Kmart: Sriving for a Comeback

Kmart: Striving for a Comeback

INTRODUCTION

Headquartered in Troy, Michigan, discount and variety retailer Kmart is among the worlds largest discount chains. For any given product, Kmart normally carries one or two national brands as well as several second tier brands and a few third tier brands. Kmart's well-known private label brands include Martha Stewart Everyday, Sesame Street, Route 66, Joe Boxer, and Jaclyn Smith.

As of 2003, Kmart had 212,000 employees at approximately 1,660 Kmart discount stores and super centers in 490 locations within the United States, Puerto Rico, The Virgin Islands, and Guam. The company also has a total of 17 distribution centers.

Kmart is the fourth largest general merchandise retailer in the world and the third largest discount retailer in the United States. The retailer is struggling with head on competition from Wal-Mart. Kmart is aware of the main problems associated with its loss of business to Wal-Mart; however, achieving a strong competitive position with Wal-Mart is difficult for Kmart due to several major problems that they are currently experiencing in areas such as housekeeping, inventory, and customer service.

Kmart's reorganization plan focuses on improving the company's weak competitive position and restoring financial solvency. If these goals are achieved Kmart will be in a better position to make significant improvements that would ultimately result in the company emerging out of bankruptcy. Attracting new customers to Kmart involves new strategies that they have put in place to help them to compete with Wal-Mart their number one competitor as well as Target and Kohl's their secondary competitors. The strategies are focused on merchandising and distribution as well as store productivity and relative cost position. Developing better working relationships with suppliers to prevent stock outs and lowering their distribution costs have contributed to the company's improvements in the merchandising and distribution aspect of the company. As far as productivity and cost position is concerned, the company is focusing on redesigning its stores so that they are more attractive and convenient for customers. Kmart also has their district managers focusing on a smaller number of stores so that they will have the time needed to visit all stores in their assigned territories and provide the store managers with better coaching and feedback.

SITUATIONAL ANALYSIS

EXTERNAL ENVIRONMENT ANALYSIS

Kmart's chief competitors in the discount and general merchandise retail industry are Wal-Mart and Target; department store retailer Kohl's is also a major competitor. Of these, Wal-Mart is the undisputed industry leader, with sales of $246,525,000,000 in 2002, followed by Target in a distant second place at $36,917,000,000, Kmart at $30,762,000,000, and Kohl's at $9,120,000,000. Nationally, Wal-Mart had 2,713 discount stores and supercenters combined in 2002, while Target had 1,147 stores, Kmart had 2,177 stores, and Kohl's had 457 stores. In addition to these major rivals, Kmart faced competition from category retailers such as Best Buy and Circuit City in electronics, Office Depot and Staples in office supplies, Kroger in groceries, and Bed, Bath, and Beyond in housewares. Other strategic groups of competitors include extreme value retailers Dollar General and Family Dollar, general closeout merchandise retailer Big Lots, apparel and accessories retailers Ross Stores and TJX Companies, and warehouse retailers Costco, Sam's Club, and BJ's Wholesale Club.

For the discount and general merchandise retail industry, there are three major industry success factors that can spell success or doom for competitors. The first is a low-cost advantage, which Wal-Mart has fully exploited in the industry. As stated in the case, Wal-Mart's prices on average were 3.8% lower than Kmart on "comparable products." A second major success factor is courteous customer service, which is also an area that Wal-Mart has focused on by training its store associates in providing good customer service and asking them to "commit to a pledge of friendliness" as is evidenced by its friendly greeters at Wal-Mart store entrances. Meanwhile, one of the major longstanding complaints of customers concerning Kmart involves its poor customer service. One story from Forbes magazine illustrated this issue by mentioning customer complaints of how Kmart employees would just "wave their hand in a general direction" when asked about the location of items within the store.

Supply chain management (including purchasing, relationships with vendors, distribution, and the use of technology to manage the supply chain) and ensuring that stores are adequately stocked with items that customers need is another crucial industry success factor. This is yet another area in which Wal-Mart excels, as it continually adopts new technologies, such as establishing satellite links between its stores, distribution centers, and headquarters during the mid 1980's, and developed its own proprietary systems to track store and distribution center inventories in real time. In addition, Wal-Mart sought out vendors "who were dominant in their category (thus providing strong brand-name recognition)" and closely studied the cost structure of its vendors in order to better negotiate for "absolute rock-bottom prices." However, despite driving a hard bargain, Wal-Mart still receives positive marks from its vendors because of its willingness to work with them to help reduce costs and improve profit margins. The company also encourages vendors to provide feedback about any problems they have with Wal-Mart. These factors help Wal-Mart to ensure that it maintained a good relationship with its suppliers, that its stores had adequate stocks of items (Wal-Mart's in-stock rate was over 99 percent as of 2002), and that it remained the low price leader. Meanwhile, Kmart, despite heavy spending on inventory tracking systems, continued to be plagued by stockouts, evidenced by an in-stock rate under 90 percent as of 2002. Kmart alienated its vendors by placing and then later canceling orders and by delaying payments due to vendors. The company also alienated its customers by making purchasing decisions "based on which vendors were willing to pay the largest slotting fees rather than what products Kmart shoppers wanted," thus resulting in stockouts of the popular products and larger than necessary inventories of slower selling products.

One of the major driving forces in the discount and general merchandise