 |
 |
 |
 |
 |
 |
 |
 |
Shopping Centers Today -> March 2002
 PRINT THIS STORY: |
  CHANGE TEXT SIZE: |
HOW POORLY MANAGED GROWTH LAID LOW A GIANT
By Donna Mitchell
 |
| James B. Adamson |
As retail experts tell it, more than 20 years of missteps and negligence have come home to roost in Kmart’s aisles.
“It goes back to 1976,” said Maggie Gilliam, president of Gilliam & Co., a New York City-based research and advisory firm specializing in retail. “The company overexpanded back in the 1970s, with inadequate systems and management, and never recovered.” By 1976 S.S. Kresge Co., Kmart Corp.’s founder and owner since 1899, had opened a record 271 Kmart stores.
But the chain never got its systems under control, sometimes building oversized distribution centers, and this lack of logistical support eventually hurt sales, Gilliam said.
Perhaps none of this would have mattered so much had it not been for two realities: Wal-Mart and Target. Wal-Mart Stores, Bentonville, Ark., and Minneapolis-based Target invested huge sums of money in information and inventory systems to ensure that merchandise flowed in and out of their stores according to consumer demand, observed Howard Davidowitz, chairman of Davidowitz & Associates, a New York City-based retail consulting and investment banking firm. That investment is now paying off, especially for Wal-Mart, which posted sales of $203 billion for 2001.
“Kmart got a free lunch here — they did not invest,” Davidowitz said. “Now their merchandise is constantly carried over and has to be marked down.”
But perhaps the retailer’s worst mistake was deciding to become a retailing conglomerate instead of keeping its focus on discount retail, he said. Starting in 1984, Kmart spent about a decade buying a series of other retailers, including Borders and Waldenbooks; Home Centers of America, which it renamed Builders Square; The Sports Authority; and a more than 90 percent ownership interest in OfficeMax.
It also tried to tap into the European, Mexican and Singaporean markets by buying stores and forging joint ventures.
But integrating the acquisitions proved too burdensome; Kmart eventually extricated itself from the ventures and disposed of all its other retailers.
Then, in 1997, Kmart tried to atone for its past mistakes. It unveiled the Big Kmart prototype, which expanded its merchandise selection, and began converting existing stores to this new format. Kmart introduced its Martha Stewart Everyday housewares and paint products, and the Sesame Street brand of children’s wear.
Bagging the Martha Stewart product line was a smart move, said Davidowitz, given the homemaking guru’s popularity and style sense. But Kmart became too dependent on the Everyday line to drive customers into the stores and spend money.
“Would Target or Wal-Mart have allowed Martha Stewart to become so important?” he asked. “No. She was able to get all of this positioning because of [Kmart’s] weakness.”
But even Martha Stewart could not counteract the effects of years of neglect. In 1997, while a restructured, refocused Kmart posted sales of $32 billion, Wal-Mart racked up sales of $105 billion — meeting a $100 billion sales goal it had set for itself, three years ahead of schedule.
“They squandered their entire position in the marketplace and let that upstart from Bentonville, Arkansas, capture the market,” Davidowitz said.
Other Kmart attempts at self-redemption have proved similarly ineffective against its competitors. Kmart invested $1.7 billion in a technology and supply chain infrastructure and signed a $4.5 billion agreement with food distributor Fleming Cos., Lewisville, Texas, earlier this year. But though introducing food as a consumer draw made sense, it was too little, too late, Davidowitz said.
“Wal-Mart spent billions paying for and building their own food infrastructure,” he said, citing the corporation’s million-square-foot warehouses all across the United States. Kmart, on the other hand, is stuck paying a middleman to keep its shelves stocked with groceries. “Explain to me how Kmart will be competitive with food,” he said, “because I don’t understand it.”
After Kmart had endured slumping sales and dodged disaster for years, a few key events brought about its swift unraveling in January. The chain’s predicament was clear to all when it reported a December same-store sales decrease of 1 percent, a marked contrast to the performance of its rivals; Wal-Mart’s sales increased 8 percent, while Target’s edged up 0.6 percent.
Cash drainage from the surety bond market drove another nail in the coffin, observers note. Under Kmart’s surety bond agreements, an insurance company provides financing in the event that the retailer cannot cover liabilities associated with worker’s compensation and with sales of guns and liquor. But the weak economy combined with the Enron Corp. collapse produced losses in the market and jacked up Kmart’s insurance costs.
Finally, when Kmart missed a $78 million payment to Fleming, the supplier halted shipments, forcing the discounter to file for Chapter 11 on Jan. 22. Retail consultant Gilliam said Fleming’s move was gutsy, given that Kmart is one of its biggest customers.
The discounter then secured $2 billion in debtor-in-possession financing from Credit Suisse First Boston, New York City, and paid Fleming, which resumed shipments two days after the filing.
Kmart has not completely run out of options, at least not for the moment. Its vendors, reluctant to lose such a large customer, have said they will stand by the retailer. In January Martha Stewart Living Omnimedia said it was optimistic that Kmart would emerge from bankruptcy stronger and more competitive. Even now the Everyday line continues to make money.
When retailers are in a shaky financial position, suppliers don’t necessarily cut them off immediately, though they do shorten the leash and demand payment before any additional shipments go out, said Gilliam.
Kmart shuffled its top management in the waning days before filing for bankruptcy. It named James B. Adamson, a Kmart board member and former Target senior executive, chairman, replacing Charles C. Conaway, who remained CEO.
Still, analysts are anything but sanguine about Kmart’s long-term prospects. Even if the retailer emerges from Chapter 11 in 2003, as company officials hope, observers suspect that its problems are so pervasive that it could slide right back into insolvency.
“They’ve had temporary upsurges under different leaders,” Gilliam said. “But they’ve been going downhill for 25 years.”
 | Current Issue November 2008 |