Vamos: Kmart exits Mexico; Canada in question

Discount Store News, March 3, 1997 by Laura Liebeck

TROY, MICH. -- And now there's just Kmart Canada in Kmart's international portfolio--but for how long?

In the wake of Kmart's recent announcement that it will exit the Mexican marketplace this spring, in which it operates four supercenters, the nagging question remains "when is it Canada's turn?"

Under Kmart's management team, led by Floyd Hall, chairman, president and ceo, the driving force at Kmart has been to concentrate on the company's core discount department stores. No timetable has ever been given for the spin-off of the non-core assets. But it has successfully spun off its 13 stores in the Czech Republic and Slovakia, as well as its three units in Singapore. And Kmart did try, unsuccessfully in 1995 to sell its 125-unit Canadian operation, the largest part of its almost extinct international holdings. Although Kmart Canada was officially taken off the sale block, the retailer has remained open to its sale.

"Our commitment to Canada is to see that we make as many improvements there that we can make and at the same time keep our options open," said Shawn Kahle, vp of corporate communications. Kmart Canada is headed by Mike Lynch, who reports directly to Hall.

Should Kmart find a buyer for Canada, the company's international operation would consist of its 19 profitable stores in Puerto Rico, plus one each in St. Thomas and St. Croix in the Virgin Islands and in Guam. Operation of those stores, considered Kmart's offshore units, were recently moved to Kmart headquarters. The block is considered part of Kmart's core business, Kahle said. The offshore stores report to Tom Down, divisional vp for international and offshore. Down reports to Paul Hueber, senior vp of store operations.

The sale of the four Super Kmart Centers in Mexico was more a surprise of timing than substance since the retailer has long said it would rid itself of non-core assets.

"While these stores have been solid performers, the sale of our interest in Kmart Mexico is in keeping with our commitment to focus on our core operations as the best way to improve Kmart's overall financial performance," Hall said.

Kmart and its Mexican partner, El Puerto de Liverpool, S.A. de C.V., have agreed to sell their 50/50 joint venture company, Kmart Mexico, to Controladora Comercial Mexicana, S.A. de C.V., Mexico's second-largest retail chain.

Controladora Comercial or Comerci as the chain is known, will buy all the shares of Kmart Mexico for $148.5 million in cash and assume the operations of the four supercenters (three in Mexico City and one in Curenavaca, plus the store in Puebla, which is scheduled to open during the second quarter of this year). The sale should be completed by April.

Since Kmart is an equal partner with Liverpool, it will share equally in the sale's receipts, $74.25 million. Kahle couldn't say how big a loss Kmart incurred from the Mexican operation but said "there will be a small loss that will be reflected in yearend '96."

At the time of the Kmart announcement, Comerci, which also is an equal partner with Costco Co. in Mexico for 13 warehouse clubs, said it would end its venture with the French hypermarket chain Auchan. With Auchan, Comerci operates one hypermarket in Mexico City.

The sale of the stores in Mexico is "a step in the right direction," said Bernie Sosnick, managing director for Genesis Merchant Group Securities, adding that "Canada is a non-core business. Management said it wanted to get out of non-core businesses--certainly Mexico is that."

Sosnick noted that Kmart has had an uphill struggle in Mexico with the devalued peso and the strength of Wal-Mart. Wal-Mart now is a leading retailer in Mexico with its joint partner Cifra. Kmart, on the other hand, only has a handful of units, all supercenters.

"There is no growth prospect for Kmart in that country even if that economy improved. Wal-Mart would overwhelm them," Sosnick said.

Kmart's exit from Mexico is just the latest in a string of recent divestiture announcements. They include:

* Discussions with Waban--operator of BJ's Wholesale Club and HomeBase--and Leonard Green & Partners to create a new home improvement chain from Kmart's Builders Square and Waban's HomeBase.

* The resignation in January of Tom Watkins, executive vp, international and offshore retailing.

* The sale of the 13-store division in the Czech Republic and Slovakia, and the three units in Singapore.