Introduction

Kmart was a pioneer of the discount retailer industry. At the turn of the century, innovative tactics and
strong customer loyalty contributed to unprecedented corporate growth. The playing field changed
however, and Kmart had newer rivals to compete with. This report will focus on the attempts to
revitalize Kmart, what factors contributed to its bankruptcy, as well as the future for an acquired Kmart.
Some Problems Just Dont Go Away
Throughout Kmarts recent history, it has been plagued by a series of problems. All management teams
attempted a variety of strategies to combat these. Listed below is the list of ongoing problems.i
Poor inventory management Too often would popular products be out of stock, while others
collected dust on the shelves, and in some cases stored in trailors outside of the stores.
Price Competition Wal-Mart had successfully found a way to offer the lowest price possible on
many goods.
Poor Customer Service Too often did consumer reports, secret shops, and industry analysts report of
the apathy of Kmart sales staff. Poor Customer Service problems plagued Kmart on a consistent store
to store level.
Nicheless While Walmart reigned supreme as the low cost leader, Target was perceived as being a
higher quality retailer. Where did this leave Kmart? What was Kmarts competitive advantage over
the two large rivals?
The Antonini Era
Kmarts conception began in 1899 with a single five-and-dime store. Over the years, Kmart continued
to grow and evolve with the market. Under CEO Joseph Antonini, Kmart changed its basic strategy.ii
Strategy prior to 1987

Antonini Strategy (1987-1995)

Continue to grow company through

additional store locations, renovating current
stores, and analyze consumer demand to add
additional products and services.

Diversify assets into a variety of industries

that were deemed high growth, ripe for
market entrance, and profitable.

Kmart acquired several established businesses in a variety of industries.iii

Builders Square (1984)
Walden Book Company (1984)
Payless Drug Stores, Inc (1985)
Harolds Discount Outlets {Canadian} (1985)
The Sports Authority (1990)
90% interest in OfficeMax (1991)
Borders, Inc (1992)
Czech Republic/Slovakian Discount Stores (1992)
Bizmart (1992)
Joint Venture into Singapore (1994)

Antonini was on a buying frenzy, continuously expanding Kmarts portfolio. 3 start-up companies were
also initiated, as well as 100 Kmart stores in Mexico. Although international expansion was the
backbone for Kmarts strategy, changes were also made to Kmart in the United States. Listed below are
the strategies Antonini put into effect during his tenure, and the outcome of such.iv
Strategy

Outcome

Diversification

Failure

Purchased a variety of businesses in several

retail industries including internationally.

Acquisitions all performed poorly posting

minimal net income or losses.
Distracted management from core business.

Renewal Program

Mixed Results

$3.5 billion program intended to modernize,

expand, or relocate Kmarts 2,435 stores.
Increase sq ft (800K to 100K), and open 500
Super Kmarts. Improve quality of private
label brands. Logic: Cash Cow Fashion to
subsidize specific hardline products to be
low price leader.

Super Kmarts sales were 23% higher than

traditional stores.
Fashion strategy was a disappointment.
Antonini blamed the failure on market
conditions.
Wal-Mart continued to emphasis on being the
local cost leader, at any cost.
Customers View of Kmart: dirty, poorly
stocked, and rude staff.
Many stores did not receive substantial
renovations.

Modernize Inventory Methods

Failure

State of the art GTE Spacenet satellite based

network. Implemented Central
Merchandising Automated Replenishment
system (CMAR). Costs of revolutionary
technology = $160 million/annually

Although an improvement from the previous

system, CMAR still did not meet
expectations. Many contribute the vast
amount of inventory, and the high
complexity of the system for its failure.

New King is Crowned

In 1990, Kmart was dethroned as the leader of the discount retailer, by rival Wal-Mart. Sales growth for
Kmart from 1980 to 1990 was a mere 7.7%, compared to the skyrocketing Wal-Mart. Shown on the
following page is a time line of sales dollars (revenue) per each of the 3 large discount chains.v
The Wal-Mart
Advantage
Near perfection
distribution system.
Lowest operating
costs allowed for

being the low cost

leader.
Newcomer advantage

Source: Target, Wal-Mart, and Kmarts Annual Reports (SEC Filings)

Hall Steps Up To Bat

After a failed corporate strategy by Joseph Antonini, the reins of Kmart were handed over to Floyd
Hall. Hall had industry clout due to his success at Target and Grand Union Supermarkets. Hall quickly
assembled a new board of top level managers with the intentions of, trying to build a teamget a
good succession plan and new policies in place.vi The competitive environment in 1995 did not reflect
positively for Kmart, as shown below.
Competitive Match-Up in 1995vii
Kmart
Customers averaged 15 visits a year
Sales/sq ft = $185
19% loyal customers

Wal-Mart
Customers averaged 32 visits per year
Sales/sq ft = $379
46% loyal customers

With rival Wal-Mart defeating Kmart clearly in every key performance indicator, Hall declared that
complete surgery was needed, no band-aid could revive this company.
Halls strategy can be defined as: Divest noncore activities, drastically improve all core principles,
and drive down cost wherever possible. A use it or loss it style was put into effect.viii
Use It

Lose It

Consolidated U.S. and

Canadian Operations
Capitalize on volume buying
power to drive down employee
health benefits
Improve stores, department
by department
Increase private labels
Expand Martha Stewart
Collection
Pantry Concept Redesign
stores based on consumer
convenience.
More District Managers
Stock Options for Store
Managers

Close 400 stores

Cleared out $700 million of
inventory
Sold of previous acquisitions
(ex. OfficeMax & Sports
Authority, etc)
Eliminated some 2nd tier
brands, and all 3rd tier brands.

Source Walmart & Kmart SEC Filings

Overall Asessment
Positives
1,600 renovated stores
Martha Stewart sales = $1
Billion
Sales per sq ft rivaled
Target
Dropped Operational
Costs by $500 million
Profit (shown in the table
below)
Negatives
Poor Customer Service
remained
Inventory System
bottlenecked and flawed.
Poor Competitive Position

Whos Next?
Halls dynasty ended in 2000, when Charles Conaway left CVS Corporation to head the sinking ship of
Kmart. Conaway elected to attack Kmarts two rivals head on with an aggressive strategy to revitalize
Kmart, and to obtain rival market share.

Source: Company Annual Reports (SEC Filings)

Rival Strategy Kmart: The authority for moms, home, and kidsix
Walmart (Low Cost)

Capable?

Target (Differentiation)

Capable?

Blue Light Always

Program $1.7
billion investment to
be the low cost leader
on 50,000 products.
Play To Win Supply
Chain Management

Blue Light Always

didnt have the
efficiency or cash
to compete with
Walmart

Greater emphasis on
private label brands. (vs.
Mossimo)
BlueLight.com (Target
shoppers statically
higher income
consumers, early internet
adopters)

Kmarts private
brands couldnt match
Mossimos
quality/style
1% of visitors
purchased a product.
$55 million poorly
invested

Play to Win was a

failure due to too
much to fast.

The White Flag 1/22/02

Bankruptcy was inevitable for Kmart due to countless failed strategies over the previous two decades.
Conaways actions solidified the bankruptcy, although in truth there was little he could do, but hope to
delay the inevitable.
Bankruptcy Contributors
$8.3 billion worth of

inventory
Blue Light Always Pricing
Strategy
Sales Decline
Unpaid vendors
Massive debt

Source: SEC Filings 2002

Source: SEC Annual Filings (1999-2001)

Kmart
Restructuring
Strategy
3/2002 Close 284 stores &
eliminate 22,000 jobs
Liquidate $758 million of
inventory
Reduce overhead by $130
million
Utilize $2 billion financing
The Stuff of Life
advertising
Sell BlueLight.com
Develop New Store Layout
1/2003 Close 316 stores &
eliminate 25,000 jobs

The New Kmart

James Adamson was CEO a mere 5 days before Kmart declared bankruptcy. Adamson who has handled
a corporate bankruptcy restructuring before, put the following strategy into place.

Restructuring Recommendations
Address housekeeping/poor customer service concerns by frequent District
Manager visits & Mystery Shoppers
Hire Fashion experts to compete with Target on Fashion, including
releasing an entirely new private brand line
Open additional distribution centers across the nation, and work on a just
in time inventory approach.
DO NOT attempt to be the low cost provider.
Compete head to head with Target.
Open Door/Open Books Policy regarding accounting letters.
Consumer
Recommendation: Dont
Buy Kmart
Wal-Mart continues to
grow momentum
Very small loyal customer
base
Accounting violations
taint brand image
Lack of Positioning
Closing stores limits
accessibility.
Underlying problems of
inventory management
have yet to find a solution

Source: SEC Filings 1992 through 2002

An Empire is Born
On November 17th 2004, the announcement was made that Kmart and Sears Roebuck Company would
merge to form the third largest retailer in the nation. Was this a strategically sound decision by Sears?x
Industry:
Department Stores

I
n
d
u
s
t
r
y
:
D
e
p
a
r
t
m
e
n

t
S
t
o
r
e
s

I
n
d
u
s
t
r
y
A
t
t
r
a
c
t
i
v
e
n
e
s
s
F
a
c
t
o
r
Industry Attractiveness
Factor
Market Size &Growth

Weight
M 0.25
a
r
k
e
t

Rating

Weighted

2.25

S
i
z
e
&
G
r
o
w
t
h

I
n
t
e
n
s
i
t
y
o
f
C
o
m
p
e
t
i
t
i
o
n

Intensity of Competition

0.15

0.75

Strategic Fit

0.1

0.7

R 0.1
e
s
o
u
r
c

0.3

Resource Requirements

e
R
e
q
u
i
r
e
m
e
n
t
s

E
m
e
r
g
i
n
g
O
p
p
o
r
t
u
n
i
t
i
e
s
/
T
h
r
e
a
t
s
Emerging
Opportunities/Threats

0.1

0.7

Cyclical Threats

0.2

External Factors

0.5

Degree of Risk

0.5

Sum of Weights

1
I
n
d
u
s
t
r
y
A
t
t
r
a
c
t
i
v
e
n
e
s
s
r
a
t
i
n
g

Industry Attractiveness
rating

9.7

Source: SEC Filings per perspective company

Competitive
Analysis

Industry
Attractiveness Factor

Indu
stry
Attr
activ
eness
Fact
or

Relative Market
Share

0.15

1.2

Costs relative to

Costs

0.4

Competitors

relati
ve to
Com
petit
ors
0.1

Match Rivals

0.1

0.4

0.05

0.15

Strategic Fit
Relationships

0.1

0.7

Innovative
Capabilities

0.2

How well matchs

KSPs

0.1

0.4

Degr
ee
profit
relev
ant to
rivals
0.2

Bargaining Leverage

Degree profit relevant to

rivals

Sum of Weights

Industry Attractiveness
rating

1
Indus
try
Attra
ctive
ness
ratin
g

5.25

Source: New York Stock Exchange (www.NYSE.com) 2006

Industry Attractive?

Cost to Enter?

Better off?

Yes, although the

department store/discount
retail stores are a mature
market. There is constantly
innovation in products and
services, and a demand will
always remain.

K-Mart merger was not

expensive enough to not do.
Value added services savings
and strategic goals being
assisted. Merges with Kmart
helps achieve their strategic
vision

Sears shareholders are better

off acquiring Kmart with
advantages in additional
stores (non-mall) and
economics of scale cost
savings

Shareholder Initial
Response Mixed;
Invest in Sears
Holding (SHLD)
today.
Fits Strategic Plan for
Sears growth.
Inherits Kmart brands,
and improves Sears
brand distribution
Combining channels of
distribution, advertising
for cost benefit.
Diversified in same
industry is a win.

Source: NYSE/Morning Star 11/16/2004 06/09/2006

The New Face of Sears

Kmart pioneered the discount retailer industry, but with any good idea comes competition. Wal-Mart, a
pioneer in its own right, perfected a distribution/cost system that was second to none. With Target
embracing a differentiation strategy, where did that leave Kmart? Costly mistakes marked the end of a
flagship American enterprise, but spun the birth of something new. Sears enjoys the benefits of nonmall stores, wider array of products, and shared value chain systems for a cost benefit. Stockholders
should see potential in Sears Holdings in a thriving industry, for years to come.
i Gamble, John E. Kmart: Striving for a Comeback, 2003

ii Gamble, John E. Kmart: Striving for a Comeback, 2003

iii Gamble, John E. Kmart: Striving for a Comeback, 2003
iv Gamble, John E. Kmart: Striving for a Comeback, 2003
v Gamble, John E. Kmart: Striving for a Comeback, 2003
vi Gamble, John E. Kmart: Striving for a Comeback, 2003
vii Gamble, John E. Kmart: Striving for a Comeback, 2003
viii Gamble, John E. Kmart: Striving for a Comeback, 2003
ix Gamble, John E. Kmart: Striving for a Comeback, 2003
x Press Release: Kmart Holding Corporation and Sears, Roebuck and Co. Agree to Merge
11/17/2004
1