Penske suit tops list of latest Kmart woes - lawsuit with Penske Auto Centers regarding the unexpected shutdown of 554 automotive centers at Kmart stores

DSN Retailing Today, April 22, 2002 by Debbie Howell

TROY, MICH. -- The spotlight that Kmart has found itself under since filing Ch. 11 early this year is suddenly getting much hotter. In addition to having an executive management office with a perpetually revolving door (see sidebar on Lorna Nagler), Kmart faced a bevy of mid-month developments that seem to be preoccupying the chain with damage control rather than reorganization.

The most significant of Kmart's challenges this month was to settle a lawsuit with Penske Auto Centers regarding the unexpected shutdown of 554 automotive centers at Kmart stores. However, the chain also was faced with two other developments: the need to remove from its store shelves copies of the The Globe, which featured an article with unflattering excerpts of a new book about Martha Stewart; and its own announcement that it may distance itself from programs related to its BlueLight brand positioning, which has come under attack and has even been blamed for Kmart's woes.

This latter point stands to have the greatest effect on Kmart's various business plans because the BlueLight name has become a ubiquitous marketing tool since it was reintroduced last year. The most consequential of the BlueLight changes is Kmart's decision to consider discontinuing BlueLight.com as an Internet business name and replace it with Kmart.com. However, Kmart also confirmed that its BlueLight Always everyday low pricing program is under review.

"Everything that Kmart is doing right now we are evaluating to make sure it's focused and reaps benefits for the betterment of the company," said spokesman Dave Karraker.

Karraker said Kmart is testing the Kmart.com URL in its current print and television advertising to gauge customer response. Based on the results, the company may change the site's name. Ironically, when BlueLight.com was launched in late 1999, initially as an independent company that Kmart partly owned, the name was purposely chosen to create a distinct brand image separate from Kmart, partly due to the increasingly tarnished Kmart name. Since then, Kmart has gained complete ownership of the dot-com business.

And even though Karraker said Kmart "absolutely" will not disband the Blue Light Special brought back to stores last year, the program is being reworked to "better suit the needs of the in-store manager." As initially launched, the program featured an item promoted every hour on the hour as an incredible value, with the intention to generate excitement and traffic in stores.

"We're testing a roaming Blue Light Special right now in several locations instead of the standard Blue Light zone," Karraker explained.

Advertising already has shifted away from last year's BlueLight value branding campaign, which touted Kmart's lowering of prices on 38,000 common items to everyday low prices. In January, the company launched a new image campaign that positions Kmart as a store that understands and meets families' needs, using the tagline "Kmart. The Stuff of Life."

Next month, shooting will begin for another series of television commercials by filmmaker Spike Lee, featuring brands, such as Martha Stewart, Jaclyn Smith and Route 66. The first of Kmart's power brand ads, launching the new Disney children's apparel line, debuted in January.

Along with the former Blue Light Always TV ads, another topic of criticism involves Kmart's store-closure plan. Kmart is in the process of shutting down 283 of its 2,114 stores. Speculation of further store shutdowns continues to haunt the company, even though ceo Jim Adamson has said no more closures are planned, at least not until Kmart defines its business strategy.

Kmart business partner Penske Corporation threw more fuel on the fire when it surprised the retailer by shutting down most of its 554 automotive centers on April 6 and filing a court document that said Kmart representatives informed Penske of a "plan to close as many as 700 additional stores."

Kmart promptly responded to the shutdown by filing suit against Penske, alleging breach of its lease agreement, and won a temporary restraining order that same weekend to halt further closures of Penske centers. After negotiations, the two parties reached a settlement that involved a wind-down of the auto service centers and Penske's agreement to pay Kmart $6 million under terms of the lease document. Further, Penske agreed to waive a claim of $5 million it alleged Kmart owed the company as a result of the store closures. Penske purchased the automotive business from Kmart in 1995 and paid rent to Kmart, while Kmart retained minority ownership.

As for the document related to store closures, a joint statement from Kmart and Penske said that reference "was not based on any business plan, memorandum or other documentation provided by Kmart to Penske."

In the statement, Kmart announced it currently has no plans to close additional stores and that any future store closings would be part of its overall strategy for exiting Chapter 11. Adamson said in the press release that the rental space Penske is exiting, which in most cases is attached to Kmart stores, will be converted to Kmart selling space. No time frame was given for this conversion process nor specifics outlined for merchandising usage.