Once a turnaround tack, food is forgotten—or is it? - Food & Consumables - role of food retailing is questioned as part of Kmart Corp.'s bankruptcy reorganization

DSN Retailing Today, March 10, 2003 by Mike Duff

With 60 fewer super-centers and a broken Fleming deal--after only two of its contracted 10 years-it's no wonder speculation about Kmart's commitment to food has reached a crescendo. But don't count Kmart out of the food business too fast.

Despite reactions from analysts--such as Bernstein's Emme Kozloff, who was among those to interpret the dramatic cut in supercenter operations as evidence that Kmart was turning its back on food-a definitive picture of Kmart's intentions will only be available once the company emerges from Chapter 11 bankruptcy protection and presents a more detailed strategic merchandising plan.

Kozloff and others are certainly not wrong in pointing out the benefits that the closings present to Kmart's competitors--such as Wal-Mart gaining roughly 60% of the sales displaced by Kmart's closings and Target gaining 25%--yet many efforts to emerge from bankruptcy have been p receded by drastic repositioning efforts, as was seen in the cases of Caldor or Ames (neither of which worked). A determination to slash costs did help Bradlees emerge, even though the results were short-lived.

Kmart chairman James Adamson has led bankrupt companies out of Chapter 11 be ore--such as restaurant chain giant Denny's. It is his expertise and his priority. And even though Adamson himself said that Kmart would not make any significant operational changes while in bankruptcy, he promised to improve basic functions such as instocks and store maintenance.

Even a preliminary strategic plan With a to probably will be changed in the aftermath of emergence. For as they say in the military, no plan survives the onset of battle--and the new 1,500-unit Kmart chain will have to be put to the test in the open market before its true strengths and weaknesses can be accurately assessed.

From the perspective of those who grew up in and around the discount store industry, retaining 57 super-centers may seem strange, particularly from the distribution point of view. From the supermarket industry perspective, it is less so. Many significant supermarket chains aren't self-distributing, and even as large a company as Albertson's switched from self- to third-party distribution last year as it scale J down involvement in a south central U.S. market. Food retailing has a significant third- party infrastructure in place with Fleming, SuperValu and Nash Finch among the major players, and recently, they have seen touting their expertise. The message is: We have the experience, the technology and the facilities to distribute better than retailers can--with are exception perhaps--and we are here to help you compete against that me exception, Wal-Mart.

Certain details of the closings suggest that supercenters closed for a variety or reasons, not as the first step in a definitive plan to exit food retailing.

Of the 60 closed supercenters that were on the initial closing list, 26 are n the Sunbelt outside of California, where Wal-Mart and Target are particularly strong. California, where Wal-Mart has a big food expansion planned, has four supercenters closing. Of the rest, 17 are in the Ohio, Michigan, Indiana and Illinois heartland where Kmart launched supercenters and where it has many of its oldest locations. Three supercenters--one in California, one in Indiana and one in Virginia--were later given reprieves along with six discount stores. One additional discount store was possible for reinstatement at press time.

Jack Ferry, a Kmart spokesman, said a number of factors influenced store closings. Reading from a statement, he said, 'The factors considered in evaluating the store portfolio were both financial and strategic. Key financial metrics for each location, on both a historical and projected basis, included comparable store sales, gross margin, four-wall EBITDA, store cash flow and lease terms. Strategic considerations included an analysis of the competitive environment in local and regional markets, distance from distribution centers and the location and number of other Kmart stores in the market."

In terms of overall pattern, its not easy to discern a single reason why so many Super Ks were slated for closing, which store basis. For again indicates the decisions truly were on a store-to example, Kmart is closing its two supercenters in lower New York state, both of which are located in commercial areas with new Wal-Mart supercenters. Yet it retained a supercenter in upper New York in the town of Queensbury, its Web site indicates, even though the next-closest supercenter geographically is in Mechanicsville, Pa. The closing of two Connecticut locations takes Kmart supercenters out of New England. The retailer also is withdrawing supercenters from San Antonio, where it has been operating multiple units for several years, but it is getting out of that market completely. Closer to home, Kmart is closing seven supercenters in the Detroit area but retaining six.

On the discount store side, the company has taken the trouble to retool pantry operations at its new prototype stores, which are based on a design launched in White Lake, Mich. The pantry has been moved to the left rear of the store, versus the right middle where it had been placed in previous prototypes. With a design that creates sightlines through the store, the new prototype offers customers a clear sightline from the entrance to the p an try, which should act to draw consumers intent on shopping the department through the store. Otherwise, the pantry is designed for customer convenience, said Dave Karraker, a Kmart spokesman.