Super K to define the future - The Power Retailers: Kmart - Company Profile

Discount Store News, June 3, 1996

The shortage of cash that has slowed the expansion of Super Kmart Centers to a crawl this year may have a silver lining for the chain.

The slowdown gives Kmart an opportunity to fine-tune the concept with a new prototype and smaller sizes before it invests in hundreds of Super Ks.

Moreover, chairman and ceo Floyd Hall maintains that Super K will still be Kmart's growth vehicle. By next year, the company will begin opening more supercenters than discount stores, he said.

Kmart demonstrates that it is getting more serious about food by rolling out this summer about 1,000 skus of its American Fare private label program. Featuring red, white and blue labeling with stars for a patriotic theme, American Fare will replace humdrum Super Kmart private labeling on bread and milk, as well as the Nature's Classic line of cookies.

The American Fare program reflects a new fact of life for Super K: supermarket executives, including Super K president Ron Floto, dominate the Super K program in increasing numbers. David Marsico, who helped design the first Super K in 1989, now is vice president in charge of general merchandise.

At stake in the supercenter race is a highly fragmented food market of some $500 billion. The entire supercenter industry barely put a dent in that market, with total food sales of $11.8 billion and a penetration of 2.56%, estimated industry consultant James Degen, president of J. M. Degen & Co., Cayucos, Calif.

"I think the convenience of one-stop shopping is being proven out to me every day by the supercenters. I mean, these supercenters are a phenomenal success," Hall said.

For one-stop convenience, the full-size Super Ks typically include an automotive center (now owned and operated by Penske Automotive, except for 12 centers that Michelin Tire leases), a hair salon, floral shop, portrait studio, vision center, pharmacy and restaurant, either a Little Caesar's pizza shop or a company-owned eatery.

In March, Kmart opened the first two units of a new Super K prototype that brings fresh produce, the hallmark of a supermarket, to the forefront, a move that will say to shoppers that Super K is a food store. When Kmart originally designed its first Super K, it placed fresh produce near the rear of the store, lumping it together with fresh meat, seafood and bakery, and operating under the traditional discount store theory that rear placement would draw customers into the store.

In contrast, supermarkets always place their fresh produce at the front of the store as a draw, so Kmart's new prototype, first displayed in remodels of Norfolk and Virginia Beach, Va., stores, turns to more of a supermarket concept.

Both Wal-Mart Supercenters and SuperTarget also position fresh produce at the front of the store, as does Meter, based in Grand Rapids, Mich., one of the most successful supercenter operators.

Another fine-tuning due this year is meant to save on labor costs by reducing to two from three the number of prepared food kiosks at the front of the store. The kiosks, originally intended to emphasize Kmart's focus on fresh food by offering salads and fresh-cut cheese, drew too little traffic to warrant the high labor expense of staffing them.

Kmart has also begun testing in Morgantown, W. Va., the first of a new, smaller 140,000-sq.-ft. prototype, compared to the standard 180,000-sq.-ft. Although it lacks an automotive service center, the smaller prototype offers the same number of skus of both food and general merchandise, but reduces the number of facings to boost sales per square foot. This addresses the priority in '96 to "attack the profitability issue in Super K," said Bob Burton, head of investor relations.

In addition, at least one of the nine Super Ks this year will be a 120,000-sq.-ft. unit. Wal-Mart is testing units of just 109,000 sq. ft., which are smaller than full-size discount stores for urban markets.

By the end of '96, Kmart will be operating 96 Super Ks, which puts it in the same ballpark with Meijer, with 99 supercenters, and Portland, Ore.-based Fred Meyer, with 94.

In contrast, Wal-Mart plans to open as many as 110 supercenters this year and will be operating about 350 by yearend.

By slowing new construction to a trickle, though, Kmart is surrendering what was to be a key advantage of its mode of expansion--hopscotching around the country to select the choicest sites ahead of Wal-Mart. Kmart could do that because it uses grocery wholesalers SuperValu and Fleming to supply its food, rather than being limited by costly distribution centers, as is Wal-Mart (with a few exceptions).

Because of its cash crunch, Kmart has no plans to begin self-distribution of food. Wal-Mart will be operating five food DCs by yearend.

Kmart cut $500 million out of S&GA costs in '95, but Super K costs offset about $100 million of those cost savings, Burton said.

"Super K is a winner," Burton said, and an independent study by Degen supports that. The general merchandise rate of sales increased by one-and-a-half to three times when Kmart replaced a discount store with a Super K, Degen found.