What to cut—it's a wrenching decision

DSN Retailing Today, March 8, 2004 by Debbie Howell

There's nothing like a bankruptcy to force a company to take a hard look at its business, enhance what works and discard parts that don't. Such has been the case with Kmart this past year as the retailer reworked its merchandise mix in an effort to become profitable, leaving bankruptcy far behind and hopefully for good.

Although Kmart has so far maintained commitment to all its merchandise departments, weaker areas have been downsized over the past year. Apparel and home-related categories are getting more attention at the expense of less-productive hardlines segments that include hardware, automotive and sporting goods.

Across all categories, Kmart has cut 10% to 12% of its SKUs. Most of these changes have been subtle, with analysis of the mix ongoing. Meanwhile, Kmart continues to promote its "store of the neighborhood" initiative to tailor assortments to local demographics, therefore mix changes aren't necessarily universal.

Kmart has downsized automotive, hardware, consumer electronics and sporting goods. Stronger performers have been lawn and garden, toys and office supplies. Given increasingly tough competition in some of these categories, however, Kmart may need to rethink its strategy as a traditional, broad-based discounter.

"Wal-Mart is expanding categories and lines. Kmart is not. It's tough to compete when you're going from a competitive assorting position to a convenience assorting position," said Jim Robisch, senior partner of The Farnsworth Group, a hardware industry research and consulting firm. "I think it's a slow demise that by default they're going to have to get out of some [categories]."

Robisch said Kmart's hardware department has grown smaller in recent years and he doubted it was one of the retailer's more profitable departments. One exception might be Martha Stewart Everyday brand paint, a strong brand despite Stewart's legal troubles. This might explain Kmart's reluctance to exit hardware in full.

Other than paint, hardware has never been a destination category at Kmart. For that reason Kmart's continued production of private label tools and hardware accessories doesn't quite make sense, even thou these items do carry a higher profit margin. The retailer sells tools under its Tool Source and Benchtop private labels, along with national branded items that include Stanley and Black & Decker. Compared with extensive assortments in Benchtop just two years ago, however, the line has definitely been reduced in scope to key sellers such as tool kits.

Automotive is another area that hasn't performed well. When Kmart ended its partnership with Penske Auto Centers, this further validated that theory. Here again, downsizing is apparent, with the former Penske private label possibly being phased out due to only one item under that label--a booster cable--found at a Big Kmart in Duluth, Minn. Basic accessories and commodity items continue as part of the mix, though the department clearly hasn't received much focus since the assortment at Duluth appeared outdated and lacked visual flair to attract impulse buyers.

"In automotive, I would suspect there just comes a point where it's not mission-critical," said Greg Silverman, senior vp of strategy and research at Design Forum, which worked with Kmart last year on a new test prototype and revised mix.

Sporting goods has also been pared back, though opportunities for taking advantage of specific market needs are too attractive to completely eliminate this category. At the Duluth store, in an area where hunting and fishing are popular, the assortment was noticeably expanded from what might be found at a typical Kmart.

Lawn and garden may be the one hardlines department with growth potential. Under the MSE brand, Kmart relishes a competitive advantage as a destination for stylish patio furniture and garden decor. But if Kmart and Stewart part ways--a possibility now that the two are embroiled in a lawsuit disputing royalty payments--a severe blow would De dealt to Kmart's lawn and garden strategy.

As for office supplies and toys, the assortments aren't extensive or even distinguishable. These categories are likely to remain part of the mix, however, given Kmart's strategy of targeting mothers who will buy gifts and back-to-school supplies. Exclusive brand deals would work wonders in differentiating Kmart here, considering such licensed lines to date have mainly been limited to apparel and home. A few Joe Boxer items are found in office, such as notebooks and folders.

"Toys is a tough one. It's very difficult to be dominant and even competitive with the way Wal-Mart's gone after it," said Silverman. "I can't imagine they can stay terribly viable in it."

If Kmart is to survive continued evaluation of its hardlines strategy is critical given the challenges of regaining shopper loyalty and offering a mix that is compelling and distinguishable from rivals. Unfortunately, Kmart just isn't there right now, with smart decisions needed to either cut or revamp struggling departments.