Kmart to Sell 91 Pace Stores to Wal-Mart : Retail: Discount stores would become Sam’s Club outlets in $300-million deal, setting the stage to challenge Price/Costco.
Kmart Corp. said Tuesday that it will sell 91 of its 113 Pace Membership stores to Wal-Mart Stores Inc., abandoning its money-losing discount warehouse operation and setting the stage for more intense competition between the surviving warehouse giants: Wal-Mart’s Sam’s Club and Price/Costco.
The $300-million sales agreement gives Wal-Mart an opportunity to expand and challenge Price/Costco in markets where it has little or no presence, particularly California. Kmart said it is selling 21 of its 22 California Pace stores to Wal-Mart, which has only four Sam’s Club stores in the state. Wal-Mart plans to convert the Pace stores to Sam’s Clubs.
The deal, which is subject to federal approval, is expected to be completed in January. Wal-Mart would also obtain Pace stores in Arizona, Alaska, Utah and Rhode Island--states that have no Sam’s Clubs.
“We’re excited because opportunities to expand quickly are rare,” said Don Shinkle, Wal-Mart spokesman. “This gives Sam’s positioning to maintain leadership and expand our customer base well into the 21st Century.”
Sam’s is expected to face particularly stiff competition from Price/Costco in California. Including the 91 Pace stores, Wal-Mart would have 421 stores nationwide compared to Price/Costco’s 206. However, Price/Costco, which has headquarters in San Diego and Kirkland, Wash., would have about four times as many stores as Sam’s in California after Wal-Mart acquired Pace sites in the state.
Some analysts believe that consumers would benefit from the head-to-head competition between Sam’s and Price/Costco.
“When it comes to keeping prices low, Wal-Mart doesn’t let up,” said Michael Exstein, an analyst at Kidder Peabody. “But I expect Price/Costco to try to match Wal-Mart on the price front.”
Shinkle said Sam’s plans to hire the estimated 15,000 people now employed at the 91 Pace stores. Kmart said it will try to transfer the remaining 5,000 workers--including the 700 at Pace headquarters in Englewood, Colo.--to its main discount stores or its specialty store operations. The fate of the unsold Pace stores is uncertain, although Kmart indicated that many would be closed.
The deal allows Kmart to concentrate on its core discount business and its specialty stores--OfficeMax, the Sports Authority, Waldenbooks and Borders bookstores--and shed a money-losing operation. After generating a profit of $39 million in 1991, earnings at Pace fell to $3 million in 1992, and the warehouse operation has lost about $63 million this year.
Industry analysts said Pace has been losing ground to Sam’s and to Price Club and Costco--two warehouse chains that officially merged in October--because it does not have the customer loyalty of its rivals. While Pace has stores in 27 states, it does not have a large number in any single market, said Richard Nelson, an analyst at Duff & Phelps in Chicago.
“Pace has no critical mass in any areas and was beat up by competitors with bigger and better stores,” Nelson said.
Wal-Mart will try to make the Pace locations profitable by increasing the inventory of bulk goods favored by small-business customers. On the New York Stock Exchange, Kmart’s stock climbed 12.5 cents Tuesday to close at $24.875, and Wal-Mart rose 87.5 cents to close at $27.
