Plans to sell Kenmore, Craftsman and other popular Sears, Roebuck & Co. brands at Kmart stores have alarmed some local retailers, who worry they'll be run into the ground in the combined Kmart-Sears era.

The potentially endangered small businesses, found in small towns across the nation, aren't ordinary mom-and-pop stores. They sell Sears products in Sears-branded stores; many of them took out loans to open their dealerships under one of the oldest names in American retailing.

For the past decade or so, Sears has had an army of so-called dealer stores selling its Kenmore appliances, Craftsman tools and lawn-and-garden products and electronics in towns too tiny to support a full-size Sears store. The stores are something in between a franchise and an independent store: Sears owns the merchandise and sets the prices; the dealers pay expenses and receive sales comissions, which are set by Sears and vary from item to item. For the fiscal year that ended in January 2004, Sears's roughly 818 dealer stores contributed about $1.5 billion to the Hoffman Estates, Ill., retail giant's $36 billion in annual sales, several dealers say.

But three months after the $11.5 billion acquisition of Sears by Kmart Holding Corp., of Troy, Mich., was announced, the deal is threatening to throw a wrench into the dealer stores' operations. In recent contract extensions offered to dealers, Sears conspicuously left open its option to stock Sears brands in nearby Kmart stores, often without offering compensation for the unexpected competition.

Many of the Sears dealers say if the combined Kmart-Sears chooses to compete with them for local sales of their most popular brands, their stores will go out of business. Sears says it is still determining what to do with dealer stores and Kmarts nearby. With few details of its plans known, dealers say it is impossible for them to bail out and sell their stores.

Reassured by Sears's long-established name and brands, some dealers borrowed heavily, mortgaged their homes or cashed in retirement savings to keep their stores going. "We invested time and money to be Sears representatives," says Richard Leidy, who has a dealer store in Toccoa, Ga. "Now they're cutting us off at the knees." Mr. Leidy says he has sunk $90,000 into his store, which had sales last year of about $1.3 million.

The controversy gives early insight into the changes that may be in store at the new company, which will be called Sears Holdings Corp. after the deal's expected closing next month. A scenario pitting two divisions of the same company against each other in direct competition underscores how complicated it will be to mesh two sometimes overlapping operations and to reconcile the competing interests involved.

Edward S. Lampert, the hedge-fund operator who forged the deal and who will serve as the new company's chairman, is focused on cost-cutting and efficiency. The changed relationship with dealer stores may indicate that Mr. Lampert is looking to streamline by favoring Kmart locations and allowing some of the dealer stores eventually to fold.

In a letter being sent to dealers, Sears says it will test appliance sales in a limited number of Kmarts to measure the effect on dealer stores. Sears will talk with owners of affected stores "to explore whether we can find a mutually beneficial arrangement to keep operating the dealer stores." Sears spokesman Larry Costello says Sears has "a real positive relationship with our dealer-store owners, and we plan to continue that good relationship."

The dealer stores tend to be located just off highways in small towns, such as Waynesburg, Pa., about 40 miles outside Pittsburgh, or Lake Geneva, Wis., a resort area more than 60 miles north of Chicago. Ranging from about 6,000 to 10,000 square feet, the one-level stores are far smaller than Sears's traditional mall stores, which average more than 90,000 square feet. The dealer stores stock Kenmore washers and dryers, lawn tractors, tools and electronics -- but not clothing or home-decorating items.

The dealer-store format originated in the early 1990s under then-Chief Executive Arthur C. Martinez after he closed Sears's giant catalog business. In an effort to maintain Sears's presence in small towns, some catalog-sales outlets were converted into dealer stores. Sears executives envisioned a store network that would fuel growth outside malls, where opportunities were limited.

But a decade later, Sears still is talking about getting out of malls and closer to its customers. At Sears's mall stores, sales have been stagnant for years. Executives at Sears and Kmart have said a major advantage of the deal is to jump-start growth by putting popular Sears brands in Kmart stores away from malls.

Even more competition may be looming: Last week, Sears said it is moving ahead with plans to convert some of the 50 Kmart stores it bought last year -- before the Kmart acquisition -- into a format it has dubbed "Sears Essentials." The Essentials stores, in locations Sears says are more convenient than its older mall stores, will sell appliances, tools, electronics and clothing, as well as some groceries and drugstore merchandise. In a statement, Sears said the Essentials stores will feature "strong brands like Kenmore, Craftsman and Apostrophe," a young women's clothing line. It plans to open the first 25 stores this spring; none of them conflict with a dealer store.

Sears has protected its dealer stores by giving them the exclusive right within their ZIP Codes to sell Kenmore appliances, a line that is estimated to contribute as much as half the dealers' sales. If Sears wanted to open another store or sell the brand at a nearby location, it had to buy out the dealer at a price equivalent to 10 percent of the store's gross sales.

For its part, Sears says the six-month contract extension has the same effect as previous contracts. And since it has always retained the right to sell Kenmore merchandise anywhere outside the dealer's ZIP Code, there was always the possibility it would open a full-size Sears store near a dealer store, the company says.

In the months since the Kmart-Sears deal was announced in November, Sears has indicated it might play hardball with dealers. Dealers who are in the same ZIP Code as a Kmart or within 15 miles of one, and whose contracts have come up for renewal, have been forced to sign an extension of just six months, instead of the typical three years. The contract offers dealers no protection against having Kenmore goods sold in a Kmart within 15 miles of the dealer's store if the two stores are in different ZIP Codes.

About 200 dealers appear to fall into this category. Some dealers say if the company starts shipping Kenmore appliances to Kmarts just down the road they will be ruined. Dealers also say they worry the new Sears will simply drop their contracts after the six months are up, leaving them with either nothing in compensation or a token $50,000 or $60,000.

A group of dealers is beginning to emerge and consider seeking legal representation. Some plan to meet at a hotel near the St. Louis airport in mid-March to choose leaders and discuss their next moves. "My desire is to have an excellent relationship with Sears and not contribute to their pain," says Scott Jackman, who has owned a dealer store in a bustling shopping area in Napa, Calif., for over six years and is helping organize the fledgling dealer association.

Mr. Jackman says the Kmart acquisition is a good idea overall, because it will put popular Sears brands in better locations and increase the retailer's buying power. He says he also understands some dealer stores will probably have to close. "But my belief is that if Sears is going to be the competition, they should buy the owners out at 10 percent so (the dealers will) at least have some money to reduce their damages," he adds.

Around Christmas, Mr. Jackman received a six-month contract extension with no protection against new products at the nearest Kmart, which although outside his ZIP Code is only 14.9 miles from his store "as the crow flies through a mountain," he says. He asked for and eventually got a reprieve -- and a three-year deal -- because the trip from one store to the other by car is 22 miles.