When Kmart engorged itself by devouring Sears and rechristened itself Sears Holding Corp. (NASDAQ:SHLD), there was a lot of speculation regarding the ultimate outcome of the venture. It raised eyebrows that a company so recently arisen from the ashes of bankruptcy was able to take over a venerable retailing institution, and made some think of the possibility of the two merged companies becoming a discount-retailing powerhouse again. The new company became the third-largest retailer in the country.
Apparently, it also made some suppliers worry about what the merger would do to their brand images.
In a surprising move, sports apparel manufacturer Nike (NYSE:NKE) reported it would no longer sell its sneakers to Sears once the two companies' current agreement expires in October. Why? On the surface, Nike called it a simple "brand decision following a routine account review." But the subliminal message was, "We don't want our brand showing up in Kmart stores."
Part of the rationale behind the Sears-Kmart merger was that Kmart stores -- though many would be folded under the Sears name -- would begin carrying Sears' brand-name products. Sears household goods from manufacturers like Kenmore and Craftsman would now also be sold in Kmart. It was a part of a strategy to compete against the likes of Target (NYSE:TGT), Wal-Mart (NYSE:WMT), and Kohl's (NYSE:KSS). Nike didn't announce plans to pull its sneakers from other mid-priced retailers, fueling the belief that animosity toward Kmart drove the decision.
Will Nike's pronouncement embolden other suppliers to also stop selling to Sears? Probably not, at least on a large scale. Nike enjoys uniquely powerful brand control and does not sell its shoes to discounters. That sort of clout permits it to dictate where it will and will not have its shoes sold. Few manufacturers are as protective of their image as Nike -- or as willing to forgo the chance to reach millions of consumers. Coupled with the wave of retailing mergers that have swept the industry, the stores themselves are gaining more influence.
Even if no other supplier withdraws from Sears, the loss of Nike still hurts. According to NPD marketing data, consumers have moved toward premium sneakers. In fact, sales for those priced above $100 a pair increased 18% last year. Retailers that carry those shoes can also encourage sales of other products as customers are driven to their stores. Nike, whose market share is twice that of competitors Reebok (NYSE:RBK) and Adidas, experienced a 10% jump in sales of its higher-end sneakers last quarter, boosting profits to $273 million. Those types of numbers motivated the company to sever its ties with Sears.
While the merger may have been good for Sears chairman Eddie Lampert, who was the biggest shareholder of the two companies before they joined forces, it might not be so good for other shareholders -- or for customers, either.
Nike competitor Reebok is a Motley Fool Stock Advisor recommendation.
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Fool contributor Rich Duprey has fond childhood memories of $1.00 plastic sneakers bought from a huge bin in Pathmark. He owns shares in Wal-Mart but does not own any of the other stocks mentioned in the article. The Fool has a disclosure policy.
