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Michael Knell

Sears Hometown store owner suing Sears over profits

WOODSTOCK, Ontario — The owner of the Sears Hometown store here is spearheading a C$100 million class action lawsuit against Sears Canada and its U.S.-based parent, Sears Holdings, alleging the publicly held retailer "breached its legal obligations by depriving the dealers of the realistic opportunity to earn a living wage and make a reasonable profit from their store businesses."

The owners of the 248 or so Sears Hometown outlets across the country are independent franchise owners operating in secondary and tertiary markets. Most carry an assortment of furniture, mattress and major appliances and often other durables while operating a Sears catalog service desk.

Sears Canada recently unveiled its largest Hometown store in Orillia, Ontario. Company President and CEO Calvin MacDonald singled out Hometown as a key element of his three-year transformation plan for the troubled department store chain.

But in its statement of claim, Sotos LLP, the Toronto-based law firm representing the Hometown store owners, paints a different picture.

"The dealer agreement is structured so that Sears sets dealers' compensation and work conditions, without regard to either minimum labor standards or franchise protection laws. Over the past three years, Sears Hometown store dealers have seen a continuous erosion of sales and profits. Meanwhile, Sears is making substantial profits from each and every Hometown store," the plaintiffs allege.

Jim Kay, the owner of the Sears Hometown store here, told local media outlets he has been pushed too far by Sears Canada and is reluctantly launching the action to recoup his losses.

"We are tired of disappointing our customers because we lack the resources to serve them properly. We are tired of facing the public without a smile, because we know there is no paycheck at the end of the week," he told the Chatham Daily News. "We are tired of being fed scraps for the benefit of a U.S. hedge fund billionaire."

Kay bought his Hometown outlet six years ago and said that although he has weathered the recession fairly well, his business and personal life have suffered.

"Basically our story here is that simply we've done everything we can over the last two or three years to improve the business and to make it sustainable and we just came to a point where we just cannot do it," he said. "We've just run out of money. Sears is not responding to any of our requests for additional income and in fact they have reduced our commission in many areas."

Only one other Hometown dealer has joined the suit, but others will be eligible to join as it progresses.

In the statement of claim, the petitioners say Sears Canada is aware of the circumstances in which these small businesses find themselves but chooses not to act.

"Sears uses its discretionary powers under the Dealer Agreement to make it virtually impossible for a dealer to realize a profit unless it achieves exceptionally high, and generally unattainable, revenues. The Hometown store program dooms dealers to financial ruin while Sears reaps the rewards of the dealers' hard work and investment," the claim maintains.

"The principal of the average class member labors 50-60 hours per week in its store for the equivalent of minimum wage and receives no return on its investment. Many dealers cannot afford to pay their principal any wage at all. Sears is well aware that the Hometown store program is not economically viable for the dealers," it continued.

Despite this, the plaintiffs say Hometown is a very profitable channel for Sears that "realizes high profit margins on sales made through the Hometown stores while downloading the high retail and handling costs onto the dealers who operate on a subsistence compensation model."

The action is being brought under Ontario's Class Proceedings Act of 1992. The claim seeks court certification on behalf of all Sears Hometown store dealers in Canada. The certification hearing isn't expected to be held for at least six months.

Sears Canada said it will vigorously defend itself in the proceeding.

"We believe the suit is without merit," said Vincent Power, the company's vice president of corporate communications, adding Sears Canada will be represented by outside counsel.

However, he indicated the company is hoping for an amicable resolution to the issues.

"We've had a good long-term relationship with our independent Hometown store owners," Power said. "This channel is important to us and we're investing in the channel and share the desire to ensure the customer is well served during this process."

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