Kmart Unable to Compete in "Mart" World

All of us remember stores such as Zaire and Venture. These were deep discount stores who sold just about everything from saran wrap and toys to swimming suits and dress gowns. However, what we also remember about these stores is that they went out of business. Now, another deep discount retailer is going through very hard times. Kmart has declared bankruptcy and is staying afloat just above the water constantly being dunked by large discount retailers such as Wal-Mart and Target. Both Kmart and Wal-Mart were founded in 1962 as discount retailers, however at this point that might be the only thing these two have in common. So how is that while two comparable retailers are doing just fine, that this [Kmart] once very successful pioneer is now in the red? The answer isn't easy. There seems to be a struggle of style and price. When Wal-Mart was winning the price war hands down, Kmart wanted to compete by bringing in higher style merchandise. However, this did not quite work as Target stores won the style competition.

The bottom line comes down to Kmart's poor strategies and identify crisis. Wal-Mart, on the other hand, is now the top seller of groceries, jewelry, photo processing, serving 100 million customers a week, employing 1/20 of the nations employees (1.3 million), is the biggest customer for manufacturers of products, and now has 22% of the grocery business, 21% of hard goods, 18% soft goods, 9% pharmaceuticals, 9% electronics, 8%toys and sporting goods, 7% beauty aids, 3% stationary, 2% one hour photo, 1% jewelry, and 1% of the shoe business (Food Industry News). Meanwhile, in the last decade, Kmart has been losing in annual revenues steadily and nothing has seemed to successfully pull the third largest retailing chain out of its rut. The exact causes and problems of Kmart and the successes of Wal-Mart can be attributed to inventory, management, strategy, price, and image. As it stands right now, Wal-Mart is continually expanding while Kmart is finding it harder and harder to stay above water.

Known to all customers, inventory is the key to going to any store. If the supplies are not there, customers lose faith in their supplier and look elsewhere for the merchandise. Perhaps the biggest problem Kmart has is its ability to keep stock on the shelves. Kmart is able to keep its goods fully stocked on shelves only 86% of the time. In the industry, anything less than 90% is considered unacceptable. Wal-Mart, however, runs close to 100%. Wal-Mart and others have emphasized "everyday low price" selling, which is more predictable for both customers and the distribution pipeline. Inventory, for such retailers as Kmart and their current state, can also have a negative effect. On the average, Kmart's inventory swells up as sales fall. In the beginning of 2002, for example, inventories rose by 5.6% as sales fell for Kmart. It is estimated that Kmart's cash flow would drop by $40 million. The bottom line is that in the third quarter of 2001, Wal-Mart raked in $52.7 Billion Dollars while Kmart only made $8 Billion (Saporito, Buamohl, Szczesny).

In any good sporting event, strategy is what it comes down to. This is specifically the area where Kmart is definitely lacking. Its management team has made some very poor choices when it comes to a marketing strategy. Everyone remembers Kmart's famous "Blue Light" specials, as the retailer used advertising circulars to lure customers. Even though this worked, it also put a strain on merchandising and distribution systems because particular demand for items came in sudden waves. Promotions also forced costs up at Kmart's suppliers, as they could not reliably predict manufacturing runs. Furthermore, after finding out that ad circulars did not work as well as they used to because of the massive waves of merchandise ads, Kmart decided to take itself away from the weekly circulars. However, in the third quarter of 2001, the company cut back too fast and left loyal ad customers in the cold. Although management did try to counteract the problem by cutting prices on some $38,000 worth of items, without the ads customers were not informed of the price cut and this resulted in Kmart sales dropping by 2.2% in the third quarter. At the same time, Wal-Mart management caught on to the price cuts and followed suit reeling in even more customers than before. Basically Wal-Mart is better at obtaining better terms from suppliers and having lower overhead. Due to this, Wal-Mart sales rose 15.5% in the third quarter of 2001 (Saporito, Baumohl, Szczesny).

Kmart, meanwhile, widened its losses to $3.22 billion for fiscal year 2002 ended on January 29, 2003, up from $2.45 billion in fiscal year 2001. Sales dropped 15% to $30.8 billion. Losses, due to competing against Wal-Mart and Target, totaled $846 million, causing Kmart to close 283 stores (13% of its floor space) after filing bankruptcy protection (Roman). As Kmart was going further and further into the red, Wal-Mart was emerging as one of the nation's largest retailers of its own private label brands at low prices. They started running ads focusing on brands using employees and customers and stressing low prices (Cuneo).

It might benefit Kmart to take a look at one of its fellow competitors and one that is competing against Wal-Mart. This retailer of course is Target and the great strategy that it acquired was to realize that it could not possibly compete with Wal-Mart in price so it stopped it turned it focus to style. Target carries better product lines and upgrades than the nations largest retailer and as long as it keeps a higher level of product, even though its customer base is not as high as Wal-Mart's, it will continue to produce a higher gross margin and have higher customer satisfaction, doing considerably well in the retail war (Amtrak).
Another area of concern for the retailer giants is customer service. Apparently Kmart is world-famous for slow service, either in the aisles or at the checkout lines. This is due, according to frequent Kmart shoppers, to a very unpopular strategy of staffing too few checkout lanes. Also, as workers quit, it could take up to six weeks to hire a replacement (Shiflett). On the other hand, studies show that Wal-Mart is dedicated to serving the customer (Lester). Overall, customer service is something that Kmart's executives do not seem to comprehend well. They fail to realize the power of customer service, even though their slogan is being "customer-focused" and "employee-drive" (Tschohl).

Usually, paying high Executives high salaries is not unheard of especially if the Executive is able to reap high profits for the company. This might have been the strategy when Kmart offered its then Chief Executive Officer, Chuck Conaway, $11.5 million if he turned the company around by 2002. Thus they fail to control costs when top executives are receiving excessive salaries and stock options. This in part plays back to 1991, when then CEO Joseph Antonini, spent about $80 million on an advertising campaign trying to convince consumers that he and the company firmly believed in customer service. Since not many consumers believed in this very optimistic idea and its implementation, Kmart's sales increased by only three percent. Meanwhile, in the same year, sales at Wal-Mart, which both stresses and provides customer service, increased by 26 percent. In addition, Wal-Mart not only provided customer service to its customers, but also to its employees, treating them better, not necessarily in high wages, but in valuing and respecting their jobs, making them a favorite all around and adding to their employees ability to provide impeccable service to the customer. Furthermore, once again in 1993 and 1994, Kmart spent about $3 billion on capital renovations, hoping to bring customers back, even though this plan, as most strategies that Kmart implements, failed. Customers just did not buy the deal and instead went to Wal-Mart which had not undergone any expensive renovations, preferring to give outstanding service to its customers instead. The bottom line is that if the company took ten percent of its advertising or renovation budgets and invested it instead into training its employees in providing quality service to its customers, it would have realized profits similar to Wal-Mart's. The results could be seen right away as during the first nine months in 2001, Kmart lost $344 million, while Wal-Mart earned a profit of $4.4 billion (Tschohl).

In order to lift out of its rut, Kmart enlisted the help of Martha Stewart, a giant in home making. Her line included everything from bedroom linens to bathroom soap and dishes (Perman). However, as her line went up in 1997, it also had an abrupt shake up, as Stewart was accused of insider trading in late 2002. Even though, Kmart stands by Stewart's brands, hoping that it will help them in the long run.

Even though it owns a significant amount of the industry, Wal-Mart was not always well favored. Warren Buffet even admits that he did not think that the department store giant would do as well as it did. The last time Wal-Mart announced a stock split in April 1999, Buffet decided to buy 100 million shares, however after accumulating five million shares, and then trading at around $24, Buffett felt the price moved too high and stopped buying. In the past few years the stock climbed as high as $70, currently priced around $50. "That one cost me about $8 billion," says Buffet, laughing. "Talk about your least admired decisions." Needless to say when it came to casting a vote this year for the most admired company in America, Buffett chose Wal-Mart. Furthermore, in fortune's annual poll of 10,000 executives, directors and analysts, Wal-Mart has toppled General Electric as the most admired company in America, marking the first time in history that the nation's largest company is also its most admired (Stein).

As K-Mart is trying to figure out how to stay alive, Wal-Mart is looking for other markets to conquer. The sales giant wants to offer low-cost checking and savings accounts and other financial services in branches since it found out that 20% of its customers do not have bank accounts. It hopes that Kmart will want to apply for a loan (Saporito, Baumohl, Szczesny). While Kmart is suffering from many different causes, the biggest complaint people have about Wal-Mart is that they emerge with more stuff than they intended to buy (Evans). In order for Kmart to somehow get back into the game it will have to make some very strategic choices and change many of its long accustomed ways. Since it filed bankruptcy on January 22, 2002, it has been able to close underperforming stores, toss bad leases, and cut debt. However, Kmart has to admit to itself that it has lost the battle against Wal-Mart and that it is no longer even a battle. It also has to close 250-500 of its 2114 stores and become smaller. And most of all it has to find a niche between Wal-Mart and Target Corp., and capitalize on its urban locations. Business Week author Joann Muller thinks that adding full-line groceries to core urban stores, developing more unique brands like the Martha Stewart collection, fixing supply chain problems, and improving marketing to give consumers a reason to shop, will significantly help Kmart's problems (Muller).

Well the future looks green for Kmart and that doesn't exactly translate into a monetary benefit. However, the retailer's signature "K" logo will be replaced with a lime green one. Apparently after polling customers, Kmart found out that customers associated the red color with cheapness and the green color with wealth and money. They are also unveiling easier-to-shop layout footage than an average store. They are going to place signature brands such as the Martha Stewart collection front and center of the store. The proposed store features brighter lighting, lower shelves, wider aisles, and futuristic Icons that delineate departments. This new prototype is dubbed "The Store of the Future," designed by Peter Arnell of the Omnicom Group. They hope this prototype store will help Kmart decide what changes to implement in its other stores (Fairchild). Even though this seems like a good solution, many of the proposed changes sound too much like what has already been done by Kmart and also which has invariably failed. There is no correct answer, but as for now, a new strategy is definitely a must for Kmart if it plans to ever be able to survive in the long run in today's market.

Works Cited

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Tschohl, John. "Kmart's Failure." (2003) 20 Mar 2003. http:///teamapproach.com/kmart.asp