Sears' Move Into IT Services: A Baffling Step If You Think Of Sears As A Retailer

Sears on Tuesday (April 24) launched a service to provide managed technology services for "brick-and-mortar enterprises across all industry verticals." It is a move partly aimed at Amazon's cloud service, with Sears promising much more customization and hand-holding. For many retail observers, this was a baffling step, another non-strategic distraction at a time when the 119-year-old retailer needed to do nothing more than focus on selling more products in its stores.

For Sears, though, the move made fiscal sense. With all of those dollars invested in IT systems—with more capacity than Sears needs—why not, in effect, lease some of it? Put another way: Turn IT from a pure cost-center to a mostly cost-center that generates at least some revenue. From an investor's perspective, some revenue is better than no revenue. (On some days, that seems to be Sears' retail strategy, too.)

Beyond the Amazon competitive issue and the effort to get any revenue out of IT, some have suggested that people perceive Sears Holdings—as opposed to just plain Sears—as a retail company, which it simply isn't.

If you remember that Sears Holdings is a diversified financial group, this move—dubbed MetaScale—looks less perplexing. Even written comments from Sears spokesman Tom Aiello support this non-retail diversification interpretation.

"MetaScale was possible because of the effort Sears is putting into technology and the shift toward integrated retail. And you remember that Sears is known for startups, whether it was Allstate, Discover Card or Prodigy, to name a few," Aiello said. Note that none of the three examples offered is a retailer. An insurance company and an online firm created back before E-Commerce was an issue have nothing to do with traditional retail. At least Discover is a card that could be used to make payments at Sears, so it was at least a little related, but it never appeared that Discover was intended to bolster Sears stores. It was simply a diversified investment.

That may be true, but some in retail found it more of a desperation move. Either that or an "I don't care about retail any more" move.

"Sears and its future seem more uncertain every day. That's what I take away from all of this," said Nikki Baird, a long-time retail analyst and, today, the managing partner at RSR Research.

Over at RetailWire, a discussion opened up on its comments boards, with almost no one initially taking the pro-Sears position.

"Technology services? Sure, why not? How about stem-cell research or maybe an airline?" asked Bill Emerson, president of Emerson Advisors. "The only puzzle is why this financier continues to hold on to Sears. He obviously has no aptitude or interest in retail. One might surmise that he's just using the real estate to collateralize whatever happens to interest him at any given moment."

Added Richard Seesel, a principal with Retailing In Focus: "There is a long list of specialists in providing data services and information management especially to retailers—such as IBM, SAP, SAS and others. This looks like yet another attempt by Sears Holdings to avoid dealing with its core problem: The lack of capital spending and compelling merchandise in its stores. If the methodology behind MetaScale were so effective, wouldn't we all be talking about Sears' great results in supply chain and inventory management? Sears Holdings ended 2011 with 5 percent less inventory but also had a gross margin decrease from 27.2 percent to 25.5 percent, which is not exactly worthy of bragging rights."Probably the best articulation of the investment versus traditional retail argument came from James Tenser of VSN Strategies. "Sears Holdings' strategies are hard for people like us to quickly grasp, because we persist in viewing them through a conventional retail lens. Better to discard the merchant frame of reference and try to take this on its own terms. An asset is an asset. A profit-generating spin-off may be worth pursuing, or not, depending upon the alternative uses available for investment capital," among other factors, he said. "If existing Sears and Kmart stores require costly, high-risk investment and huge tie-up of capital to generate value, but MetaScale's data services can generate high returns with modest capital, well, then, the choice becomes clearer. It's no different from some other chains that have focused on real estate investing over merchant profits in the past. Yes, we've all heard the conventional wisdom about sticking with one's core area of expertise. But Sears Holdings is an investment vehicle first."

MetaScale itself is officially a wholly owned subsidiary of Sears Holdings, albeit one with a lot of management overlap with Sears. It lists Phil Shelley as its founder and CEO, but Shelley's day job still is Sears' Chief Technology Officer. Oddly, neither Shelley nor any other MetaScale employee was quoted in the news release announcing the venture. That honor was given to Sears CIO Keith Sherwell.

A Sears internal comparison document made it clear that Amazon's cloud operation is what Sears sees as the main rival for MetaScale customers. The comparison paints Amazon's offering as a "This is what we're offering. Take it or leave it" package, with MetaScale positioning itself as more of a custom shop, pushing custom security and encryption along with code development and implementation consulting.

If this is viewed as an unrelated business for Sears Holdings—given that it's a legal wholly owned subsidiary, which is certainly a fair view—it's another IT shop offering to sell its services.

A Consumerist piece this week offered a great reminder why a healthy amount of distance from Sears retail is not necessarily a bad thing.