The turnaround at midpoint; its strategy in place, Kmart must buildmomentum

Discount Store News, June 23, 1997 by Laura Liebeck

Kmart still has to ace pop quizzes. Although the retailer would get an "A" for effort in its turnaround strategy, a couple of big tests loom, namely Back-to-School and Christmas, that ultimately will help determine Kmart's final grade.

Too bad the chain's not graded on a curve because the competition is cramming.

Floyd Hall, a top retailing student and the leader in Kmart's turnaround efforts, has established a list of objectives for 1997 that he has identified as musts in his efforts to ensure the company's future. He wants to strategically position Kmart between its two nemeses, Wal-Mart and Target. That entails better attention to such retail basics as price, assortment and the mix between brands and private label, cleaner stores, more customer service, an improved instock position and an increased mix of high frequency, everyday basics and consumables.

But more than that, Kmart must accomplish five critical tasks:

* Create a new corporate culture that embodies the company's new outlook;

* Forward a comprehensive apparel program that meets the needs--and exceeds the expectations--of its customers;

* Close more underperforming stores;

* Develop an image campaign that helps customers identify with the new and improved Kmart;

* Drive down the average age of its customer profile.

All the while, Kmart must drive in more sales, increase its gross margins, grow its ticket sales and fatten its sales-per-sq.-ft. ratios.

"On a scale of one to 10, I'd give us a six," Hall said recently when asked to assess where Kmart is in its turnaround. "We still have a long way to go. We need to pull hard, work harder over the next two years." Even with its new programs, Kmart is still challenged to transform itself from an also ran in the discount store business to a reborn chain with a brand new identity. All the while, Kmart's chief competitors Wal-Mart and Target, continue to roil across the landscape building more forward momentum as they go, providing Kmart with more than a good game of catch-up; now Kmart fights for its survival.

It is apparently is headed in the right direction and has a strong management team led by Warren Flick, president of U.S. Kmart Stores and chief operating officer. But whether or not Kmart will realize its goals and actually become a turned-around company is still being debated.

Without question, though, retail analysts and consultants tend to agree that Kmart will be around for a long time. The question that remains is: "In what form?" And an even bolder question that some ask is: "Who will own it?"

If Kmart is trying to model itself after the spectacular turnaround achieved by Sears, it should be bracing itself for a monstrous if not impossible undertaking. The difference between the two retailers is the state of their respective markets. Sears had a large, diverse, fragmented and weak market from which to grab market share. Kmart does not. In order to be more successful, Kmart has to gain market share. Neither Wal-Mart nor Target, much stronger competitors, is about to give up its market share. Generally, the regionals are considered weak, but is that enough on which to stake a turnaround?

So far, Kmart seems to have time on its side, given a strong economy, more than 2,000 locations, a loyal if aging clientele, plus supportive vendors, lenders and a still tolerant Wall Street.

"These kinds of things [turnarounds] take a long time. You're influencing customers, not the stock market," said Sid Doolittle, principal in the Chicago-based retail consulting firm of McMillan/Doolittle. "The turnaround will take longer than Floyd will take it. The important thing is they have a direction and they stay with it."

Consultant Walter Loeb of Walter Loeb Associates also feels that Kmart has turned a corner. "They've done a great deal; they feel a sense of urgency."

Loeb noted that for Kmart to chart sustained growth, it must invigorate its fashion program, which is "not there yet," he said. "It needs to be meaningful, value-oriented and have an identity."

For others, Kmart's revival is anything but certain.

One retail industry consultant said he doesn't think Kmart can turn itself around, "but they will last a long time," he added. "They can be an also-ran in the low-priced mass merchant game."

Another retail analyst said, "The economy has been good and so long as the economy is on their side they'll be in the game." Kmart has had a "free ride" from investors for the first six months of the year because new merchandise was rolling in, he said. "The free ride ends when you hold Kmart's feet to the fire."

This analyst was particularly concerned about Kmart's apparel department, which remains in flux at headquarters and on the sales floor, and even with the revival of the Martha Stewart program that Kmart "went around the block with" once before. The program, he said, may go beyond the taste of most Kmart customers.

The key is execution said David Poneman, analyst with Sanford Bernstein. The new Big Kmart format that everyone is pointing to will be neither a winner nor a loser. It is the execution of that program that will make Kmart a winner and a viable chain in the future, he said. He specifically pointed to Kmart's need for more sales without sacrificing gross margin. Poneman believes that the issue for Kmart is the mix of the whole box, not of a single part.