Introduction

Kmart was a pioneer of the discount retailer industry. At the turn of the century, innovative tactics and strong customer loyalty contributed to unprecedented corporate growth. The playing field changed however, and Kmart had newer rivals to compete with. This report will focus on the attempts to revitalize Kmart, what factors contributed to its bankruptcy, as well as the future for an acquired Kmart.

Some Problems Just Don’t Go Away

Throughout Kmart’s recent history, it has been plagued by a series of problems. All management teams attempted a variety of strategies to combat these. Listed below is the list of ongoing problems.i

Poor inventory management Too often would popular products be out of stock, while others collected dust on the shelves, and in some cases stored in trailors outside of the stores. Price Competition Wal-Mart had successfully found a way to offer the lowest price possible on many goods. Poor Customer Service Too often did consumer reports, secret shops, and industry analysts report of the apathy of Kmart sales staff. Poor Customer Service problems plagued Kmart on a consistent store to store level. “Niche”less While Walmart reigned supreme as the low cost leader, Target was perceived as being a “higher quality” retailer. Where did this leave Kmart? What was Kmart’s competitive advantage over the two large rivals?

The Antonini Era

Kmart’s conception began in 1899 with a single five-and-dime store. Over the years, Kmart continued to grow and evolve with the market. Under CEO Joseph Antonini, Kmart changed its basic strategy.ii

Strategy prior to 1987 Antonini Strategy (1987-1995)

Continue to grow company through additional store locations, renovating current stores, and analyze consumer demand to add additional products and services.

Diversify assets into a variety of industries that were deemed high growth, ripe for market entrance, and profitable.

Kmart acquired several established businesses in a variety of industries.iii

Builder’s Square (1984) Walden Book Company (1984) Payless Drug Stores, Inc (1985) Harold’s Discount Outlets {Canadian} (1985) The Sports Authority (1990) 90% interest in OfficeMax (1991) Borders, Inc (1992) Czech Republic/Slovakian Discount Stores (1992) Bizmart (1992) Joint Venture into Singapore (1994)

Antonini was on a buying frenzy, continuously expanding Kmart’s portfolio. 3 start-up companies were also initiated, as well as 100 Kmart stores in Mexico. Although international expansion was the backbone for Kmart’s strategy, changes were also made to Kmart in the United States. Listed below are the strategies Antonini put into effect during his tenure, and the outcome of such.iv

Strategy Outcome

Diversification Failure

Purchased a variety of businesses in several retail industries including internationally.

Acquisitions all performed poorly posting minimal net income or losses. Distracted management from core business.

Renewal Program Mixed Results

$3.5 billion program intended to modernize, expand, or relocate Kmart’s 2,435 stores. Increase sq ft (800K to 100K), and open 500 Super Kmarts. Improve quality of private label brands. Logic: Cash Cow Fashion to subsidize specific hardline products to be low price leader.

Super Kmarts sales were 23% higher than traditional stores. Fashion strategy was a disappointment. Antonini blamed the failure on market conditions. Wal-Mart continued to emphasis on being the local cost leader, at any cost. Customer’s View of Kmart: dirty, poorly stocked, and rude staff. Many stores did not receive substantial renovations.

Modernize Inventory Methods Failure

State of the art GTE Spacenet satellite based network. Implemented Central Merchandising Automated Replenishment system (CMAR). Costs of revolutionary technology = $160 million/annually

Although an improvement from the previous system, CMAR still did not meet expectations. Many contribute the vast amount of inventory, and the high complexity of the system for it’s failure.

New King is Crowned

In 1990, Kmart was dethroned as the leader of the discount retailer, by rival Wal-Mart. Sales growth for Kmart from 1980 to 1990 was a mere 7.7%, compared to the skyrocketing Wal-Mart. Shown on the following page is a time line of sales dollars (revenue) per each of the 3 large discount chains.v

The Wal-Mart Advantage

Near perfection distribution system. Lowest operating costs allowed for being the low cost

leader. Newcomer advantage

Source: Target, Wal-Mart, and Kmart’s Annual Reports (SEC Filings)

Hall Steps Up To Bat

After a failed corporate strategy by Joseph Antonini, the reins of Kmart were handed over to Floyd Hall. Hall had industry clout due to his success at Target and Grand Union Supermarkets. Hall quickly assembled a new board of top level managers with the intentions of, “…trying to build a team…get a good succession plan and new policies in place.”vi The competitive environment in 1995 did not reflect positively for Kmart, as shown below.

Competitive Match-Up in 1995vii

Kmart Wal-Mart

Customers averaged 15 visits a year Sales/sq ft = $185 19% loyal customers

Customers averaged 32 visits per year Sales/sq ft = $379 46% loyal customers

With rival Wal-Mart defeating Kmart clearly in every key performance indicator, Hall declared that complete surgery was needed, no band-aid could revive this company.

Hall’s strategy can be defined as: Divest noncore activities, drastically improve all core principles, and drive down cost wherever possible. A “use it or loss it” style was put into effect.viii

Use It Lose It Overall Asessment

Consolidated U.S. and Canadian Operations Capitalize on volume buying power to drive down employee health benefits Improve stores, “department by department” Increase private labels Expand Martha Stewart Collection Pantry Concept Redesign stores based on consumer convenience. More District Managers Stock Options for Store Managers

Close 400 stores Cleared out $700 million of inventory Sold of previous acquisitions (ex. OfficeMax & Sports Authority, etc) Eliminated some 2nd tier brands, and all 3rd tier brands.

Positives

1,600 renovated stores Martha Stewart sales = $1 Billion Sales per sq ft rivaled Target Dropped Operational Costs by $500 million Profit (shown in the table below)

Negatives

Poor Customer Service remained Inventory System bottlenecked and flawed. Poor Competitive Position

Source Walmart & Kmart SEC Filings

Who’s Next?

Hall’s dynasty ended in 2000, when Charles Conaway left CVS Corporation to head the sinking ship of Kmart. Conaway elected to attack Kmart’s two rivals head on with an aggressive strategy to revitalize Kmart, and to obtain rival market share.

Source: Company Annual Reports (SEC Filings)

Rival Strategy – “Kmart: The authority for moms, home, and kids”ix

Walmart (Low Cost) Capable? Target (Differentiation)

Capable?

Blue Light Always Program $1.7 billion investment to be the low cost leader on 50,000 products. Play To Win Supply Chain Management

Blue Light Always didn’t have the efficiency or cash to compete with Walmart

Play to Win was a failure due to “too much to fast”.

Greater emphasis on private label brands. (vs. Mossimo) BlueLight.com (Target shoppers statically higher income consumers, early internet adopters)

Kmart’s private brands couldn’t match Mossimo’s quality/style 1% of visitors purchased a product. $55 million poorly invested

The White Flag – 1/22/02

Bankruptcy was inevitable for Kmart due to countless failed strategies over the previous two decades. Conaway’s actions solidified the bankruptcy, although in truth there was little he could do, but hope to delay the inevitable.

Bankruptcy Contributors

$8.3 billion worth of inventory Blue Light Always Pricing Strategy Sales Decline Unpaid vendors Massive debt

Source: SEC Filings 2002

Source: SEC Annual Filings (1999-2001)

Kmart Restructuring Strategy

3/2002 – Close 284 stores & eliminate 22,000 jobs Liquidate $758 million of inventory Reduce overhead by $130 million Utilize $2 billion financing “The Stuff of Life” advertising Sell BlueLight.com Develop New Store Layout 1/2003 Close 316 stores & eliminate 25,000 jobs

The New Kmart

James Adamson was CEO a mere 5 days before Kmart declared bankruptcy. Adamson who has handled a corporate bankruptcy restructuring before, put the following strategy into place.

Restructuring Recommendations

Address housekeeping/poor customer service concerns by frequent District Manager visits & Mystery Shoppers

Hire Fashion experts to compete with Target on Fashion, including releasing an entirely new private brand line Open additional distribution centers across the nation, and work on a “just in time” inventory approach. DO NOT attempt to be the low cost provider. Compete head to head with Target. “Open Door/Open Books” Policy regarding accounting letters.

Consumer Recommendation: Don’t

Buy Kmart

Wal-Mart continues to grow momentum Very small loyal customer base Accounting violations taint brand image Lack of Positioning Closing stores limits accessibility. Underlying problems of inventory management have yet to find a solution

Source: SEC Filings 1992 through 2002

An Empire is Born

On November 17th 2004, the announcement was made that Kmart and Sears Roebuck Company would merge to form the third largest retailer in the nation. Was this a strategically sound decision by Sears?x

Industry: Department Stores

Industry: Department

     

Stores  

Industry Attractiveness Factor

Industry Attractiveness Factor   Weight Rating Weighted

Market Size &Growth Market Size &Growth

0.25 9 2.25

 

Intensity of Competition

Intensity of Competition   0.15 5 0.75

Strategic Fit     0.1 7 0.7

Resource Requirements

Resource Requirements   0.1 3 0.3

Emerging Opportunities/Threats

Emerg

0.1 7 0.7

ing Opportunities/Threats  

Cyclical Threats     0.2 5 1

External Factors     0.5 2 1

Degree of Risk     0.5 6 3

Sum of Weights     1    

Industry Attractiveness rating

Industry Attractive

    9.7

ness rating  

Source: SEC Filings per perspective company

Competitive Analysis

 

       

Industry Attractiveness Factor

Industry Attr

 

activeness Factor

Relative Market Share

  0.15 8 1.2

Costs relative to Competitors

Costs relative to Competit

ors 0.1 4 0.4

Match Rivals   0.1 4 0.4

Bargaining Leverage

  0.05 3 0.15

Strategic Fit Relationships

  0.1 7 0.7

Innovative Capabilities

  0.2 5 1

How well matchs KSPs

  0.1 4 0.4

Degree profit relevant to rivals

Degree

profit relevant to rivals

0.2 5 1

Sum of Weights   1    

Industry Attractiveness rating

Industry Attractiveness rating     5.25

Source: New York Stock Exchange (www.NYSE.com) 2006

Industry Attractive? Cost to Enter? Better off?

Yes, although the department store/discount retail stores are a mature market. There is constantly innovation in products and services, and a demand will always remain.

K-Mart merger was not expensive enough to not do. Value added services savings and strategic goals being assisted. Merges with Kmart helps achieve their strategic vision

Sears shareholders are better off acquiring Kmart with advantages in additional stores (non-mall) and economics of scale cost savings

Shareholder Initial

Response Mixed;

Invest in Sears Holding (SHLD) today.

Fits Strategic Plan for Sears’ growth. Inherits Kmart brands, and improves Sears brand distribution Combining channels of distribution, advertising for cost benefit. Diversified in same industry is a win.

Source: NYSE/Morning Star 11/16/2004 – 06/09/2006

The New Face of Sears

Kmart pioneered the discount retailer industry, but with any good idea comes competition. Wal-Mart, a pioneer in it’s own right, perfected a distribution/cost system that was second to none. With Target embracing a differentiation strategy, where did that leave Kmart? Costly mistakes marked the end of a flagship American enterprise, but spun the birth of something new. Sears enjoys the benefits of non-mall stores, wider array of products, and shared value chain systems for a cost benefit. Stockholders should see potential in Sears Holdings in a thriving industry, for years to come.

i Gamble, John E. Kmart: Striving for a Comeback, 2003

ii Gamble, John E. Kmart: Striving for a Comeback, 2003

iii Gamble, John E. Kmart: Striving for a Comeback, 2003

iv Gamble, John E. Kmart: Striving for a Comeback, 2003

v Gamble, John E. Kmart: Striving for a Comeback, 2003

vi Gamble, John E. Kmart: Striving for a Comeback, 2003

vii Gamble, John E. Kmart: Striving for a Comeback, 2003

viii Gamble, John E. Kmart: Striving for a Comeback, 2003

ix Gamble, John E. Kmart: Striving for a Comeback, 2003

x Press Release: “Kmart Holding Corporation and Sears, Roebuck and Co. Agree to Merge” 11/17/2004

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