The Craftsman brand, long associated with Sears, will soon belong to SB&D, the world’s largest tool company. In a deal announced on January 5, SB&D will acquire the Craftsman brand for cash payments, and royalties that will stretch out over 15 years. It’s an unusual arrangement that will allow Sears to continue to source Craftsman tools from its existing supplier base and sell them within its retail channels (Sears, Kmart, and Sears Appliance and Hardware). SB&D will own the brand and have the right to develop, produce, and sell Craftsman-branded products through non-Sears sales channels. This is the second major acquisition by SB&D in the past few months; in October it announced the purchase of Newell Brands’ tool business (Lenox, Irwin, and Hilmor). Pending regulatory approval, both deals are expected to close this year.
To find out what the sale of Craftsman to SB&D might mean for tradespeople, I listened to the webcast of a conference call between SB&D executives and investment analysts from Goldman Sachs, JP Morgan, and the like. It was the usual boring financial-speak interspersed with interesting tidbits for those of us who buy and use tools. What follows are bits and pieces from the conference call plus my comments (in italics).
Currently, about 90% of Craftsman’s sales are through Sears; the remaining 10% are distributed through outside vendors—primarily Ace Hardware stores. Sears Holdings will retain the right to distribute Craftsman products through its channels. SB&D will be able to sell through outside vendors. It hopes to boost sales through existing outside channels as well as its own retail, industrial, online, and mobile channels (which includes MAC Tools). It seems kind of odd that both Sears and SB&D will be able to develop and produce Craftsman branded tools. I assume there is some fine print in the deal that was not discussed in the call, and that there will be a way to distinguish Sears-developed Craftsman from SB&D-developed Craftsman. It’s also possible SB&D agreed to let Sears continue to develop and source Craftsman tools because it believes that Sears (after decades of decline) will finally go under.
According to Jim Loree, President and CEO of SB&D, the company is in conversation with several large U.S. retailers and says interest is high in distributing its Craftsman-branded product. The retailers were not specified, but I suspect they include companies such as Lowe’s, Home Depot, and Amazon—which already sells Craftsman.
The purchase of Craftsman will increase SB&D’s presence in the $12B/year lawn and garden market. DeWalt believes this will boost sales of its OPE, the existing 40V MAX line and the 60V MAX FlexVolt line introduced last summer—which includes a chainsaw, blower, and string trimmer.
The issue of cannibalizing the sale of existing SB&D brands (by Craftsman) came up a couple of times. According to Loree, they expect most of the cannibalization to come from competing brands. No brands were mentioned, but I suspect they were referring at least partially to power tools from Ryobi, though I think that brand has a better reputation than Craftsman. Given the strong relationship between Ryobi and Home Depot, Lowe’s seems like the more likely big box venue for SB&D/Craftsman tools—where they could be positioned above Kobalt and below DeWalt. Craftsman tools are already sold at Orchard Supply, a West-Coast hardware chain that was acquired by Lowe’s in 2013.
If Sears Holdings goes under, SB&D is not contractually obligated to support warranty claims for Craftsman tools that were sold at Sears. Based on comments made during the conference call, it seems possible SB&D might choose to honor those claims to protect the reputation of the brand and because the obligation is expected to be “only” $5M per year—which to a company the size of SB&D is probably not much.
No factories will change hands in this deal because Craftsman tools are produced by OEM manufacturers—most of them overseas. In the short term, tools will continue to be sourced this way, but SB&D’s long-term plan is to bring some Craftsman tool production in-house.
Loree Said “We believe this is an excellent opportunity to invest in, re-Americanize, and revitalize this legendary brand; ramp up product innovation and broaden its distribution—making Craftsman products more readily available to consumers and growing the overall tool market.” To that end the company plans “to increase our manufacturing capacity in the United States, consistent with our philosophy to make where we sell wherever possible. This includes plans to open a new high tech manufacturing facility in the U.S. Location TBD”. About that new U.S. factory—it will be different than the plants that were closed when tool manufacturing fled the U.S. in the 80s and 90s. According to Loree, the factory will be industry 4.0, a term used to describe highly automated plants where robots and computerized machines perform the work with little input from human operators. This high degree of automation will reduce the need for expensive U.S. labor and make it possible to produce tools here for about the same cost as producing them in Asia or Mexico (two of the places where SB&D operates factories).
SB&D currently operates 11 U.S. plants making tool and storage products. Those plants employ 3,000 people and employment has gone up 40% in the last three years. As Loree put it, “We know our end users generally like to buy products made in their own countries, especially professionals in the trades.”SB&D is in the process of bringing some of its production back to the U.S. (for example, its power tool assembly plant in NC), though it’s worth noting that the bulk of its sales are of products currently made outside of the U.S. There was much discussion of the $80M or so being set aside to build and upgrade factories over a period of years. How far this money goes depends on what it is spent on. According to Loree, it takes relatively little capital to build a screwdriver factory; a pliers factory is much more expensive—presumably because it involves forging, heat treating, and a lot more machining.
One of the analysts on the phone call asked how SB&D plans to position the recently acquired Craftsman and Newell brands against DeWalt and Stanley. Loree seemed to think it would not be a problem. He said Lenox is an iconic brand that is very strong in the industrial market. The Irwin brand—created by Newell over the last 13 to 14 years—includes 25 or so well-known brands such as Vise-Grip. SB&D thinks Irwin plays well in home centers and with the trades—and is particularly strong in pliers and accessories, areas where Stanley has “historically been underweight.”