New day dawning: emergence or emergency? - Kmart Corp. works to emerge from bankruptcy

DSN Retailing Today, March 10, 2003 by Debbie Howell

Kmart's period in bankruptcy has been its darkest hour, revealing a pattern of mismanagement and botched strategies that brought this once-mighty retailer to its knees. But now with emergence in sight, hope has returned. With a little luck and lots of hard work, ceo Julian Day just might be the magician who transforms Kmart into a viable, profitable retailer again.

Though the odds may not be in Day's favor, given the industry's long list of casualties t at have failed to survive bankruptcy, the new ceo has embraced a game plan that makes sense for Kmart--remain a high-low promotional retailer,. Emphasize exclusive brands as a point of differentiation and create a positive store experience that caters to core shopper groups.

Despite the best of intentions, the question remains whether this strategy is sufficient to regain customer loyalty. A history of disappointing shoppers has haunted Kmart for years and damaged its reputation, while its principal competitors Wal-Mart and Target keep getting stronger.

And while Kmart's sales were growing just two years ago, the bankruptcy filing an d two rounds of store closures set off a downturn in same-store sales that has yet to reverse.

Unwilling to give up, Kmart managed to secure $2 billion in exit financing and funding by two outside investors that nearly assures the retailer will emerge from bankruptcy in April as planned. Kmart's an of reorganization lays out a financial forecast that calls or a return to profits in 2004 after a loss of $286 million for the current year.

Kmart lost $2.44 billion in 2001, the year it went into bankruptcy, and was forecast to lose $3.26 billion for the recently ended fiscal year. Sales have dropped from a height of $37 billion in 2000 to an estimated $30.8 billion this year, and as a result of further store closures, will decline to $25 billion for the fiscal year that kicked off last month.

The retailer's tough decision to close 600 stores since its bankruptcy filing, shrinking its store base to about 1,500 units, has forever changed Kmart. But many experts said the shedding of underperforming stores, and in some cases weak markets, was long overdue. Now Kmart can focus its energy on a leaner, more profitable store base.

Another interesting development is Kmart's decision to close half of its 117 supercenters. To many, this signals a switch in strategy away from supercenter growth, a format that has always proved troublesome for Kmart. The recent termination of a food supply agreement with Fleming puts the responsibility for distribution back in Kmart's hands, and the retailer has indicated it will attempt self-distribution on at least some food items. Though Day has said Kmart will remain in the supercenter business, some have their doubts.

"I think they've had a tough time trying to make food work," said George Whalin, president and ceo of Retail Management consultants of San Marcos, Calif. "With that number of closings ... what they're trying to do is distance themselves from that strategy."

Kmart's failure at trying to win a price war with Wal-Mart on the food front may be another factor at work. Under former ceo chuck conaway, Kmart tried to enact an ever day low pricing strategy in food, but the effort failed miserably, with the retailer sacrificing profit margins that weren't compensated by a boost in customer traffic. As a result, Kmart is no longer hyping its supercenter format and intends to focus on its competencies. This is a good thing, according to analyst Ulysses Yannas of Buckman, Buckman & Reid.

"There is a shift in emphasis toward more apparel or soft goods than before, which in turn means higher gross margins," Yannas said. "It's not as if they were strong in [food], they were always very weak"

Yannas said he was pleased that Kmart is now emphasizing its brands, which seemed to be put on the back burner during the conaway era. Further, a renewed focus on serving ethnic shoppers who remain loyal to Kmart is a smart move going forward, he said.

In recent months, Kmart has ramped up ethnic marketing efforts. Besides the recent addition of an apparel line tied to Mexican-born singer Thalia, the retailer now publishes separate entertainment magazines wrapping its circulars called La Vida, Urban Direct and Tea Leaf that respectively target Hispanic, African-American and Asian shoppers. With one-third of Kmart shoppers considered ethnic, these initiatives could p rove worthwhile.

A related Kmart strategy is its "store of the neighborhood" program, in which store managers are given autonomy to tailor merchandise to neighborhood interests and demographics. Though Wal-Mart has employed a similar strategy for years, the move to cater to shopper needs will be critical to Kmart's success given its poor history in this area.

Meanwhile, Kmart has been testing new merchandising and layout changes at stores in White Lake, Mich., and Peoria, Ill. This "store of the future" was designed to cater to the core Kmart shopper, a mother of moderate income. Among the features are wider aisles, visual displays that spotlight key brands and a new color scheme of green and gray. Children's departments were moved up front. In Kmart's plan of reorganization, the retailer said it would continue evaluating the test, with "possible future implementation of a modest rollout of the concept to a large group of stores within the chain."