Kmart: The Learning Curve Over

Kmart: The Learning Curve

Over the last three years the retail organization of Kmart has faced many challenges in the marketplace. Keeping up with mega giant retail king and global retail corporation Wal-Mart and other like Target has taken a back seat to just plain survival for Kmart. In January 2002, the company filed a Chapter 11 Bankruptcy for reorganization of debt and protection. According to Jennifer Dixon of the Detroit Free Press "37,000 employees will lose their jobs, 326 stores will close, and the familiar Kmart logo will disappear from the large swatches of the country." Many decisions had to be made for the health of the organization that suffered at the hands of mismanagement and poor planning of supply. It was not a lack of discounting product but a lack of goods and services that was causing Kmart's quick downfall. By filing the Chapter 11 Bankruptcy, Kmart hoped to emerge a stronger, healthier company. In 2002, Kmart lacked the cash "to refurbish its stores and build the sophisticated inventory and distribution systems needed to compete."i

Kmart had lost $4.4 billion dollars before filing over the two previous years. How does Kmart begin to recreate itself? What about the competition of Wal-Mart and others?

Kmart's recreation begins with analyzing what went wrong in the first place and learning from its mistakes to discover new strategies. Kmart needed to rethink its business plan and realign itself with the public. Reducing stores and employees reduced overhead but also made the organization smaller and easier to manage. While this served its purpose, it also became a public relations nightmare in the eyes of the customer. Still Kmart took appropriate steps by rearranging its upper management and putting into place a better system of company-wide communication. The Bankruptcy was a wake-up call and Kmart after years of stagnant behavior, started to take action.

This paper will examine Kmart on many different levels. The paragraphs below will first give a general history of the retail store by comparing and contrasting it with that of Wal-Mart's history. Second, this paper will discuss Kmart's steps toward reorganization and what the company could learn from Wal-Mart's success as retail giant. Third, the paragraphs below will examine Kmart's presence in the market today compared with Wal-Mart's. Fourth, this paper will explore what Kmart has learned from its Bankruptcy experience and how it use Wal-Mart's blueprint to come more successful and unique as a discount retailer. Lastly, this paper will discuss Kmart's future and impending merger with Sears. Will it succeed so both companies can benefit or will one brand name live out the other?

Two years ago many analysts predicted Kmart would not survive its first year of Bankruptcy. Dixon writes, "it's just a normal part of the cycle -- the strong survive and the weak fail. Kmart failed to do what it needed to do."i Rightfully so after years of focusing on lowering prices, they were not implementing technology, innovation of product, systems for their stores or even taking care and pride in the ascetics of their stores while others like Wal-Mart and Target were continually investing in presentation and feel of retail space. Two years ago, Kmart had a difficult task. How do they begin to compete as Dixon comments, "we are in a very difficult economic environment and Wal-Mart and Target are unrelentingly competitive. The environment makes it difficult for a Kmart to survive."i How did Kmart after only two years of reorganizing debt and suffering numerous losses, rise out of the ashes like a phoenix and start a merger with Sears? This paper will explore this comeback and evaluate the validity of this merger. Did Wal-Mart's way of doing business have any influence?

Kmart's History

More than one hundred years ago, Sebastian Spering Kresge opened a modest five-and-dime store in downtown Detroit and changed the entire landscape of retailing. The store that Kresge built has evolved into an empire of more than 1,500 stores and an Internet presence that reaches millions of customers. The Kmart name has become a symbol of Americana, standing for quality products at low prices. Kresge understood one premise with the changing American landscape that order for Kmart to stay ahead, it too must also change. He knew that retail began with giving the customer the right price for the right time. Kresge was one of the first retailers to use newspaper advertisement on a weekly basis. He later moved into television and radio commercials in the 1950's, which was very innovative and daring for the time. It was in this decade that Kruse saw the wave of the future and moved away from focusing on the five and dime store chain to something larger. He decided to expand into discount department stores. This concept would later become the Super Kmart and sprout up mainly throughout the Midwest.

In 1976, Kruse made history by opening 271 Kmart stores in one year, becoming the first-ever retailer to launch 17 million square feet of sales space in a single year. In 1977, nearly Kmart stores generated 95% of S.S. KRESGE COMPANY sales. To reflect this dramatic impact, the company officially changed its name to Kmart Corporation and he sold the remaining five and dime stores.

Wal-Mart's History

While it seems Kresge maintained momentum and strides toward acquiring more stores, Sam Walton of Wal-Mart built his retailer differently. He saw the same basic need for discount retail items that Kresge did and understood giving the customer a good price was important but he took it a step further. Instead of focusing on building a large chain of stores, he focused on the few that he did have and ways to improve service standards. He traveled the country in 1962 to study other retail chains and their ways of doing business and customer service. He used his own personal money to invest in building only 15 Wal-Mart stores. It was a risk he was willing to take. Wal-Mart got the boost it needed in 1970 when its stock was offered for the first time on the New York Stock Exchange. The public offering created the capital infusion that grew the company to 276 stores by the end of the decade. By focusing on customer expectations, Wal-Mart was growing rapidly in 11 states. He was more focused on the point of the customer and their experience in his store than building an empire. He believed in giving the customer certain rights to "a wide assortment of good quality merchandise; the lowest possible prices; guaranteed satisfaction with what you buy; friendly, knowledgeable service; convenient hours; free parking; a pleasant shopping experience" and this philosophy lead to booming success later. Rather than quickly acquire stores, he slowly invested time and personal interest in his chain.

By the 1980s Wal-Mart was comprised of nearly 1,400 stores. Wal-Mart Stores, Inc. branched out into warehouse clubs with the first SAM'S Club in 1983. The first Supercenter, featuring a complete grocery department along with the 36 departments of general merchandise, opened in 1988. Wal-Mart became a textbook example of managing rapid growth without losing sight of a company's basic values. In Wal-Mart's case, the basic value was, and is, customer service. Still it was Wal-Mart's ability to focus on multiple values that lends to its current success. As technologies changed, American social needs became more immediate due to a 24/7 schedule, Wal-Mart saw the need to use bigger and better computer systems to provide not only customer service at the store but also provide the product. Ironically, technology plays an important role in helping Wal-Mart stay customer focused. Wal-Mart invented the practice of sharing sales data via computer with major suppliers, such as Proctor & Gamble. Every time a box of Tide is rung up at the cash register, Wal-Mart's data warehouse takes note and knows when it is time to alert P&G to replenish a particular store. As a result, Wal-Mart stores rarely run out of stock of popular items. Also to keep up with supply and demand, Wal-mart's intricate communication systems with its distribution centers and hubs make the product available faster. This concept diminishes the amount of space needed to house the product; the amount of time needed for transport and keeps the communication level in constant play. Therefore, the employees are never in the dark about inventory and are able to focus on providing excellent customer service.

In keeping with the customer's needs, another aspect of Wal-Mart's business model is to keep the store simple and adapt when adaptation is needed. This worked to benefit Wal-Mart's international presence in Europe. Instead of pushing the Wal-Mart way of life down the European's throat, executive chose to enter the market by buying out existing infrastructure. In this way, the company was able to keep operation costs because they used existing retail stores and employees. The only real thing that changes was the inventory and product price for the Europeans. Once again Wal-Mart is giving the customer what they want just on a different scale.

Wal-Mart will also adjust itself to the economic environment in order to remain competitive. After 9/11 Wal-Mart recognized a change in consumer spending at their stores and adjusted prices to reflect this trend. Wal-mart understood "the consumer need of a breather at the start of s long-awaited consumer spending recession." What did his business philosophy, model for business success over the long-range and subsequent adjustments due to consumer trends amount to for Wal-Mart? This last Christmas seasonal shopping remained promising when compared to 2003 but still did not meet analysts' forecasts. When in this challenging economic state, Wal-Mart to be successful because of "a late surge in shopping and use of gift cards -- which estimated to make up 8% of holiday sales this year -- after Christmas resulted in solid, if unspectacular, sales." In comparison, Kmart "stores open at least a year fell 4.6% in the November-December period."v

Learning Curve

What can Kmart stand to learn from Wal-Mart in light of its new merger with Sears? It is clear that this is Kmart's chance to reinvent itself and persuade the public to believe in their way of doing business. Kmart needs a complete revamping of its brand, the stores and its customer service because it's that simple. Without customers and their loyalty, there would be no stores. Yes, price plays a role but it's the immediacy of product that is number one for the customer. Kmart needs to restructure its process of providing inventory and devise a way to make it cost effective. In this regard, using Wal-Mart's model of tracking inventory from the distribution center to the hub, then to shelf and out the door; would substantially improve Kmart's image. Investing the time and resources in remodeling its stores and making the stores it already has top-notch will also add to their edge. Still once this is done, continued upkeep and organization is key. Presentation is everything in retail. Kmart could also learn from Wal-Mart's top-notch customer service and use of flexibility. By having happier employees, who have received proper training and knowledge, this reflects down to the customer. Another thing is Kmart needs to stop flaunting its discounts and focus on the quality of their products. This will drive customers to the stores and create consumer confidence.