Kmart needs reinvention, analysts say

`Blue-light specials' grew stale

shabby looks hurt stores

Closings, layoffs advised

Cutting items, using home store format suggested by some

January 27, 2002|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

For decades, Kmart's blue light has flashed like a beacon for bargain-hunters as a chipper voice called out, "Attention, Kmart shoppers," with equal enthusiasm, whether promoting fishing poles or bleach.

They're familiar sights and sounds for veteran Kmart shoppers - perhaps too familiar - a tired come-on for a chain whose time had gone. The "blue-light specials" grew stale, the store interiors shabby. Stores ran out of popular sale items and competitors undercut discount prices.

Now, the chain's very survival hinges on its ability to reinvent itself with a fresher image and a broad-enough appeal to get people out of Wal-Mart and into Kmart.

Confronted with weak sales, heavy debt and crushing competition, Kmart Corp., the nation's No. 3 discount retailer, declared bankruptcy last week, promising to emerge leaner and stronger. But some have their doubts about whether a scaled-down Kmart will even be around five years from now.

"The real issue for Kmart ... is whether it can figure out what it wants to be when it grows up," said Conor D. Reilly, a senior partner in New York-based law firm Gibson, Dunn & Crutcher's bankruptcy group.

Retail and bankruptcy experts say Kmart needs a clear vision of how to stay relevant in discount retailing and give shoppers a reason to go to its stores. The 103-year-old retailer once pioneered and led the discount sector, only to lose its edge to rivals Wal-Mart Stores Inc. and Target Corp.

After struggling through the recession and a holiday season in which December sales fell 1 percent, Kmart filed for Chapter 11 bankruptcy protection in Chicago, listing $17 billion in assets and $11.3 billion in debt.

As a start, analysts say, the Troy, Mich.-based company will need to close hundreds of unprofitable stores, lay off thousands of workers, cut additional expenses and restructure its debt. Beyond that, they say, Kmart needs to get the right products on the shelves, hang onto its exclusive arrangement with lifestyle personality Martha Stewart and even consider doing away with some product categories and becoming a discount home store.

"They need to get the right products on the shelves and the right customers in the stores, and that has little to do with lawyers and everything to do with experienced retailers with excellent judgment," said Martin Zohn, a Los Angeles-based partner in the corporate department of Proskauer Rose LLP.

A mistake, analysts say, would be to bank on past, failed strategies. Those include going head-to head with the much bigger and more efficient Wal-Mart on price - an initiative of Chief Executive Officer Charles C. Conaway's last year - or trying for Target's more fashion-forward appeal.

"Stop the food fight with Wal-Mart immediately," advised Burt Flickinger III, managing director of Reach Marketing in Westport, Conn.

Kmart, trying to compete with Wal-Mart, had been selling grocery items since 1999 but started an unwinnable price war on food and household goods last year, he said. "Kmart simply was not able to sustain in-stock conditions on the food products. The fatally flawed focus on food was the catalyst to complete collapse."

Turkey disaster

The strategy fell apart in November, Flickinger said. Kmart tried to undercut Wal-Mart on the sale of frozen Thanksgiving turkeys but ended up losing $10 a bird and leaving customers annoyed when stores ran out days before Thanksgiving.

Kmart said the bankruptcy filing and $2 billion in debtor-in-possession financing will allow it to turn itself around, negotiate with suppliers, work out a plan to pay creditors and get out of unfavorable leases. It says it can save $250 million by terminating leases at about 350 stores it had previously closed or leased to other tenants, and that it expects to slash annual expenses by $350 million through job cuts, store closings and other reductions.

The retailer will also likely focus on retaining midlevel and senior managers, rather than losing them to competitors.

"It's critical to keep midlevel managers, and they'll be focusing on that ... offering special bonuses to key employees," said H. Jason Gold, managing principal of Gold Morrison & Loughlin PC.

Before the end of the first quarter, Kmart said, it will evaluate the performance of every store and the terms of every lease, to determine how many of its 2,114 stores to close. Analysts expect 500 to 1,000 stores to close, possibly in several stages. The company has about 20 stores in the Baltimore area.

A smart move would be to re-emerge as more of an urban retailer, concentrate on locations where Wal-Mart has less of a presence, Flickinger said. The company should reject leases "anywhere where Wal-Mart is within a mile or has one under development," he said.

Thanks to the new financing and the time the bankruptcy process gives the chain to restructure, Kmart should be able to emerge from Chapter 11, possibly by the company's target date of 2003, some analysts say.

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