Today's Kmart plants the seeds for tomorrow's respectability - The Power Retailers: Kmart - Company Profile

Discount Store News, June 3, 1996

Today's Kmart is not the Kmart of six months ago, nor is it what Kmart will be six months from now. Once the country's leading discounter, it has passed through a nearly fatal fire. Skeptics contend the experience crippled it permanently. Kmart's team believes in the company's ultimate recovery and is doggedly working to prove the naysayers wrong.

Chief among the believers is chairman, president and ceo Floyd Hall, who celebrates his first anniversary with Kmart this week. Hall told DSN he believes Kmart will achieve "a fair recovery" in '96 and will establish its "respectability" in '97.

And in truth, as Kmart labors through the most critical juncture in its 35-year history, it has a number of angels in its corner:

* 2,164 stores, all but a handful of them profitable, according to the company;

* A determined team of senior executives, 28 of them hired within the past 18 months;

* A revamped board of directors, seven of whose 12 members have joined since Hall's arrival--all of whom except Hall are independent outsiders;

* Leaders who have faced down the dragon of bankruptcy before: Hall at Grand Union and U.S. stores president Warren Flick at Sears;

* Perhaps the most potent blessing of all, the fact that almost everyone in the factoring and vendor communities is literally terrified of what will happen if Kmart doesn't make it.

But none of that will amount to much if Kmart continues to operate in an environment where it needs shoppers far more than shoppers need Kmart.

Hall is the first to admit it's a critical issue.

"I think the strength of any great company is that every division is absolutely in touch with the customer and is making decisions about the space allocations that are representative of what she really wants," he said in an exclusive interview following the company's May 21 annual meeting. In the past, "we weren't building a progressive, aggressive merchandising organization to the degree that I felt we should have been. We weren't getting the specialization that I felt that we should have as a company."

Making every department in the store function "just as a specialty operator would" is part of the plan to become the retailer of choice for the low- to middle-income mother whose annual household income is about $40,000. The challenge is that this consumer already has more than enough retail options. She is the woman, research says, who will drive past Kmart to get to a store that has more reliable in-stocks, sharper prices and more knowledgeable employees.

To win her back, Kmart plans to employ a strategy that "uses the best elements" of Wal-Mart's EDLP position and Target's promotional one, Hall said. The chain has made clean, orderly stores a priority. And it's implementing systems that audit everything from the performance of new merchandise to the performance of individual store associates.

"It's very, very difficult to change your image. But we can change it if we take it on in about four or five planks. The first one is, when [customers] come in, they have to see and feel the store we tell them we're running."

Living up to the promise requires significantly changing what Hall refers to as the old Kmart's "silo approach" to merchandising, wherein each category was run as an independent duchy by an executive team that had engendered "a culture of entitlement." Category merchants are now working in tandem to present a more consistent message across the store.

Stripped down to the essentials, Kmart is betting on four things:

Convenience

Kmart wants to become the home of one-stop shopping, whether it's being done at Super Kmart Centers or at Pantry-enhanced discount stores. Nearly 80% of Kmart's shoppers come from close by, according to one study. The idea is to leverage that convenience quotient to get them coming in more frequently.

The new Pantry program, which consists of dairy staples, bread, cereal, chilled beverages and basic freezer goods like ice cream, is said to increase store sales by up to 20% and will be rolled out to 150 stores by yearend.

Although the margins in this strategy are low, Hall believes the volume it will deliver will drive sales per square foot from the cur rent level of $190 to the corporate goal of $220.

"The reason it makes so much sense for us is it's incremental volume," Hall said. When you have an underutilized capacity, as we do, if you do $190 a foot at a 23% margin, in that same product you might do $300 a foot at a 15% margin."

While Kmart is excited about the prospects for the Pantry, it is Super K the company is counting on to truly carry the convenience message forward.

Hall told DSN that next year Kmart will begin opening more supercenters than discount stores, and the latter are likely to incorporate some of Super K's more successful programs.

Consumables

They're not just food items as Kmart defines them. The chain wants to become the destination store for high-turn merchandise across a range of categories:

* "Stock-up items" such as snacks, cleaning suppliers, pet food, paper, H&BC and OTC drugs;