Even Wal-Mart founder learned from Kmart

Chain in Chapter 11 made many mistakes in descent to No. 3

January 23, 2002|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Decades before taking the crown as the unrivaled king of retailing, Wal-Mart Stores Inc. looked to its then-bigger competitor, Kmart Corp., to learn the do's and don'ts of discount selling.

Kmart, now cash strapped and No. 3 in discount retailing, filed for bankruptcy protection yesterday, in no small part because of crushing competition from Wal-Mart. Michigan-based Kmart said it plans to close an undetermined number of its 2,100 stores this year.

But more than competition is to blame for Kmart's fall. Kmart, which pioneered discount retailing, turned to Chapter 11 reorganization after years of inefficient store operations, missteps by management and failed makeovers, retail experts say.

As Kmart slowed its new-store growth and made mistakes that resulted in messy, out-of-stock and outmoded stores, Wal-Mart grew larger, more efficient and better at Kmart's original mission: selling goods more cheaply than anyone else. Target, once a small division of the Dayton Hudson department store empire, has also passed Kmart, becoming the second-largest mass discounter by distinguishing itself as a slightly more upscale version of Wal-Mart.

"Kmart's image has sunk over the years," said Sheldon Grodsky, director of research for Grodsky Associates Inc. of South Orange, N.J. "The discount business has always been competitive. There have always been companies with brief periods of success that went bankrupt; that's the rule. ... The real exception is what Wal-Mart has done. Wal-Mart seems to have the formula better than anyone before it and seems to be unstoppable."

Kmart traces its origin to 1897 when Sebastian Kresge and John McCrory began opening "five and dime" variety stores in Detroit and Memphis, Tenn. Two years later the partners split, and Kresge founded the S.S. Kresge Co. in Detroit. By the 1950s, Kresge had grown into one of the largest general merchandise retailers in the nation. Kresge opened its first discount store, Kmart, in Detroit in 1962, and the stores proliferated throughout the 1970s.

"Kmart was very early in the game recognizing that the variety store channel was not viable," said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting firm. "When all the smoke cleared, there were no more variety stores. ... For many years, Kmart was the No. 1 discounter in the United States, and all of the discounters viewed them as the gold standard in discounting." Even legendary Wal-Mart founder Sam Walton tried to copy Kmart's ideas, Davidowitz said.

"The country was hungry for value products, and they [Kmart] provided them," he said.

But in the 1980s and early 1990s, Kmart shifted its focus away from discounting, taking on partial or full stakes in chains such as Walden Book Co., Builders Square, Payless Drugstores Northwest, PACE Membership Warehouse, The Sports Authority, OfficeMax and Borders bookstores.

"Instead of using capital to improve logistics and real estate, they took the capital and went into about eight other businesses," which would be spun off in 1994 and 1995 during a close call for Kmart with bankruptcy, Davidowitz said. "Kmart didn't focus on the core business."

In the past decade, analysts and experts say, Kmart failed to put adequate resources into updating technology to keep its stores properly stocked. Communication between stores and distribution centers was out of sync. Seasonal items would come in late, forcing stores to sell candy corn, for instance, at a markdown.

"They were trying to put merchandise in their stores that they bought very cheaply, and they were really not looking at the financial returns," said Marie Driscoll, an analyst with Argus Research in New York. "When it didn't sell, it was put in trailers in back of the store."

When former CVS Corp. President Charles Conaway became Kmart chairman and chief executive in May 2000, the chain was saddled with $280 million worth of obsolete inventory. Conaway gave himself two years to strengthen Kmart's supply chain technology. But before the company realized the full benefits of the new technology, it decided to cut prices to better compete.

"If you straight-out compete on prices without the systems to do so, Wal-mart is going to eat your lunch, and Wal-Mart beat those prices," said Tom Steinert-Threlkeld, editor-in-chief of the monthly magazine Baseline.

In the last several years, Kmart tried to become more relevant to consumers, hoping to re-invent itself as the destination of choice for mothers, kids and the home. In 1997, the chain launched a successful bed, bath and kitchen products line designed by Martha Stewart. Kmart also reached an exclusive deal to sell Sesame Street products and started moving more into grocery items.

But beyond that, the strategy seemed to lose its focus, said Justin Pettit, a partner with consulting and turnaround firm Stern Stewart & Co.

"The advertising did not reinforce the exclusive brands," Pettit said. "The customer would have to fall upon them by chance." Instead, "they were going head-to-head on price" against the competition.And fighting back on price alone proved a losing battle against bigger, and more efficient, Wal-Mart. When Kmart lowered prices on 35,000 items last year, Wal-Mart simply matched or beat the prices.

"Wal-Mart has changed the way people shop," Driscoll said. "If Wal-Mart has something for $9, you know it's a good deal, you don't have to do comparison shopping."

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