Wages and Benefits Likely to be Slashed in Effort to Compete with Wal-Mart

As analysts study the financial footprint of the merger between Kmart Holding Corp. and Sears, Roebuck and Co., workforce management experts are examining the impact of the $11.5 billion deal on employees.

“What this means is what I call ‘creative destruction,’ ” says Nelson Lichtenstein, director of the Center for the Study of Work, Labor and Democracy at the University of California, Santa Barbara. “Every time there is a merger this big, there are tremendous layoffs.”

Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm in New York, predicts that there will be consolidations and major staff reductions at both companies, but the changes will be “evolutionary.”

He points out that Kmart and Sears have been cutting people for 15 years. “How are they going to compete with Wal-Mart? Sears will sell off some divisions,” Davidowitz says. “So the question now isn’t ‘How many jobs are the two companies going to lose?’ but ‘How many jobs are they going to save?’ If this merger isn’t successful, there won’t be any jobs for anybody.

“What we are looking at here is survival.”

The bold merger was masterminded last month by financier and Kmart Chairman Edward Lampert, who turned the once-bankrupt retail chain into an unexpected $3 billion success story. The new company called Sears Holdings Corp. will be the third-largest retailer, behind Wal-Mart and Home Depot, with about $55 billion in annual revenues. Lampert will be chairman.

The company will have its headquarters at the Sears head office in the Chicago suburbs but will maintain a “significant presence” in Troy, Michigan, where Kmart is based.

Despite inevitable layoffs, Jack Plukett, who follows Wal-Mart and is chairman of Plunkett Research Ltd. in Houston, says that most Kmart and Sears employees will be better off. He describes Lampert as an extraordinarily talented investor.

“The futures of both companies were very uncertain. Sears was slowly sinking,” Plunkett says. “Lampert has proven he can make profits, and in the long run, that will help employees.”

In their effort to compete with Wal-Mart, Lichtenstein says, the two retailing warhorses will likely cut wages and benefits. The notion that retail workers in America will earn middle-class wages as they once did working for companies like Sears “has gone out the door.

“Wal-Mart is the template for the 21st century philosophy of low benefits and low wages,” Lichtenstein says. “Retail workers will be the working poor. What the Kmart/Sears merger means is that any retail alternative to Wal-Mart is history.”

Adds Stanford Jacoby, professor of human resources and organizational behavior at UCLA, “It will be interesting to watch pay and benefits. Another tricky part will be merging the operation. Staying where they are for now is a first good step. But eventually they will have one headquarters. Holding on to good people will be a problem.

“But Lampert is very impressive, very savvy.”