K-Ching! : Kmart Trying to Boost Image, Products
Kmart Corp. has big hopes for Big K, redesigned discount stores touted in splashy commercials by Rosie O’Donnell, Bob Hope and Big Bird.
The retailer is betting that Big K stores--with their large grocery sections and broad, easy-to-navigate aisles--will turn occasional customers into regular shoppers.
Kmart is trying to catch up to swifter competitors. Dayton Hudson’s Target, which describes itself as an upscale discounter, is considered the smartest apparel merchandiser.
Wal-Mart promotes service, selection and low prices--an approach that has helped it vault to the top of the heap with a market share of 22%, compared with 9% for Kmart and 5% for Target.
Kmart’s hook has been advertised specials, but now the reborn retailer wants to be known for selection and quality.
“We’re a promotional discount store with . . . great sales offerings,” says Chairman Floyd Hall. “We fit in the middle.”
Since Kmart began converting stores to Big Ks two years ago, the strategy has shown promise. Consumers have been buying groceries more often at Big K stores. But clothing purchases have dropped throughout the chain, including the 665 stores that have been converted to Big K.
Kmart executives had hoped that customers lured to the stores by low-priced groceries would regularly buy apparel, which has higher profit margins.
But the Troy-based retailer, busy converting stores to Big K and developing its signature Martha Stewart and Sesame Street lines, lost touch with fashion. Kmart stocked large quantities of rayon shirts and dresses despite weak demand and sent shoppers packing with short, tight-fitting suede skirts too adventurous for discount customers.
Mistakes in apparel selection, combined with inventory management problems, are two reasons Kmart’s earnings for fiscal 1997 will be smaller than analysts had expected. Kmart will report its earnings in March.
“I don’t feel good about the [apparel] debacle,” says a chastened Hall. “There were some major setbacks--particularly in ladies’ and men’s lines. We made mistakes. We became too fashion-forward for a discount chain. We were trying to attract new customers and did not take care of our existing customers--and they made us pay.”
“A company can’t lose sight of the core customer,” says Walter Loeb, a New York-based industry analyst. “Kmart’s apparel pricing lines were wrong, the color and styling was wrong, and the timing of the apparel offerings was wrong.”
Kmart has responded swiftly to the apparel problem. The two top executives responsible for apparel selection were fired last year and replaced with experienced buyers from Massachusetts-based Hills Department Stores and private-label powerhouse J.C. Penney Corp. Analysts approve of Kmart’s clothing choices for spring--casual jumpers and twill dresses, for example, along with more denim and knit offerings.
The chain is also giving greater prominence to exclusive brands--Jaclyn Smith and Kathy Ireland clothing for women and Sesame Street children’s clothing. Kmart recently narrowed its underwear selection to Hanes and Fruit of the Loom, dropping lines with less quality and less name recognition.
Big K is Kmart’s most recent incarnation. Founded as S.S. Kresge Co., the chain changed its name to Kmart in 1977, converting Kresge stores to Kmart. Later, it opened 99 Super Kmarts--mega-stores with supermarket sections that include meat and produce. They won’t be converted to Big Ks.
Analysts say Kmart has suffered from a reputation for poor quality for years.
“Kmart in its earliest days was selling lower-quality merchandise at low prices,” says Richard Nelson, a Chicago-based industry analyst. “Wal-Mart and Target made hay by coming out with higher-quality merchandise at low prices. Kmart is now trying to change its image . . . and that has been a challenge.”
Many analysts blame Kmart’s woes on former Chairman Joseph Antonini. Under him, Kmart had a whopping loss of $974 million in 1993. The company posted a small profit in 1994, but then recorded a loss of $571 million in 1995. Antonini resigned in March 1995 under pressure from the company’s board of directors and shareholders.
Hall, once a Target executive, succeeded him. He moved to Kmart from the museum items reproductions business he co-founded in 1989. Before that, he headed the New Jersey-based Grand Union supermarket chain for five years. As chief executive of Target from 1981 to 1984, he led the discounter’s expansion into California.
Though Hall, 59, has started a search for a successor, he doesn’t view himself as a caretaker. One of his first moves was to close about 200 poorly performing stores. He has set two short-term goals for the company: boost profit and--at the very least--retain Kmart’s current share of the intensely competitive discount market.
“Our objective would be to increase market share to the degree our resources allow,” says Hall. “Department stores and specialty [apparel] retailers are struggling, but the discount sector is growing 4% to 5%. If we don’t do any more than get our share of that growth, we’ll do fine.”
One piece of Hall’s strategy is to leverage brands, not just in apparel but throughout the store. Kmart has tacked the Roger Penske nameplate onto its revamped auto service centers. It carries only Huffy bicycles instead of the unbranded bikes that sold poorly. Its greatest success has been with its licensed Martha Stewart products--ranging from towels and bedding to house paint--exclusive to Kmart.
The Martha Stewart name is luring new customers to Kmart, such as Janet Day of Glendale. She shopped at Kmart recently for Martha Stewart house paint, having picked up Martha Stewart towels on an earlier shopping trip.
“Martha Stewart has a reputation for doing things right,” says Day. “I’m sure she wouldn’t allow anyone to use her name on a product unless she was happy with it.”
Another piece of Hall’s strategy is better inventory management. The chain is notorious for misjudging demand, forcing it to discount slow-moving merchandise and issue rain checks to consumers on hot sellers.
“This is a high priority,” Hall said. “We have inventory lumps. When we have [excess], we have clearances. When we have inventory shortages, we have to offer rain checks. That frustrates customers and sometimes they don’t return for rain-checked items and that means we have to put those items on clearance.”
Kmart recently hired a consultant to improve inventory management and analysts expect to see improvements this year.
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But the biggest initiative is the roll-out of the Big K stores, which combine Kmart’s brand-building efforts with a big grocery department to encourage consumers to shop weekly. It plans to convert nearly all of its 2,100 stores to that format by 1999; about one-quarter of its stores have been converted so far.
The grocery section is 35% larger than at traditional Kmarts. Although it has no fresh meat or produce, it has an array of beverages, dry goods, canned and frozen food and products for the kitchen and bathroom. In expanding the grocery departments, Kmart is taking a page from Wal-Mart, which has long used bargain-priced paper goods, dog food, detergent and other sundries to get customers into the stores.
“The [grocery] section is at the hub of our strategy,” said Don Keeble, Kmart’s executive vice president of store operations. “Our research showed that the sales value of our average basket is close to Wal-Mart’s. Our pricing is close to Wal-Mart, and our customer demographics are close to Wal-Mart. However, we also learned that Wal-Mart shoppers shop at Wal-Mart twice as often as Kmart.”
Same-store sales at Big Ks--revenue from stores open at least 12 months--are about 10% higher than sales at unrenovated stores--an increase that has helped Kmart’s bottom line.
Despite flagging apparel sales in 1997, Kmart had income of $63 million for the 39-week period ended Oct. 31, contrasted with a loss of $5 million for the same period in 1996. Much of the improvement is because of a strong sales increase in the grocery section.
Now, as Kmart converts to Big K, it needs to persuade grocery shoppers to buy clothes at Big K, too.
