Kmart cuts hint of future strategy - Plans to emerge from bankruptcy this spring

DSN Retailing Today, Jan 27, 2003 by Debbie Howell

TROY, MICH. -- Kmart's plan to emerge from bankruptcy this spring may be a first step to financial health, yet the retailer's latest move to shutter stores leaves many questions unanswered, including whether a sound strategy is in play to ensure long-term survival.

With $2 billion in exit financing secured and a plan of reorganization ready for court approval, there's little doubt at this point that the retailer will exit bankruptcy--even earlier than planned. But many retail experts remain unconvinced Kmart has a handle on a viable long-term strategy. The retailer's decision earlier this month to close 324 of its 1,829 stores and one distribution center raises new questions, including Kmart's degree of commitment to supercenters and whether the retailer is retrenching from a national presence.

Kmart will close half of its supercenters, or 60 units out of the 117 it now operates. Some interpreted this as a sign that Kmart may get out of the fresh food business due to the complications of distribution, lower margins and tough competition from Wal-Mart. The remaining 57 units could eventually be phased out, or perhaps even sold.

"By having 57 units, you might as well have none. These are not the kind of stores you can operate fewer of and become more profitable," said Neil Stern, a senior partner with retail consulting firm McMilla Doolittle.

Stern said he viewed the decision as financially driven, with those stores perhaps closed because they were too expensive to operate, even if profitable. Yet, he said the drastic paring down of Kmart's supercenters, which only a year ago was the company's top growth priority, sends a message that Kmart's future strategy may not include supercenters. Kmart spokesman Jack Ferry held firm on the company's dedication to food, however.

"The company is not exiting the food business and we will continue to operate supercenters where it makes good strategic sense to do So," Ferry said.

The possibility that Kmart may withdraw from the supercenter business has its pros and cons. Some said Kmart has always struggled to make the grocery business profitable and never managed to get distribution to work efficiently with its sole supplier, Fleming. On the other hand, both Target and Wal-Mart are aggressively pushing supercenter expansion, the apparent wave of the future in discount retailing. Whether the traditional discount store will remain a force in its own is subject to debate, at least on a national scale.

Another issue is whether the downsizing of Kmart may in time turn this chain into a regional, and if so, is survival possible given the number of discounters that have folded in recent years.

"The history for regionals is bleak. They need to be a viable national operation," said George Whalin, president and ceo of Retail Management Consultants.

Kmart has already fallen from its long-held spot as the second-largest discounter in revenue. Sales are forecast at $31.5 billion for the fiscal year ending this month, and could drop to $25 billion next year due to store closings. Sales at Target stores, in contrast, will come in at more than $34 billion this year from a base of 1,148 units in 47 states.

At the time of its bankruptcy filing last January, Kmart operated 2,114 stores in the United States, Guam, Puerto Rico and U.S. Virgin Islands. Combining the 283 stores Kmart shut down last March with the latest 324, the retailer has now trimmed its store base by 29%.

While last year's closures were more evenly distributed, this time Kmart is significantly pulling out of markets, particularly in the South where WalMart is strong. The decision to close was based on competition, poor performance or unfavorable leases. Broken down, Kmart will dose 264 Kmart stores and 60 Kmart supercenters in 44 states and Puerto Rico.

All five stores in Alaska will close, leaving Kmart in 49 states. In Texas, 53 stores and the state's single distribution center will close, leaving just 20 units in smaller cities. Kmart will exit Dallas, Fort Worth, Houston, San Antonio and Austin, the state's largest cities.

More than a quarter of the stores in Mississippi, Georgia, Arkansas and Louisiana will close, other strong Wal-Mart regions, and also in the states of Rhode Island, Connecticut, North Carolina and Nebraska. By number, states with the most closures are Texas, California, Georgia, North Carolina, Indiana, Florida, New York, Ohio and Michigan.

"We determined that Kmart cannot be as competitive in certain markets as necessary, and for that reason we decided to significantly reduce our store base in these markets," Ferry said.

But some questioned whether a complete pullout of certain markets might make more sense, such as in Texas where distribution will become costly Then again, some of the remaining Texas stores could be strong performers that Kmart needs both from a financial perspective as well as to maintain a presence in this heavily Hispanic market. Kmart has a large and loyal Hispanic customer base, something the retailer can ill afford to lose.