Disney Hopes Kmart Deal Will Boost Its Flagging Sales

Walt Disney Co. will be hanging out with Martha Stewart at Kmart. The entertainment giant hopes to resuscitate its flagging merchandise by following Stewart’s model for downscale success.

Disney, which announced its new retail partnerships this week at a meeting with analysts in Anaheim, plans to have fresh clothing lines and dedicated display space in 2,106 Kmart stores by early next year.

The company, which is shuttering as many as 130 of its 734 Disney Stores, hopes to double its 5% share of the children’s apparel market over three to five years with this and other deals, including one pending with J.C. Penney Co.

Trading high-end mall space for the land of the blue-light special, however, could tarnish Disney’s cherished image, some analysts said.

“Are they leveraging their product and cheapening it at the same time?” asked Sheldon Grodsky, research director for New Jersey-based Grodsky Associates. “That’s a tough one to answer.”

Disney may have no choice.

Last year, revenue in the consumer-products division, which includes Disney Stores, decreased 6%, or $169 million, from 1999 revenue. The year before, revenue fell 7%, or $211 million.

Disney’s quick fix could saturate the market with its products. Last month, Warner Bros. announced it was closing all of its stores, in part a casualty, analysts said, of competition from its own less-expensive merchandise available in discount stores.

That won’t happen, Disney said. Its model is Martha Stewart’s experience with Kmart.

“If you want to grow, you need to go to all levels,” said Sharon Patrick, president of Martha Stewart Living Omnimedia.

Four years ago, Kmart entered an agreement with Stewart to produce an exclusive line of bed, bath and kitchen products under the name Martha Stewart Everyday. Kmart estimates that later this year, the Martha Stewart line will top $1.4 billion in worldwide sales since its 1997 introduction.

“Kmart has proven themselves to be a very savvy retailer and very conscientious of their brands, particularly in recent years,” said John Singh, spokesman for Disney’s consumer products division.

Disney would never compromise its mystique, he said, “There is nothing more important to Disney--even the Disney characters--than our Disney brand name.”

Martha Stewart officials retained control over the design, fabric selection and packaging of the products sold at Kmart. They demanded a rigid quality-assurance program and prodded Kmart executives to revamp older stores and pay closer attention to customer service, a $2-billion improvement effort recently initiated by Kmart.

“We want the in-store operations to be equal to the products that we offer,” Patrick said.

Disney officials said they will have the same oversight in all phases of production, everything from the use and display of Disney characters and the color of fabric to the quality of stitches.

“We will make sure our standards are met,” Singh vowed.

The lines developed for Kmart will be separate from those sold in the Disney Stores. And the Kmart agreement does not prohibit Disney from striking similar deals with competing retailers.

Industry analysts say the company probably got its best deal from the No. 2 mass retailer, Kmart. The more successful Wal-Mart is known for driving a harder bargain.

“We are looking at other major retailers and are in various degrees of discussion,” Singh said, declining to name any.

In switching gears, Disney officials admitted their current mass-retailing operation wasn’t working. Too much time and effort was spent riding herd over some 3,000 manufacturers that have licenses to stamp out everything from Simba the lion T-shirts to Pluto purses.

Under the new scenario, Kmart will work directly with the manufacturers. “There will be less time spent worrying about so many companies,” Singh said.

Although Disney’s consumer products revenue totaled $2.6 billion, with licensed merchandise sales accounting for $600 million last year, the company suffered an unusual problem: lack of exposure in many retail outlets. Some clothing sporting Disney characters would get lost among other brands crowding the racks at discount stores. Now, Goofy and Dumbo will have equal billing with Big Bird and Elmo of Sesame Workshop, which also has a clothing deal with Kmart.

Kmart “will have more of a stake in making sure our product line is successful and has excellent presence in their retail environment,” Singh said.

Disney closed at $32.13, up $1.13 on the New York Stock Exchange.