already in 2006, Sears/Lampert had apparently created a separate entity--KCD IP (standing for "Kenmore Craftsman DieHard"). Ownership in these three marks was assigned to this entity, which then licensed the right to use them back to Sears for a licence fee. KCD then issued bonds secured by the income stream (all internal within the Sears group), which bonds it sold to an off-shore insurance subsidiary.

3. This means that the rights in these marks may be out of the reach of creditors if insolvency proceedings are ever commenced against Sears. For more details on this arrangement, the reader is invited to read "The New Alchemy at Sears", BusinessWeek, April 16, 2007 here .

4. I do not know the current status of this arrangement (a lot has certainly happened in the financial world since 2007). At the least, however, it points to a recognition by the company of the potentially separate and distinct value of the company's principal product labels. Moreover, if the arrangement is still in place, it does suggest the possibility that the current moves to market major company product labels separately through third parties might in some way be related to it.

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