Super K: a fresh outlook - Super Kmart Centers - It's Now or Never

Discount Store News, Dec 9, 1996 by Laura Liebeck

At the time chairman Floyd Hall came to Kmart 18 months ago, he pronounced Super Kmart Center the company's vehicle of the future - even before he saw one.

Now it's lingering on Kmart's "to do" list.

Growth of the 96-unit division has stalled because Kmart simply doesn't have the money to roll it out. When Super K debuted five years ago, company executives projected 500 Super Ks by the turn of the century. Realistically, Kmart will have approximately 150 Super Ks by that time.

Hall said Kmart had to modify Super K the way the retailer has had to modify all of its store prototypes. He specifically noted that Kmart "modified the investment base, the store sizes, the whole model that we used before expansion. [Super K] is a very viable part of our future. And we're going to go back to relatively aggressive expansion, aggressive for us, maybe not so aggressive for others."

That aggressive posture won't take place until 1998, however. In '97 Super K will open just four new supercenters, said Ron Floto, president of Super K and executive vp of Kmart Corp. The division was caught up in Kmart's precarious financial position of a year ago and managed to get just four units on the drawing board. Things don't get cooking again until 1998, which is now being planned; next year, Floto said he expects to open 15 to 20 Super Ks.

The slow pace of expansion has some retail analysts concerned, given the rapid rollout of Wal-Mart Supercenters. One analyst called Kmart's efforts superfluous now given Wal-Mart's expansion schedule. Wal-Mart will end 1996 with 350 units. Another 100 are planned for 1997. Even Target, which debuted its SuperTarget only a year ago, has already opened seven units and plans to open at least six more in 1997.

Floto said that while he wishes his store count paralleled Wal-Mart's, he's not "in a foot race" with the larger retailer. "We are not in a position to see this thing as a horserace."

In the meantime, Wal-Mart is rolling across the landscape placing supercenters where it likes and building momentum.

What's at stake here is more than grocery sales; the prize is beefy margins from greatly enhanced general merchandise sales that rise about 30% when paired with food and grocery. Customers seem to like the one-stop shopping option and reward the retailer that can provide this environment with their shopping dollars and their loyalty.

Wal-Mart and Super K are pursuing different expansion strategies with their combo stores. Wal-Mart has advanced its supercenters in much the way it did its discount stores, from a base of rural stores working in concentric circles from its own food distribution centers, beginning in rural markets and spiraling out to suburban locales. This has been a winning plan for Wal-Mart, enabling it to keep retail prices low as it builds momentum and customer loyalty across the landscape.

Super K uses food wholesalers to supply the stores (Fleming and SuperValu), which is often seen as a costly step, and has taken more of a metro-oriented focus to its rollout. Kmart has preferred to site its stores in high population areas where it can get a bigger bang for its buck. But here again, Wal-Mart is beginning to come closer to metro areas, possibly beating Kmart into its own markets.

Initially, the Kmart rollout plan called for Super K to dot the landscape with units, gaining a foothold in a wide swath of cities but never owning them. Under Floto, that program has changed. Super K will no longer drop a supercenter in a new market and then skip off to another metro area. From now on, Floto said, Super K will backfill stores in markets where it already has a presence in order to strengthen its position, build market share and gain economies of scale that make advertising costs efficient.

As a result, no new markets are planned. "We don't have plans to enter any new markets in terms of states," said Floto. "We see plenty of opportunities to grow where we now have Super Ks and in adjoining states."

Another opportunity for Super K is with smaller prototypes, said Floto, specifically noting the division's 146,000-sq.-ft. supercenter layout now in two stores with a third one on the way in '97. "They'll open up new markets for us because it lowers the volume required to make our targeted return on assets," he said. Typically, Super Ks run about 178,000 sq. ft., with about 100,000 skus of merchandise.

The 146,000-sq.-ft. Super K is about as small as Super Ks will get, Floto noted. Super K will not forward a very small unit like Wal-Mart Supercenter's 110,000-sq.-ft. prototype, although converting traditional Kmarts into Super Ks, like Wal-Mart has done in its organization, will eventually occur - where and when applicable. A wide-scale store conversion program is not planned, however. Super K may be vulnerable here, too, as Wal-Mart is positioning itself to convert almost any store in its portfolio into higher-yielding supercenters, leaving Kmart with only traditional discount stores in its arsenal.

According to research conducted by food marketing consultant James Degen, president, James M. Degen & Co., Super K earned $230.86 in sales per sq. ft. in 1995, the most recent figures available. Wal-Mart's was $273.88 per sq. ft., and Meijer, the most productive chain in the industry, had $374.15 in average sales per sq. ft. Super K's sales per unit, according to Degen, was $39.2 million in '95 compared to $46.6 million for Wal-Mart and $67.3 million for Meijer, a much more mature chain.