Analysts Say New Strategy Crucial for Kmart
BRIGHTON, Mich. -- As Kmart Corp. emerges from Bankruptcy Court protection, its future rests on whether the discount retailer can persuade customers to shop at its stores instead of Wal-Mart and Target.
Kmart expects to exit from the biggest retail bankruptcy in U.S. history Tuesday with 600 fewer stores, new leadership and a $2-billion loan. It has a key financial backer in investor Edward Lampert, whose company is converting $2 billion in financial claims against the Troy, Mich.-based retailer into stock.
Most crucial for Kmart’s survival is whether it has a strategy that will bring it the customers and revenue it needs.
“It won’t be enough to perform modestly well. The modest performers are doomed to fail,” said Martin Zohn, a Los Angeles bankruptcy specialist with law firm Proskauer Rose. “If they continue to lose money, they’ll find themselves back in Chapter 11 again.”
Some analysts believe the odds aren’t on the side of Kmart, which filed for bankruptcy protection Jan. 22, 2002, after a poor holiday selling season and a long reputation for cluttered stores and items out of stock. It faces a weak economy and tougher competition as Wal-Mart Stores Inc. adds stores and Target Corp. strengthens its appeal to style-conscious consumers.
Retail watchers say Kmart won’t be able to escape the fate of Montgomery Ward, Ames and other retail chains that came out of bankruptcy only to liquidate, unless it gives people a compelling reason to shop in its 1,500 remaining stores -- and keep coming back.
“They’re going to have to change customer shopping patterns to steal customers who are now going to other stores and convince them they have to get to a Kmart,” said Darrell Rigby, who heads the worldwide retail practice of Bain & Co., a business consulting firm.
Exactly what Kmart will and should look like is open to debate. Some retailing and bankruptcy experts say they haven’t seen signs of a clear direction that sets Kmart apart enough to be profitable and competitive in the long term.
“The Chapter 11 provided a time for the company’s management to test the market to find a new niche, a new reason for being. Management failed miserably,” Zohn said. “They have a little more time based upon the cash they have. But they better come up with a good idea quickly.”
But some bankruptcy and retail experts, noting that Kmart has passed through Chapter 11 fairly quickly, say it’s unfair to expect the company to have initiated a new retailing plan while under the tight rules of Bankruptcy Court.
“Whenever a company goes through something like this it’s extremely distracting to management,” said Nancy Aversa, analyst for the retail sector at Victory Capital Management. “This is definitely a positive that they’re going to put this behind.”
Righting a company after Chapter 11 isn’t a quick fix and people shouldn’t expect it to be, she said, adding, “You’ve got to give them at least a year.”
2003 is expected to be a transition year for Kmart, with a profit not projected until 2004, under the plan of reorganization approved April 21 by a federal bankruptcy judge. The company reported a loss of $3.22 billion for fiscal 2002.
The retailer, long known for its “blue light special” marketing tool, said people would shop at its stores because of its exclusive brands, such as Martha Stewart Everyday and Joe Boxer, and because it has everyday items at competitive prices. The Joe Boxer line generated sales of $300 million last year.
Some observers wonder whether that will be sufficient.
“You need to have merchandise that customers are going to come out of their way to come to you for,” said Jordan Kaplan, professor of managerial science at Long Island University. “Some have promise. I don’t know that Joe Boxer is enough to carry [Kmart] through.”
Heather Rozzano, shopping recently at a Kmart in Brighton, said she shops at Kmart for specific items but prefers the style of items at Target.
“I don’t usually come here unless they have a good price,” said Rozzano, who was shopping for a car seat. “Sometimes they have good prices.”
In hopes of improving Kmart’s merchandise, the company has rebuilt its corporate structure to streamline purchasing and ensure that stores are stocked with popular items. Only 15 employees are now authorized to give final approval to orders, down from 220.
At the same time, store managers now have more power to decide what items their stores should carry, an idea Kmart calls the “store of the neighborhood.”
Kmart spokesman Jack Ferry said the concept is working well.
Lampert, chairman and chief executive of ESL Investments, which will own 49% of the new Kmart, said Kmart would choose retailing strategies that make good economic sense and help establish loyal customers.
“I think if you go in there, you’re going to find they have what you’re looking for and they’re going to have it at pretty good prices,” he said.
