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Kmart Corporation

Kmart Corporation

3100 West Big Beaver Road
Troy, Michigan 48084-3163
U.S.A.
Telephone: (248) 463-1000
Toll Free: (800) 63-KMART; (800) 635-6278
Fax: (248) 463-5636
Web site: http://www.kmartcorp.com

Public Company
Incorporated:
1912 as S.S. Kresge Company
Employees: 252,000
Sales: $37.03 billion (2001)
Stock Exchanges: New York Pacific Chicago
Ticker Symbol: KM
NAIC: 452910 Warehouse Clubs and Superstores; 452990 All Other General Merchandise Stores; 454110 Electronic Shopping and Mail-Order Houses

Kmart Corporation, which entered 2002 as the second largest U.S. discount retailer (behind Wal-Mart Stores, Inc.) with over 2,100 outlets in 50 states, Guam, Puerto Rico, and the Virgin Islands, once so dominated the discount store marketplace that few believed any competitor could shake its mighty grip. Yet too much diversification, too little attention to its core business, and brutal competitionparticularly from the mighty Wal-Martled to a prolonged state of decline and ultimately to a filing for Chapter 11 bankruptcy protection in January 2002. The company soon announced a host of changes in upper management, the planned closure of hundreds of stores, and various efforts at improving operations in a massive turnaround effort that was far from guaranteed of success.

Kresge Red Fronts and Green Fronts: 1899 to 1929

The giant Kmart Corporation grew from a Detroit five-and-dime store opened in 1899. Its proprietor was Sebastian Spering Kresge, a former Pennsylvania tinware salesman, who along with a partner, John McCrory, adopted the chain-store idea first used by Frank W. Woolworth. When Kresge and McCrory dissolved the partnership they had formed in 1897, McCrory took over the stores in Memphis, and Kresge maintained those in Detroit, forming S.S. Kresge Company. Kresges eponymous outlet sold costume jewelry, housewares, and personal grooming aids. Its success encouraged him to open a second store in Port Huron, Michigan, the same year; others followed in rapid succession. By 1912, when Kresge incorporated his company in Delaware with a capitalization of $7 million, there were 85 stores producing annual sales of $10.3 million. Four years later he reincorporated in Michigan, this time with a $12 million capitalization. In 1918 the firm went public with a listing on the New York Stock Exchange.

Always in high-traffic, convenient locations, Kresge Red Front stores featured open displays of merchandise with items systematically associated. Following their founders abhorrence of credit, they kept their prices to thrifty nickel and dime limits, until inflation after World War I made the cost of many items too high. Undaunted, Kresge opened a chain of Green Front units in 1920, all selling merchandise at prices ranging between 25 cents and $1. He also acquired Mount Clemens Pottery, to supply the stores with ever popular inexpensive dinnerware.

In 1924 the companys 257 stores generated annual sales of $90 million. Convinced this success should go hand in hand with corporate responsibility toward the less fortunate, the company founder established the Kresge Foundation, making an initial contribution of $1.3 million plus securities worth $65 million.

The following year Kresge resigned the presidency he had held since 1907 to concentrate on long-range goal-setting as company chairman. His planning bore fruit in January 1929, when a Kresge store opened in the United States first suburban shopping center, Country Club Plaza, in Kansas City, Missouri, thereby anticipating a shift in shopping patterns by some 15 years.

Another long-range goal crystallized in September 1928, with the formation of a Canadian subsidiary that opened the countrys first Kresge store the following May. Based in Kitchener, Ontario, the initial venture was so successful that the companys $5 million investment financed another 18 stores in locations from Winnipeg to Montreal by the end of 1929. These brought the total number of Kresge stores to 597, together yielding sales of $156.3 million.

Weathering the Great Depression: 193040

The companys orderly expansion changed after 1929, when the Depression-era stock market plunged the price of Kresge stock from $57.50 per share to an eventual low of $5.50. This was a severe blow to company management, which had pledged its support by taking turns to buy the deflated stock, gambling on its bottoming out at $26. Kresge found himself at a loss, having promised to buy 100,000 shares he could no longer afford, and the company took them off his hands. By 1936, however, the chairman had bought back at cost his own shares plus the 251,306 others owned by the management.

The Depression also brought falling sales as well as inventory losses through the failure of suppliers businesses. Competition also increased; the scramble for the retail dollar fueled rivalry from Sears, Roebuck and prompted other chains to open department store bargain basements. Forced to broaden its inventory to meet this threat, Kresge had to raise its prices, so that Green Front stores had many items selling for up to $3 despite their former $1 ceiling.

With the Depression over by 1940, there were 682 stores in 27 U.S. states, plus 61 in Canada. Together, the stores produced 1940 sales of $158.7 million. As the decade advanced, many homeowners moved out to the suburbs from inner-city locations; the retailers followed. Kresge management cautiously opened one suburban shopping center store in 1947, adding to the first one that had opened in 1929. Three more followed in 1948. By 1953 there were about 40 suburban stores in the United States, plus one in Canada.

Massive Expansion: 1950s

By the mid-1950s Chairman Sebastian Kresge was long retired from active company management. An operating committee of 16 executives appointed by the board of directors steered the corporate strategy. Although the committee frequently combined smaller stores in high-volume areas to provide better selection and more efficient service, there were 616 U.S. stores by 1954, plus 74 in Canada. Many of the units featured modern conveniences such as air conditioning, self-service displays, and shopping baskets. All these operations combined to reach sales figures totaling $337.9 million in 1954up from $223.2 million in 1945.

Although the variety store image still guided company activities during the 1950s, pricing limits were fading away, with the concept of discount retailing coming to the fore in its stead. Kresge offered economical private-label products ranging from clothing to house paint. The variety of brand-name offerings also broadened to include electric appliances, radios, and lawnmowers.

In the late 1950s food grew into the largest single department, warranting training in food management for all store managers. Many stores had delicatessens, and Kresge in-store luncheonettes provided shoppers with a large assortment of snacks, lunches, and dinners devised by the test kitchen at the companys Detroit headquarters. By 1958 these mini-restaurants were so popular that at least one new or remodeled facility opened alongside a delicatessen counter in some Kresge store each week.

A wider variety of merchandise plus higher pricing brought a need for a layaway plan allowing customers to save for expensive items. It was, however, still against company policy to offer credit, although competitors were luring customers in this way.

In 1959, coinciding with the opening of the first Kresge store in Puerto Rico, Harry Blair Cunningham succeeded to the presidency of S.S. Kresge Company. Cunningham, aged 58, had been with Kresge since 1928. A former newspaper reporter, he had worked his way up from trainee status through the store manager ranks, eventually becoming general vice-president. Twin assignments went with this position: one was to tour all of Kresges U.S. stores, assessing the future position of the company and its competitors in the variety store industry; the other was to prepare himself for the company presidency, when Franklin Williams would retire in two years time.

Cunninghams travels convinced him that Kresges competitors were not other variety chains, but the new discounters aiming for fast inventory turnover, which they could achieve by lower markups on a large assortment of small items. Discounting, in fact, was a return to Sebastian Kresges basic merchandising philosophy, which would be a bulwark against competition in the future, just as it had been in the past. Cunningham, after a period of testing, concluded that higher sales volume, rather than higher markups, would boost the companys profits, which had dropped during the 1950s.

The Birth of Kmart: 1960s

In 1962 the company opened its first discount store in the Detroit suburb of Garden City, calling it Kmart. Within a year, there were 17 others. Unlike Kresge stores, Kmarts were not placed in shopping centers but were built in plazas by themselves, to avoid internal competition and also to provide ample parking. To ensure a 25 percent annual pretax return on investment, each store featured decor that was pleasant, though not extravagant, and each aimed for eight inventory turnovers per year. The Kmart stores were an instant success; by 1963, there were 63 facilities, 51 of which provided repair and maintenance service for automobiles. Three years later, the number of Kmarts had swelled to 122.

Company Perspectives:

We expect Kmart will emerge from the Chapter 11 process as a much stronger company poised for profitability and growth.

The Kmart introduction still left the company with a number of older Kresge stores, still on long leases, which were too small to display Kmarts expanded merchandise lines. Numerous Kresge stores, mostly in deteriorating business areas, were renamed Jupiter Discount Stores and converted to facilities offering a limited variety of low markup, fast-moving merchandise such as clothes, drugstore items, and housewares. By 1966 there were almost 100 Jupiter stores in operation.

In 1965 the company underwent several changes. One involved the sale of longtime subsidiary Mount Clemens Pottery. Another was the acquisition of Holly Stores, a retailer of womens and childrens clothing that had been a Kmart licensee since 1962, and was operating clothing departments in 124 Kmarts, Kresges, and Jupiters at the time of the acquisition. The same year, the company acquired Dunhams Stores Corporation, a sporting goods supplier already operating under license in 42 Kmarts. Dunhams then became Kmart Sporting Goods, Inc.

S.S. Kresge Companys sales for 1965 reached a record $851 million, representing a 23.6 percent gain from 1964. There were 895 stores, of which 108 were in Canada. Although discount retailing had gained momentum somewhat later in Canada than in the United States, the Canadian subsidiary had opened its first Kmart in London, Ontario, in 1963. At the same time, while inner-city deterioration in Canada had not reached the same level as in U.S. cities, the company turned some of its smaller, older Canadian stores into Jupiters.

The successful Canadian operations made a large contribution to the total sales figures for 1966, which topped $1 billion for the first time, reflecting a 28 percent rise over 1965. Company founder Sebastian Kresge did not live to see this triumph. He died in September 1966 at the age of 99, having retired from the company chairmanship only three months earlier. Also in 1966, the famous Blue Light Special was invented by a Kmart manager in Fort Wayne, Indiana, who was seeking a way to make it easier for his customers to find the Christmas wrapping paper that he was clearing; the Blue Light Special went on to be adopted chainwide and become an American icon. Meantime, spurred by its Canadian success, the company found another international opportunity in Australia, via a joint venture: Kmart (Australia) Limited, with retailer G.J. Coles & Coy, Limited. The 1968 undertaking, in which Kmart held 51 percent of the shares, produced five Australian Kmarts by 1970.

By 1969 S.S. Kresge Company had decided against purchasing the licensee of its automotive departments, instead opening another subsidiary called Kmart Enterprises, Inc., to operate the departments, now so popular that 56 had opened in that year alone. That year the number of company stores stood at 1,022, sales at $4.6 billion, and average profit per store at $42,358.

Further Diversification: 1970s

As the 1960s ended, an economic slowdown posed challenges for S.S. Kresge. The company resorted to heavier-than-usual promotional markdowns in December 1969 and January 1970 that shaved profit margins. Other problems included the difficulty of keeping to a 25 percent annual rate of sales gain for an ever expanding number of stores; the fact that the rate of sales growth in a store slowed as the store aged; and the increase in inventory that came from formerly licensed in-store departments. All these factors led to an earnings slowdown in 1970s first quarter, bringing company stock down 11.5 points in one day. Still, sales for 1970 reached almost $2.2 billion.

In 1972 Cunningham was succeeded as chief executive by Robert E. Dewar, a former company lawyer and president since 1970. The presidency was filled by Ervin Wardlow, whose forte was merchandising.

Key Dates:

1897:
Sebastian Spering Kresge and John McCrory form partnership to open five-and-dime stores in Detroit and Memphis.
1899:
Partnership is dissolved, and Kresge takes over the Detroit stores, forming S.S. Kresge Company.
1912:
S.S. Kresge Company, with 85 stores and $10.3 million in sales, is incorporated.
1918:
Company goes public with a listing on the New York Stock Exchange.
1929:
First store in Canada opens; a Kresge store is opened in the first suburban shopping center in United States; store total reaches 597 and sales hit $156.3 million.
1962:
First discount store, called Kmart, opens in the Detroit suburb of Garden City.
1977:
With Kmarts accounting for almost 95 percent of sales, the company changes its name to Kmart Corporation.
1984:
Diversification into specialty retailing begins with purchase of Home Centers of America (renamed Builders Square) and Walden Book Company.
1985:
First celebrity product line is introducedthe Jaclyn Smith line of clothes.
1987:
Martha Stewarts association with Kmart begins; most U.S. Kresge and Jupiter stores are sold to McCrory Corporation.
1989:
PACE Membership Warehouse Inc. is acquired.
1990:
Wal-Mart surpasses Kmart in sales.
1991:
First Super Kmart opens in Medina, Ohio, featuring a full-service grocery store and general merchandise; 90 percent stake in OfficeMax is acquired.
1992:
Borders book superstore chain is acquired.
199495:
Numerous noncore assets are shed, including PACE, OfficeMax, Sports Authority, Borders Group, and 860 auto service centers.
1995:
More than 200 U.S. stores are closed.
1997:
The Big Kmart format debuts; the Martha Stewart Everyday line of bed and bath products is launched.
1998:
Kmart sells its stores in Canada to Hudsons Bay Company.
2001:
Declining sales amid intense competition leads to liquidity crisis and halts in shipments from major vendors.
2002:
Kmart files for Chapter 11 bankruptcy protection, becoming the largest retailer ever to do so; company announces that it will close 284 stores.

The three upper managers hurdled these challenges with strategies forged under Cunninghams tenure, such as the centralized buying for both Kresge and Kmart stores that reduced possible in-house conflict between variety store and discount divisions. The company also expanded its management training program, so variety store managers could switch to discount facilities with ease. Meticulous crafting of the training program guaranteed each store manager could make decisions about products, promotions, pricing, and locations to ensure the stores competitiveness. Other policies included limiting each store to one entrance and exit, thus reducing staff needs and escalating sales per employee, and designing smaller stores of 65,000 to 70,000 square feet, adequate for smaller, more affluent shopping communities. All of these changes gave the company a chance to upgrade merchandise while phasing out leased departments on all items except shoes.

The course charted for the 1970s brought Kresge an annual sales growth of 22 percent from 1972 to 1976, with 1976 sales totaling $8.4 billion. The company, however, was not without its failures. A fast-food drive-in chain called Kmart Chef, set up in 1967, closed in 1974 after having peaked at just 11 units. The costly credit card operation, used by only 9 percent of Kmarts customers, was withdrawn the same year, while a $65 million purchase of Planned Marketing Associates, an insurance company renamed Kmart Insurance Services Inc., brought a loss of $8 million in 1975, although a modest profit of $344,000 was recorded for 1976. By this time the companys 1,206 Kmarts were accounting for almost 95 percent of sales. For this reason, shareholders changed the company name to Kmart Corporation in 1977.

Bolstering a Faded Image: 197889

The late 1970s saw changes in Kmarts seemingly impregnable position. New competitors with more inviting stores made company facilities seem shoddy, and specialty stores began to stock Kmart staples such as sports equipment, drugs, and personal grooming aids. Changes in public taste showed up in lagging profits, which sank 27 percent in 1980 on record sales reaching $14.2 billion. Other warning signals showed in plunging inventory turnover, which dropped from the 8 times annually level of the 1960s to 3.8 times by 1979. Utility bills, wages, and other overhead costs soared because of inflation, but fierce competition prevented the company from raising its discount prices.

Kmart responded by cutting the number of scheduled new stores in favor of remodeling existing units and restocking them with more fashionable merchandise. It also installed a computer system to handle inventories, orders, shipments, and other procedures that could speed up delivery times to each store. Other changes included the 1978 sale of the companys 51 percent interest in Kmart (Australia) Limited to G. J. Coles & Coy for a 20 percent stake in G.J. Coles & Coy (known as Coles Myer Ltd. following a 1985 merger), thus closing out Kmarts ownership of the Australian Kmart stores.

Bernard M. Fauber succeeded Dewar as chairman and chief executive in 1980. Fauber steered the company through an economic slowdown and into diversification that year, with purchase of a 44 percent interest in a Mexican discount chain, as well as a joint venture into Japanese mass-merchandising with Japans biggest retailer, The Daiei, Inc. Kmart also bought Texas-based Furrs Cafeterias Inc., a 76-unit chain that was a natural outgrowth of the cafeterias in Kmart stores.

In 1984 Kmart expanded its acquisition program and diversified into specialty markets. Because Kmart had already been experimenting with its home improvement departments, a logical move was the $88.2 million purchase of a nine-unit Texas chain called Home Centers of America, Inc. Kmart made Home Centers operations into warehouse-type stores, changing the name to Builders Square. Next came the Walden Book Company (Walden-books), costing $300 million for 845 stores that had produced sales of $417 million in 1983. An Oregon-based chain of 164 drugstores called PayLess joined the growing lineup in 1985.

There was another change in 1985this one in Kmart strategy when apparel division president Joseph Antonini launched a new line of clothes named for and designed by actress Jaclyn Smith that helped turn apparel into the companys fastestgrowing business. By the time he succeeded to the company chairmanship in 1987, Antoninis strategy had added racing driver Mario Andretti to the list for automotive accessories promotions, Fuzzy Zoeller for golf products, and domestic doyenne Martha Stewart for kitchen and housewares support. The celebrities helped the bottom lineprofits for 1987 rose 19 percent, to reach $692 million on total sales of $25.6 billion. Other factors in year-end figures were the sale of all U.S. Kresge and Jupiter stores to McCrory Corporation (the business founded by Sebastian Kresges original partner); the $238 million sale of Furrs Cafeterias and another cafeteria chain called Bishop Buffets, Inc., to Cavalcade Foods, Inc.; and the disposal of Mexican interests.

New ventures in 1988 included a partnership with Brunos Inc., a food retailer, which generated the American Fare hypermarket near Atlanta in 1989; purchase of a 51 percent ownership interest in Makro Inc., which operated membership warehouses; and launch of Office Square, a discount office supply chain. In 1989 Kmart acquired PACE Membership Warehouse Inc. and the remaining 49 percent of Makro, converting Makro stores to PACE formats. It also opened Sports Giant, a group of sporting goods stores, and finished the year with sales of $27.7 billion and income of $800 million.

Beleaguered but Not Beaten: Early 1990s

The company changed its logo from red and turquoise to red and white, with mart written within the larger K in 1990. Next came the acquisition of The Sports Authority into which it rolled the Sports Giant stores. Kmart also began a long overdue six-year overhaul of its stores (including openings, closings, enlargements, and refurbishings) to help shore up its image. By this time, Wal-Mart had emerged as a credible threat and overtook Kmart in sales and market share in 1990. The following year, Kmart opened the first Super Kmart Center in Medina, Ohio, combining a full-service grocery store with the Kmart general merchandise selection and opening 24 hours a day, seven days a week. Still believing diversification was a good investment, the company purchased a 21.6 percent interest in OfficeMax, an office supply chain, in 1990 then increased the stake to 90 percent in 1991. By 1992 Kmart was still in an acquisition mode, buying 13 stores in the Czech Republic and Slovakias Maj department store chain; Borders book superstores as a complement to Waldenbooks; and Intelligent Electronics Bizmart chain. Sales for 1992 hit $34.6 million, a healthy notch above 1991s $32.5 billion, and Kmarts workforce reached an all-time high of 373,000.

Realizing that Kmarts future lay in its core retail business, the company began shedding noncore assets and sprucing up its stores. In 1993 Kmart sold 91 of its 113 PACE membership Warehouses to Wal-Mart. In 1994 came the spinoff of Office Max and the Sports Authority (keeping a quarter interest in the former and 30 percent of the latter); the sale of PayLess Drug Stores (retaining 46 percent interest) and its 22 percent interest in Coles Myer Ltd.; an alliance to open stores in Mexico and Singapore; and the launch of Kathy Irelands apparel line. Sales for 1993 had hit a high of $37.7 billion with income of $941 million; sales for 1994 fell to $34.6 billion but the big news was a staggering loss of $940 million.

More serious than ever in its reorganization, Kmarts newest journey began with the appointment of Floyd Hall, former chairman of Target stores, as president, CEO, and chairman of the board in June 1995. Next came the spinoff of the Borders Group (Borders and Waldenbooks combined corporate name), the sale of its remaining interest in OfficeMax and the Sports Authority, and the divestment of 860 auto service centers to the Penske Corp. With widespread rumors of bankruptcy, the downgrading of its rating, and analysts predicting Kmarts demise, many wondered if the nearly 100-year-old retailer could survive increased competition from both Wal-Marts and Targets newer, snazzier stores. Hall set out to prove Kmart not only was not going underbut had just begun to fight.

Short-Lived Comeback: Late 1990s

After closing 214 stores, disposing of its Czech, Slovak, and Singapore properties, and pledging to reduce expenses by $600-$800 million, Kmart was ready to prove its retail mettle. Its new merchandising credo centered around four simple words: brands, consumables, convenience, and culture. To help achieve its goals came a new advertising campaign featuring comedian Rosie ODonnell and director Penny Marshall, a massive shakeup in upper management, and the launch of a multiyear $750 million remodeling program. The latter involved the introduction of the Big Kmart format, which was cleaner and brighter and featured wider aisles for easier shopping. Other key changes were the addition of a section of consumable goods conveniently located near the front of the stores and an increased emphasis on the childrens and home furnishings departments. By the end of 1998, 1,245 of the companys stores (or 62 percent of the total) had been converted to the Big Kmart format.

Another important initiative was an expansion of popular brand-name and private-label lines, particularly the 1997 launch of the Martha Stewart Everyday line of bed and bath products through a strategic alliance between Kmart and Martha Stewart Living Omnimedia L.L.C., which Stewart had formed earlier that year to oversee her growing empire. The Martha Stewart line was expanded to include garden and patio products as well as baby products in 1999, and that year the line generated more than $1 billion in sales. Proving successful as well was the launch of a line of Sesame Street childrens apparel and juvenile products.

Also in 1997, Kmart announced the sale of its remaining interest in Thrifty PayLess to Rite Aid, refinanced its debt load, started leasing out hundreds of its largest parking lots, and built a hip new three-story Kmart in Manhattan near Greenwich Village. The firm also sold its interest in its Mexican joint venture and sold Builders Square to Leonard Green & Partners for a mere $10 million. Further retrenchment came in February 1998 when Kmart sold its 112 stores in Canada to Hudsons Bay Company for US$167.7 million (the stores were either closed or converted to other formats, mainly Zellers).

Through these and other moves, Hall succeeded in saving Kmart from oblivion, and the firm returned to profitability in the fiscal year ending in January 1998, posting net income of $249 million on sales of $32.18 billion, and stayed in the black for the following two years. By 1999 Hall was confident enough of the companys future to announce plans to open 400 stores over the next five years, with half of the units to be Super Kmart Centers. About 100 new stores were opened in 1999, the same year that Kmart ventured into e-commerce with the formation of BlueLight.com, a joint venture formed by Kmart, Softbank Corp., Yahoo! Inc., and Martha Stewart Living Omnimedia. Kmart also signed agreements in 1999 with Fleming Companies, Inc. and SuperValu Inc. to distribute grocery items to its stores. Despite this string of positive developments, underlying and significant problems remained, and Halls expansion program quickly proved to be premature.

Falling into Bankruptcy, Early 21st Century

Hall retired as chairman, president, and CEO in early 2000. Hired as the new chairman and CEO was 39-year-old Charles C. Chuck Conaway, who had been president and COO of CVS Corporation, the giant drugstore chain. Conaway moved quickly to implement major changes as Kmarts financial performance began to once again head south. He shook up senior management, announced that 72 underperforming stores would be closed, and launched a $1.7 billion program to improve the supply chain and attempt to resolve the chains chronic problem of keeping items in stock. The new initiatives continued in 2001. The company inked a deal with Fleming, making that firm the exclusive supplier of food and consumables for Kmarts and Super Kmarts. The Martha Stewart Everyday line was expanded even further, and an agreement was reached to develop a new and exclusive line of Disney childrens clothing. On the marketing side, Conaway brought back the Blue Light Specialwhich had been shelved in 1991in an attempt to instill some excitement into the stores, and prices were permanently trimmed on 38,000 everyday items in a new Blue Light Always pricing strategy.

This last maneuver, an ill-advised attempt at beating Wal-Mart at its own game that was launched in August 2001, proved to be a critical mistake. Not only did Wal-Mart move quickly and ruthlessly to match or undercut the prices, but Kmart also compounded its mistake by simultaneously and drastically cutting back its distribution of expensive advertising circulars. Customers used to the circulars simply stopped shopping at Kmart, and same-store sales fell throughout the final months of 2001, including during the crucial holiday selling season. The declining sales resulted in a liquidity crisis and halts in shipments from major vendors, leading the company to file for Chapter 11 bankruptcy protection on January 22, 2002, becoming the largest retailer ever to do so.

Just prior to the filing, James B. Adamson was named Kmart chairman, with Conaway remaining CEO. Adamson had been a Kmart director since 1996 and had previously served as chairman and CEO of Advantica Restaurant Group, Inc., owner and operator of mid-priced restaurant chains, such as Dennys. In March 2002 Conaway resigned and Adamson took on the position of CEO as well. That month, Kmart announced that it would close 284 underperforming stores, resulting in the elimination of 22,000 jobs and a charge of more than $1 billion. As the company attempted to emerge from bankruptcy by mid-2003, its biggest challenge was to find a niche to occupy. Many observers were doubtful that a major discount chain could find such a niche given the strengths of the two main rivals: Wal-Mart with its rock-bottom prices and extensive grocery aisles and Target with its discount prices for slightly upscale products. In February 2002 Kmart launched a new advertising campaign featuring television commercials directed by Spike Lee and sporting a family values theme and the tagline Kmart. The Stuff of Life. In a company press release, Steven Feuling, a senior marketing vice-president, said that Kmarts goal with this campaign is to build an emotional bond with the consumer by re-establishing the role Kmart plays in its shoppers lives. Whether this campaign and the companys other initiatives would be enough to save Kmart remained to be seen.

Principal Competitors

Wal-Mart Stores, Inc.; Target Corporation.

Further Reading

Brauer, Molly, Kmart Posts Profit, Denies Buyout Rumor, Knight-Ridder/Tribune Business News, November 21, 1996.

Byrne, Harlan S., New Look at Kmart: The Retailer Goes Upscale and Its Earnings Follow Suit, Barrons, May 11, 1987, pp. 8+.

Coleman, Calmetta Y., Grand Designs: Ask Ms. Stewarts Advice for How to Improve Kmart, Wall Street Journal, May 1, 2000, pp. A1+.

Fauber, Bernard M., Kmarts New Directions, Discount Merchandiser, November 1983, pp. 34+.

Gallanis, Peter J., Next Chapter in Kmarts Book Reads Refinement, Expansion, Discount Store News, March 6, 2000, pp. 51+.

Halverson, Richard, Leaner, Meaner, Cleaner: Nearly $1 Billion in Cost Cutting Has Goosed Earnings and Improved Efficiencies, Discount Store News, December 9, 1996, p. 27.

Hays, Constance L., Kmart to Close 284 Stores; 22,000 Jobs Will Be Cut, New York Times, March 9, 2002.

Hazel, Debra, Kmart: Is the Rebound Real?, Chain Store Age, May 1997, pp. 4548.

Johnson, Jay L., Kmarts Solution, Discount Merchandiser, November 1999, pp. 27+.

Kmart: It All Begins and Ends in the Store, Discount Merchandiser, August 1986, pp. 106+.

Kmart Rises from Would-Be Fall, but Others Not So Lucky, Discount Store News, July 1, 1996, p. 59.

Koudsi, Suzanne, Attention Kmart Bashers: The Folks at BlueLight Are Turning the Troubled Retailer into an Online Force. And Wal-Mart Is Watching, Fortune, November 13, 2000, pp. 213+.

Kresge, Stanley Sebastian, S.S. Kresge Company and Its Builder, Sebastian Spering Kresge, New York: Newcomen Society in North America, 1957, 32 p.

, The S.S. Kresge Story, Racine, Wis.: Western Publishing, 1979, 373 p.

Kresges, Fortune, June 1, 1940.

Kresges Triple-Threat Retailing, Business Week, January 29, 1966.

Kruger, Renée, Big Plans at Kmart, Discount Merchandiser, June 1997, pp. 20+.

Lieback, Laura, Kmarts To-Do List: Succession, Status, Stability, Discount Store News, March 9, 1998, pp. 22+.

, A New Day Dawns for Kmart, Discount Store News, March 22, 1999, pp. 23+.

Main, Jeremy, Kmarts Plan to Be Born Again, Again, Fortune, September 21, 1981, pp. 74+.

Mammarella, James, The Martha-ization of Kmarts Home, Discount Store News, December 9, 1996, p. H3.

Mayer, Caroline E., Budget Retailer Kmart Tries to Dress Up Its Bargain-Basement Image, Washington Post, October 4, 1987, p. H1.

Merrick, Amy, Expensive Ad Circulars Help Precipitate Kmart Presidents Departure, Wall Street Journal, January 18, 2002, pp. Bl, B6.

, Kmart Lays Out Plans to Trim Its Size, Increase Efficiency in Bankruptcy Filing, Wall Street Journal, January 23, 2002, pp. A3, A6.

, Kmart Says CEO Conaway Resigned, Adds Post to Cart of Chairman Adamson, Wall Street Journal, March 12, 2002, pp. A3, A10.

, Kmart Store Closures Will Include Many of Its New Ones, Wall Street Journal, April 5, 2002, p. B4.

Mitchell, Russell, and Amy Dunkin, How Theyre Knocking the Rust Off Two Old Chains: As Other Old-Line Mass Merchandisers Struggle, Woolworth and Kmart Soar, Business Week, September 8, 1986, pp. 44+.

Muller, Joann, Kmarts Last Chance, Business Week, March 11, 2002, pp. 6869.

, Kmart: The Flood Waters Are Rising, Business Week, January 28, 2002, p. 106.

Muller, Joann, and Ann Therese Palmer, Kmarts Bright Idea, Business Week, April 9, 2001, pp. 50+.

Muller, Joann, and Diane Brady, A Kmart Special: Better Service, Business Week, September 4, 2000, pp. 80, 82.

Naughton, Keith, Bright Lights, Big City Wont Cut It for Kmart, Business Week, May 26, 1997, p. 57.

Perman, Stacy, Attention KMartha Shoppers, Time, October 6, 1997, pp. 5558, 60.

Sanger, Elizabeth, Value at a Discount: Kmart Can Still Deliver the Goods, Barrons, February 28, 1983, pp. 24+.

Schlesinger, Jacob M., Kmarts New Look Seems to Be Taking Hold, Wall Street Journal, September 2, 1986.

Schwadel, Francine, Kmart Is Trying to Put Style on the AisleWill Upscale Image Confuse Core Customers?, Wall Street Journal, August 9, 1988.

Sellers, Patricia, Attention, Kmart Shoppers, Fortune, January 2, 1989.

S.S. Kresge Expansion Is Costly, Barrons, September 7, 1936.

Taub, Stephen, Can Kmart Come Back Again?, Financial World, March 31, 1983, pp. 50+.

Wellman, M.G., Kmarts Repositioning for Growth, Discount Merchandiser, April 1988, pp. 40+.

When 2 Cents = $380 Million, Forbes, April 1, 1970.

Gillian Wolf
updates: Taryn Benbow-Pfalzgraf, David E. Salamie

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Kmart Corporation

Kmart Corporation

3100 W. Big Beaver Road
Troy, Michigan 48084
U.S.A.
(313) 643-1000
Fax: (313) 643-5398
Web site: http://www.kmart.com

Public Company
Incorporated:
1912 as S.S. Kresge Company
Employees: 307,000
Sales: $34.4 billion (1996)
Stock Exchanges: New York
SICs: 5211 Lumber and Other Building Materials; 5331 Variety Stores; 5411 Grocery Stores; 5651 Family Clothing Stores

Kmart Corporation, the second largest U.S. retailer (behind Wal-Mart) with over 2,100 outlets in 50 states, Guam, Mexico, Puerto Rico, and the Virgin Islands, once so dominated the discount store marketplace few believed any competitor could shake its mighty grip. Yet too much diversification and too little attention to its core business took its toll in the early 1990s, knocking an increasingly bloated and diffuse Kmart off its pedestal. By divesting its noncore assets, refinancing, and slashing costs by $900 million, Kmart returned to buoyancy in 1996 going head-to-head with Wal-Mart, Target, and a similarly revitalized Sears.

Kresge Red Fronts and Green Fronts, 1899 to 1929

The giant Kmart Corporation grew from a Detroit five-and-dime store opened in 1899. Its proprietor was Sebastian Spering Kresge, a former Pennsylvania tinware salesman, who along with a partner, John McCrory, adopted the chain-store idea first used by Frank W. Woolworth. When Kresge and McCrory dissolved their partnership, McCrory took over the stores in Memphis, and Kresge maintained those in Detroit. Kresges eponymous outlet sold costume jewelry, housewares, and personal grooming aids. Its success encouraged him to open a second store in Port Huron, Michigan, the same year; others followed in rapid succession. By 1912, when Kresge incorporated his company in Delaware with a capitalization of $7 million, there were 85 stores producing annual sales of $10.3 million. Four years later he reincorporated in Michigan, this time with a $12 million capitalization.

Always in high-traffic, convenient locations, Kresge Red Front stores featured open displays of merchandise with items systematically associated. Following their founders abhorrence of credit, they kept their prices to thrifty nickel and dime limits, until inflation after World War I made the cost of many items too high. Undaunted, Kresge opened a chain of Green Front units in 1920, all selling merchandise at prices ranging between 250 and $1. He also acquired Mount Clemens Pottery, to supply the stores with ever-popular inexpensive dinnerware.

In 1924 the companys 257 stores generated annual sales of $90 million. Convinced this success should go hand in hand with corporate responsibility toward the less fortunate, the company founder established the Kresge Foundation, making an initial contribution of $1.3 million plus securities worth $65 million.

The following year Kresge resigned the presidency hed held since 1907 to concentrate on long-range goal-setting as company chairman. His planning bore fruit in January 1929, when a Kresge store opened in the United States first suburban shopping center, Country Club Plaza, in Kansas City, Missouri, thereby anticipating a shift in shopping patterns by some 15 years.

Another long-range goal crystallized in September 1928, with the formation of a Canadian subsidiary that opened the countrys first Kresge store the following May. Based in Kitchener, Ontario, the initial venture was so successful that the companys $5 million investment financed another 18 stores in locations from Winnipeg to Montreal by the end of 1929. These brought the total number of Kresge stores to 597, together yielding sales of $156.3 million.

Kresge Weathers the Depression, 1930 to 1940

The companys orderly expansion changed after 1929, when the Depression-era stock market plunged the price of Kresge stock from $57.50 per share to an eventual low of $5.50. This was a severe blow to company management, which had pledged its support by taking turns to buy the deflated stock, gambling on its bottoming out at $26. Kresge found himself at a loss, having promised to buy 100,000 shares he could no longer afford, and the company took them off his hands. By 1936, however, the chairman had bought back at cost his own shares plus the 251,306 others owned by the management.

The Depression also brought falling sales as well as inventory losses through the failure of suppliers businesses. Competition also increased; the scramble for the retail dollar fueled rivalry from Sears, Roebuck and prompted other chains to open department store bargain basements. Forced to broaden its inventory to meet this threat, Kresge had to raise its prices, so that Green Front stores had many items selling for up to $3 despite their former $1 ceiling.

With the Depression over by 1940, there were 682 stores in 27 U.S. states, plus 61 in Canada. Together, the stores produced 1940 sales of $158.7 million. As the decade advanced, many homeowners moved out to the suburbs from inner city locations; the retailers followed. Kresge management cautiously opened one suburban shopping center store in 1947, adding to the first one that had opened in 1929. Three more followed in 1948. By 1953 there were about 40 suburban stores in the United States, plus one in Canada.

Massive Expansion, the 1950s

By the mid-1950s chairman Sebastian Kresge was long retired from active company management. An operating committee of 16 executives appointed by the board of directors steered the corporate strategy. Although the committee frequently combined smaller stores in high-volume areas to provide better selection and more efficient service, there were 616 U.S. stores by 1954, plus 74 in Canada. Many of the units featured modern conveniences like air conditioning, self-service displays, and shopping baskets. All these operations combined to reach sales figures totaling $337.9 million in 1954up from $223.2 million in 1945.

Although the variety store image still guided company activities during the 1950s, pricing limits were fading away, with the concept of discount retailing coming to the fore in its stead. Kresge offered economical private-label products ranging from clothing to house paint. The variety of brand name offerings also broadened to include electric appliances, radios, and lawn mowers.

In the late 1950s food grew into the largest single department, warranting training in food management for all store managers. Many stores had delicatessens, and Kresge in-store luncheonettes provided shoppers with a large assortment of snacks, lunches, and dinners devised by the test kitchen at the companys Detroit headquarters. By 1958 these mini-restaurants were so popular that at least one new or remodeled facility opened alongside a delicatessen counter in some Kresge store each week.

A wider variety of merchandise plus higher pricing brought a need for a layaway plan allowing customers to save for expensive items. It was, however, still against company policy to offer credit, although competitors were luring customers in this way.

In 1959, coinciding with the opening of the first Kresge store in Puerto Rico, Harry Blair Cunningham succeeded to the presidency of S.S. Kresge Company. Cunningham, aged 58, had been with Kresge since 1928. A former newspaper reporter, he had worked his way up from trainee status through the store manager ranks, eventually becoming general vice-president. Twin assignments went with this position: one was to tour all of Kresges U.S. stores, assessing the future position of the company and its competitors in the variety store industry; the other was to prepare himself for the company presidency, when Franklin Williams would retire in two years time.

Cunninghams travels convinced him that Kresges competitors were not other variety chains, but the new discounters aiming for fast inventory turnover, which they could achieve by lower markups on a large assortment of small items. Discounting, in fact, was a return to Sebastian Kresges basic merchandising philosophy, which would be a bulwark against competition in the future, just as it had been in the past. Cunningham, after a period of testing, concluded that higher sales volume, rather than higher markups, would boost the companys profits, which had dropped during the 1950s.

The Birth of Kmart, the 1960s

In 1962 the company opened its first discount store in a suburb of Detroit, calling it Kmart. Within a year, there were 17 others. Unlike Kresge stores, Kmarts were not placed in shopping centers but were built in plazas by themselves, to avoid internal competition and also to provide ample parking. To ensure a 25 percent annual pretax return on investment, each store featured decor that was pleasant, though not extravagant, and each aimed for eight inventory turnovers per year. The Kmart stores were an instant success; by 1963, there were 63 facilities, 51 of which provided repair and maintenance service for automobiles. Three years later, the number of Kmarts had swelled to 122.

Company Perspectives:

To become the discount store of choice for low- and middle-income families with children, and to do so by satisfying their routine and seasonal shopping needsas well as or better thanour competitors.

The Kmart introduction still left the company with a number of older Kresge stores, still on long leases, which were too small to display Kmarts expanded merchandise lines. Numerous Kresge stores, mostly in deteriorating business areas, were renamed Jupiter Discount Stores and converted to facilities offering a limited variety of low markup, fast-moving merchandise like clothes, drugstore items, and housewares. By 1966 there were almost 100 Jupiter stores in operation.

In 1965 the company underwent several changes. One involved the sale of long-time subsidiary Mount Clemens Pottery. Another was the acquisition of Holly Stores, a retailer of womens and childrens clothing that had been a Kmart licensee since 1962, and was operating clothing departments in 124 Kmarts, Kresges, and Jupiters at the time of the acquisition. The same year, the company acquired Dunhams Stores Corporation, a sporting goods supplier already operating under license in 42 Kmarts. Dunhams then became Kmart Sporting Goods, Inc.

S.S. Kresge Companys sales for 1965 reached a record $851 million, representing a 23.6 percent gain from 1964. There were 895 stores, of which 108 were in Canada. Although discount retailing had gained momentum somewhat later in Canada than in the U.S., the Canadian subsidiary had opened its first Kmart in London, Ontario, in 1963. At the same time, while inner-city deterioration in Canada had not reached the same level as in U.S. cities, the company turned some of its smaller, older Canadian stores into Jupiters.

The successful Canadian operations made a large contribution to the total sales figures for 1966, which topped $1 billion for the first time, reflecting a 28 percent rise over 1965. Company founder Sebastian Kresge did not live to see this triumph. He died in September 1966 at the age of 99, having retired from the company chairmanship only three months earlier. Spurred by its Canadian success, the company found another international opportunity in Australia, via a joint venture: Kmart (Australia) Limited, with retailer G.J. Coles & Coy, Limited. The 1968 undertaking, in which Kmart held 51 percent of the shares, produced five Australian Kmarts by 1970.

By 1969 S.S. Kresge Company had decided against purchasing the licensee of its automotive departments, instead opening another subsidiary called Kmart Enterprises, Inc., to operate the departments, now so popular that 56 had opened in that year alone. That year the number of company stores stood at 1,022, sales at $4.6 billion, and average profit per store at $42,358.

Further Diversification, the 1970s

As the 1960s ended, an economic slowdown posed challenges for S.S. Kresge. The company resorted to heavier-than-usual promotional markdowns in December 1969 and January 1970 that shaved profit margins. Other problems included the difficulty of keeping to a 25 percent annual rate of sales gain for an ever-expanding number of stores; the fact that the rate of sales growth in a store slowed as the store aged; and the increase in inventory that came from formerly licensed in-store departments. All these factors led to an earnings slowdown in 1970s first quarter, bringing company stock down 11.5 points in one day. Still, sales for 1970 reached almost $2.2 billion.

In 1972 Cunningham was succeeded as chief executive by Robert E. Dewar, a former company lawyer and president since 1970. The presidency was filled by Ervin Wardlow, whose forte was merchandising.

The three upper managers hurdled these challenges with strategies forged under Cunninghams tenure, like the centralized buying for both Kresge and Kmart stores that reduced possible in-house conflict between variety store and discount divisions. The company also expanded its management training program, so variety store managers could switch to discount facilities with ease. Meticulous crafting of the training program guaranteed each store manager could make decisions about products, promotions, pricing, and locations to ensure the stores competitiveness. Other policies included limiting each store to one entrance and exit, thus reducing staff needs and escalating sales per employee, and designing smaller stores of 65,000 to 70,000 square feet, adequate for smaller, more affluent shopping communities. All of these changes gave the company a chance to upgrade merchandise while phasing out leased departments on all items except shoes.

The course charted for the 1970s brought Kresge an annual sales growth of 22 percent from 1972 to 1976, with 1976 sales totaling $8.4 billion. The company, however, was not without its failures. A fast-food drive-in chain called Kmart Chef, set up in 1967, closed in 1974 after having peaked at just 11 units. The costly credit card operation, used by only 9 percent of Kmarts customers, was withdrawn the same year, while a $65 million purchase of Planned Marketing Associates, an insurance company renamed Kmart Insurance Services Inc., brought a loss of $8 million in 1975, although a modest profit of $344,000 was recorded for 1976. By this time the companys 1,206 Kmarts were accounting for almost 95 percent of sales. For this reason, shareholders changed the company name to Kmart Corporation in 1977.

Bolstering a Faded Image, 197889

The late 1970s saw changes in Kmarts seemingly impregnable position. New competitors with more inviting stores made company facilities seem shoddy, and specialty stores began to stock Kmart staples like sports equipment, drugs, and personal grooming aids. Changes in public taste showed up in lagging profits, which sank 27 percent in 1980 on record sales reaching $14.2 billion. Other warning signals showed in plunging inventory turnover, which dropped from the 8-times-annually level of the 1960s to 3.8 times by 1979. Utility bills, wages, and other overhead costs soared because of inflation, but fierce competition prevented the company from raising its discount prices.

Kmart responded by cutting the number of scheduled new stores in favor of remodeling existing units and restocking them with more fashionable merchandise. It also installed a computer system to handle inventories, orders, shipments, and other procedures that could speed up delivery times to each store. Other changes included the 1978 sale of the companys 51 percent interest in Kmart (Australia) Limited to Coles Myer for new Coles Myer shares, thus closing out Kmarts ownership of the Australian Kmart stores.

Bernard M. Fauber succeeded Dewar as chairman and chief executive in 1980. Fauber steered the company through an economic slowdown and into diversification that year, with purchase of a 44 percent interest in a Mexican discount chain, as well as a joint venture into Japanese mass-merchandising with Japans biggest retailer, The Daiei, Inc. Kmart also bought Texas-based Purrs Cafeterias Inc., a 76-unit chain that was a natural outgrowth of the cafeterias in Kmart stores.

In 1984 Kmart expanded its acquisition program and diversified into specialty markets. Because Kmart had already been experimenting with its home improvement departments, a logical move was the $88.2 million purchase of a nine-unit Texas chain called Home Centers of America, Inc. Kmart made Home Centers operations into warehouse-type stores, changing the name to Builders Square. Next came the Walden Book Company (Waldenbooks), costing $300 million for 845 stores that had produced sales of $417 million in 1983. An Oregon-based chain of 164 drugstores called PayLess joined the growing lineup in 1985.

There was another change in 1984this one in Kmart strategy when apparel division president Joseph Antonini launched a new line of clothes named for actress Jaclyn Smith that helped turn apparel into the companys fastest-growing business. By the time he succeeded to the company chairmanship in 1987, Antoninis strategy had added racing driver Mario Andretti to the list for automotive accessories promotions, Fuzzy Zoeller for golf products, and caterer Martha Stewart for kitchen and housewares support. The celebrities helped the bottom lineprofits for 1987 rose 19 percent, to reach $692 million on total sales of $25.6 billion. Other factors in year-end figures were the sale of all U.S. Kresge and Jupiter stores to McCrorys, the $238 million sale of Purrs Cafeterias and another cafeteria chain called Bishop Buffets, Inc., to Cavalcade Foods, Inc., and the disposal of Mexican interests.

New ventures in 1988 included a partnership with Brunos Inc., a food retailer, which generated the American Fare hypermarket near Atlanta in 1989; purchase of a 51 percent ownership interest in Makro Inc., which operated membership warehouses; and launch of Office Square, a discount office supply chain. In 1989 Kmart acquired PACE Membership Warehouse Inc. and the remaining 49 percent of Makro, converting Makro stores to PACE formats. It also opened Sports Giant, a group of sporting goods stores, and finished the year with sales of $27.7 billion and income of $800 million.

Beleaguered But Not Beaten, 1990s

The company changed its logo from red and turquoise to red and white, with mart written within the larger K in 1990. Next came the acquisition of The Sports Authority into which it rolled the Sports Giant stores. Kmart also began a long overdue six-year overhaul of its stores (including openings, closings, enlargements, and refurbishings) to help shore up its image. The following year, 1991, as the company opened its first Super Kmart Center, Wal-Mart emerged as a credible threat and soon overtook Kmart in sales and market share. Still believing diversification was a good investment, the company purchased a 21.6 percent interest in OfficeMax, an office supply chain, with intent to acquire the remaining shares later in the year. By 1992 Kmart was still in an acquisition mode, buying 13 stores in the Czech Republic and Slovakias Maj department store chain; Borders book superstores as a complement to Waldenbooks; and Intelligent Electronics Bizmart chain. Sales for 1992 hit $34.6 million, a healthy notch above 1991s $32.5 billion, and Kmarts workforce hit an all-time high of 373,000.

Realizing that Kmarts future lay in its core retail business, the company began shedding noncore assets and sprucing up its stores. In 1993 Kmart sold 91 of its 113 PACE membership Warehouses to Wal-Mart. In 1994 came the spinoff of OfficeMax and the Sports Authority (keeping a quarter interest in the former and 30 percent of the latter); the sale of PayLess Drug Stores (retaining 46 percent interest) and its 22 percent interest in Coles Myer Ltd.; an alliance to open stores in Mexico and Singapore; and the launch of Kathy Irelands apparel line. Sales for 1993 had hit a high of $37.7 billion with income of $941 million; sales for 1994 fell to $34.6 billion but the big news was a staggering loss of $940 million.

More serious than ever in its reorganization, Kmarts newest journey began with the appointment of Floyd Hall, former chairman of Target stores, as president, CEO, and chairman of the board in June 1995. Next came the spinoff of the Borders Group (Borders and Waldenbooks combined corporate name), the sale of its remaining interest in OfficeMax and the Sports Authority, and the divestment of 860 auto service centers to the Penske Corp. With widespread rumors of bankruptcy, the downgrading of its rating, and analysts predicting Kmarts demise, many wondered if the nearly 100-year-old retailer could survive increased competition from both Wal-Marts and Targets newer, snazzier stores. Hall set out to prove Kmart not only wasnt going underbut had just begun to fight.

Leaner and Meaner, 1996 and Beyond

After closing 214 stores, disposing of its Czech, Slovak, and Singapore properties, and pledging to reduce expenses by $600-800 million, Kmart was ready to prove its retail mettle. Its new merchandising credo centered around four simple words: brands, consumables, convenience, and culture. To help achieve its goals came a new advertising campaign featuring comedian Rosie ODonnell and director Penny Marshall, popular brand name expansion (especially the Martha Stewart line, which was absorbing Kmarts home textiles), and a massive shakeup in upper management. The company then announced the sale of its remaining interest in Thrifty PayLess to Rite Aid, refinanced its debtload, started leasing out hundreds of its largest parking lots, and built a hip new three-story Kmart in Manhattan near Greenwich Village.

Kmarts recovery began to show in its 1996 numbersfor the first three quarters of the year it reported sales of $23.7 billion with a loss of $56 million, while the previous years figures were sales of just under $24 billion and a much heftier loss of $151 million. Costs for 1995 and 1996 were reduced by $900 million, and management gave the Kmart credit card (first introduced in the 1970s) another trybut there was still much more to be done. Could Floyd Hall could do for Kmart what Arthur Martinez did for Sears? Was Kmart the new comeback kid on the block? Only time would tell.

Principal Subsidiaries

Builders Square Inc.; Kmart Canada Limited; Kmart Fashions; Super Kmart Centers.

Further Reading

Brauer, Molly, Kmart Posts Profit, Denies Buyout Rumor, Knight-Ridder/Tribune Business News, November 21, 1996.

Halverson, Richard, Leaner, Meaner, Cleaner: Nearly $1 billion in Cost Cutting Has Goosed Earnings and Improved Efficiencies, Discount Store News, December 9, 1996, p. 27.

Kmart Rises from Would-Be Fall, But Others Not So Lucky, Discount Store News, July 1, 1996, p. 59.

Kresges, Fortune, June 1, 1940.

Kresges Triple-Threat Retailing, Business Week, January 29, 1966.

Main, Jeremy, Kmarts Plan to Be Born Again, Again, Fortune, September 21, 1981.

Mammarella, James, The Martha-ization of Kmarts Home, Discount Store News, December 9, 1996, p. H3.

Sellers, Patricia, Attention, Kmart Shoppers, Fortune, January 2, 1989.

S.S. Kresge Expansion Is Costly, Barrons, September 7, 1936.

When 2 Cents = $380 Million, Forbes, April 1, 1970.

Gillian Wolf

updated by Taryn Benbow-Pfalzgraf

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Kmart Corporation

Kmart Corporation

3100 West Big Beaver Road
Troy, Michigan 48084
U.S.A.
(313) 643-1000
Fax: (313) 643-5398

Public Company
Incorporated: 1912 as the S.S. Kresge Company
Employees: 373,000
Sales: $32.07 billion
Stock Exchanges: New York Boston Cincinnati Midwest Pacific Philadelphia

Kmart Corporation is a discount retailer operating in the United States, Canada, and Puerto Rico. The company has two groups: the general merchandise group, which in 1990 included 2,350 discount department stores and membership warehouse clubs; and the specialty retailing group, with 1,830 retail outlets offering drugs, books, and products for home improvement.

The giant Kmart Corporation grew from a Detroit five-and-dime store that opened in 1899. Its proprietor was Sebastian Spering Kresge, a former Pennsylvania tinware salesman who adopted the chain-store idea first used by Frank W. Wool-worth. Kresges store sold costume jewelry, housewares, and personal grooming aids, and its success encouraged him to open a second store in Port Huron, Michigan, the same year. Others followed in rapid succession; by 1912, when Kresge incorporated his company in Delaware with a capitalization of $7 million, there were 85 stores producing annual sales of $10.3 million. Four years later he reincorporated in Michigan, this time with a $12 million capitalization.

Always in high-traffic, convenient locations, Kresge Red Front stores featured open displays of merchandise with items systematically associated. Following their founders abhorrence of credit, they kept their prices to thrifty nickel and dime limits, until inflation after World War I made the cost of many items too high. Undaunted, Kresge opened a chain of Green Front units in 1920, all selling merchandise at prices ranging between 25C and $1. He also acquired Mount Clemens Pottery, to supply the stores with ever-popular inexpensive dinnerware.

In 1924 the companys 257 stores generated annual sales of $90 million. Convinced that this success should go hand in hand with corporate responsibility toward the less fortunate, the company founder established the Kresge Foundation, making an initial contribution of $1.3 million plus securities worth $65 million.

The following year Kresge resigned the presidency he had held since 1907 to concentrate on long-range goal-setting as company chairman. His planning bore fruit in January 1929, when a Kresge store opened in the United States first suburban shopping center, Country Club Plaza, in Kansas City, Missouri, thereby anticipating a shift in shopping patterns by some 15 years.

Another long-range goal crystallized in September 1928, with the formation of a Canadian subsidiary that opened the countrys first Kresge store the following May. Based in Kitchener, Ontario, the initial venture was so successful that the companys $5 million investment financed another 18 stores in locations from Winnipeg to Montreal by the end of 1929. These brought the total number of Kresge stores to 597, together yielding earnings of $55.1 million on total sales of $156.3 million.

The companys orderly expansion changed after 1929, when the Depression-era stock market plunged the price of Kresge stock from $57.50 per share to an eventual low of $5.50. This was a severe blow to company management, which had pledged its support by taking turns to buy the deflated stock, gambling on its bottoming out at $26. Kresge found himself at a loss, having promised to buy 100,000 shares he could no longer afford, and the company took them off his hands. By 1936, however, the chairman had bought back at cost his own shares plus the 251,306 others owned by the management.

The Depression also brought falling sales as well as inventory losses through the failure of suppliers businesses. Competition also increased; the scramble for the retail dollar fueled rivalry from Sears, Roebuck and prompted other chains to open department store bargain basements. Forced to broaden its inventory to meet this threat, Kresge had to raise its prices, so that Green Front stores had many items selling for up to $3 despite their former $1 ceiling.

With the Depression over by 1940, there were 682 stores in 27 U.S. states, plus 61 in Canada. Together, the stores produced 1940 sales figures of $158.7 million. As the decade advanced, many homeowners moved out to the suburbs from inner-city locations. The retailers followed. Kresge management cautiously opened one suburban shopping center store in 1947, adding to the first one that had opened in 1929. Three more followed in 1948. By 1953 there were about 40 suburban stores in the United States, plus one in Canada.

By the mid-1950s chairman Sebastian Kresge was long retired from active company management. An operating committee of 16 executives appointed by the board of directors steered the corporate strategy. Among them was a vice-president in charge of store management, whose chief responsibility was to train and guide all store managers, partly through the district office supervisors who interpreted company policies, improving the performance of individual units. Another committee member, the vice-president in charge of merchandising, handled all merchandise for the U.S. stores, through a department consisting of the buyers who chose all wares from the product lines of the companys 4,600 suppliers, purchased them, and set pricing policies. The sales manager, in charge of public relations, merchandise delivery, advertising, and displays also sat on the committee, along with the vice-president in charge of real estate, store locations, leasing, and modernization programs.

Although the committee frequently combined smaller stores in high-volume areas to provide better selection and more efficient service, there were 616 U.S. stores by 1954, plus 74 in Canada. Many of the units featured modern conveniences like air-conditioning, self-service displays, and shopping baskets. All these operations combined to reach sales figures totaling $337.9 million in 1954up from $223.2 million in 1945.

Although the variety store image still guided company activities during the 1950s, pricing limits were fading away, with the concept of discount retailing coming to the fore in its stead. Kresge offered economical private-label products ranging from clothing to house paint. The variety of brand-name offerings also broadened to include electric appliances, radios, and power lawn mowers.

In the late 1950s food grew into the largest single department, warranting training in food management for all store managers. Many stores had delicatessens, and Kresge in-store luncheonettes provided shoppers with a large assortment of snacks, lunches, and dinners devised by the test kitchen at the companys Detroit headquarters. By 1958 these mini-restaurants were so popular that at least one new or remodeled facility opened alongside a delicatessen counter in some Kresge store each week.

A wider variety of merchandise plus higher pricing brought a need for a layaway plan allowing customers to save for expensive items. It was, however, still against company policy to offer credit, although competitors were luring customers in this way.

In 1959, coinciding with the opening of the first Kresge store in Puerto Rico, Harry Blair Cunningham succeeded to the presidency of S.S. Kresge Company. Cunningham, aged 58, had been with Kresge since 1928. A former newspaper reporter, he had worked his way up from trainee status through the store manager ranks, eventually becoming general vice-president. Twin assignments went with this position: one was to tour all of Kresges U.S. stores, assessing the future position of the company and its competitors in the variety store industry; the other was to prepare himself for the company presidency, when Franklin Williams would retire in two years time.

Cunninghams travels convinced him that Kresges competitors were not other variety chains, but the new discounters aiming for fast inventory turnover, which they could achieve by lower markups on a large assortment of small items. Discounting, in fact, was a return to Sebastian Kresges basic merchandising philosophy, which would be a bulwark against competition in the future, just as it had been in the past. Cunningham, after a period of testing, concluded that higher sales volume, rather than higher markups, would boost the companys profits, which had dropped during the 1950s.

In 1962 the company opened its first discount store in a suburb of Detroit, calling it K mart. Within a year, there were 17 others. Unlike Kresge stores, K marts were not placed in shopping centers but were built in plazas by themselves, to avoid internal competition and also to provide ample parking. To ensure a 25% annual pretax return on investment, each store featured decor that was pleasant, if not extravagant, and each aimed for eight inventory turnovers per year. The K mart stores were an instant success; by 1963, there were 63 facilities, 51 of which provided repair and maintenance service for automobiles. Three years later, the number of K marts had swelled to 122.

The K mart introduction still left the company with a number of older Kresge stores, still on long leases, which were too small to display K marts expanded merchandise lines. Numerous Kresge stores, mostly in deteriorating business areas, were renamed Jupiter Discount Stores and were converted to facilities offering a limited variety of low markup, fast-moving merchandise like clothes, drugstore items, and housewares. By 1966 there were almost 100 Jupiter stores in operation.

In 1965 the company underwent several changes. One involved the sale of long-time subsidiary Mount Clemens Pottery. Another was the acquisition of Holly Stores, a retailer of womens and childrens clothing that had been A K mart licensee since 1962, and was operating clothing departments in 124 K marts, Kresges, and Jupiters at the time of the acquisition. The same year, the company acquired Dunhams Stores Corporation, a sporting goods supplier already operating under license in 42 K marts. Dunhams then became K mart Sporting Goods, Inc.

S.S. Kresge Companys sales for 1965 reached a record $851 million, representing a 23.6% gain from 1964. There were 895 stores, of which 108 were in Canada. Although discount retailing had gained momentum somewhat later in Canada than in the United States, the Canadian subsidiary had opened its first K mart in London, Ontario, in 1963. At the same time, while inner-city deterioration in Canada had not reached the same level as in U.S. cities, the company turned some of its smaller, older Canadian stores into Jupiters.

The successful Canadian operations made a large contribution to the total sales figures for 1966, which topped $1 billion for the first time, reflecting a 28% rise over 1965. Company founder Sebastian Kresge did not live to see this triumph. Aged 99, he died in September 1966, having retired from the company chairmanship only three months earlier.

Spurred by its Canadian success, the company found another international opportunity in Australia, via a joint venture: K mart (Australia) Limited, with retailer G.J. Coles & Coy, Limited. The 1968 undertaking, in which K mart held 51% of the shares, produced five Australian K marts by 1970.

By 1969 S.S. Kresge Company had decided against purchasing of the licensee of its automotive departments, instead opening another subsidiary called K mart Enterprises, Inc., to operate the departments, now so popular that 56 had opened in that year alone. That year the number of company stores stood at 1,022; sales at $4.6 billion, and average profit per store at $42,358.

As the 1960s ended, an economic slowdown posed challenges for S.S. Kresge. The company resorted to heavier-than-usual promotional markdowns in December 1969 and January 1970 that shaved profit margins. Other problems were the difficulty of keeping to a 25% annual rate of sales gain for an ever-expanding number of stores; the fact that the rate of sales growth in a store slowed as the store aged; and the increase in inventory that came from formerly licensed in-store departments. All these factors led to an earnings slowdown in 1970s first quarter, bringing its stock down 11.5 points in one day. Still, sales for 1970 reached almost $2.2 billion.

In 1972 Cunningham was succeeded as chief executive by Robert E. Dewar, a former company lawyer and president since 1970. The presidency was filled by Ervin Wardlow, whose forte was merchandising, while Walter Teninga, the new vice-chairman, had been the companys chief financial and development officer.

These three hurdled these challenges with strategies forged under Cunninghams tenure, like the centralized buying for both Kresge and K mart stores that reduced possible in-house conflict between variety store and discount divisions. The company also expanded its management training program, so that variety store managers could switch to discount facilities with ease. Meticulous crafting of the training program guaranteed that each store manager could make decisions about products, promotions, pricing, and locations that would ensure the stores competitiveness. Other policies included limiting each store to one entrance and exit, thus reducing staff needs and escalating sales per employee, and designing smaller stores of 65,000 to 70,000 square feet, adequate for smaller, more affluent shopping communities. All these changes gave the company a chance to upgrade merchandise while phasing out leased departments on all items except shoes.

The course charted for the 1970s brought Kresge an annual sales growth of 22% from 1972 to 1976, with 1976 sales totaling $8.4 billion. The company, however, was not without its failures. A fast-food drive-in chain called K mart Chef, set up in 1967, closed in 1974 after having peaked at just 11 units. The costly credit card operation, used by only 9% of K mart customers, was withdrawn the same year, while a $65 million purchase of Planned Marketing Associates, an insurance company renamed K mart Insurance Services Inc., brought a loss of $8 million in 1975, although a modest profit of $344,000 was recorded for 1976.

By this time the companys 1,206 K marts were accounting for almost 95% of sales. For this reason, shareholders changed the company name to K mart Corporation in 1977.

The late 1970s saw changes in K marts seemingly impregnable position. New competitors with more inviting stores made company facilities seem shoddy, and specialty stores began to stock K mart staples like sports equipment, drugs, and personal grooming aids. Changes in public taste showed up in lagging profits, which sank 27% in 1980 on record sales reaching $14.2 billion. Other warning signals showed in plunging inventory turnover, which dropped from the 8-times-annually level of the 1960s to 3.8 times by 1979. Utility bills, wages, and other overhead costs soared because of inflation, but fierce competition prevented the company from raising its discount prices.

K mart responded by cutting the number of scheduled new stores in favor of remodeling existing units and restocking them with more fashionable merchandise. It also installed a computer system to handle inventories, orders, shipments and other procedures that could speed up delivery times to each store. Other changes included the 1978 sale of the companys 51% interest in K mart (Australia) Limited to Coles Myer for new Coles Myer shares, thus closing out K marts ownership of the Australian K mart stores.

Bernard M. Fauber succeeded Dewar as chairman and chief executive in 1980. Fauber steered the company through an economic slowdown and into diversification that year, with purchase of a 44% interest in a Mexican discount chain, as well as a joint venture into Japanese mass-merchandising with Japans biggest retailer, The Daiei, Inc. K mart also bought Texas-based Furrs Cafeterias Inc., a 76-unit chain that was a natural outgrowth of the cafeterias in K mart stores.

In 1984 K mart expanded its acquisition program and diversified into specialty markets. Because K mart already had been experimenting with its home improvement departments, a logical move was the $88.2 million purchase of a nine-unit Texas chain called Home Centers of America, Inc. K mart made Home Centerss operations into warehouse-type stores, changing the name to Builders Square. Next came Waldenbooks, costing $300 million for 845 stores that had produced sales of $417 million in 1983. An Oregon-based chain of 164 drugstores called Pay Less joined the growing lineup in 1985.

In 1984 there was another change in K mart strategy when apparel division president Joseph Antonini launched a new line of clothes named for actress Jaclyn Smith that helped to turn apparel into the companys fastest-growing business. By the time he succeeded to the company chairmanship in 1987, Antonini s strategy had added both racing driver Mario An-dretti to the list for automotive accessories promotions, and caterer Martha Stewart for kitchen and housewares support.

The celebrities helped the bottom lineprofits for 1987 rose 19%, to reach $692 million on total sales of $25.6 billion. Other factors in year-end figures were the sale of all U.S. Kresge and Jupiter stores, the $238 million sale of Furrs Cafeterias and another cafeteria chain called Bishop Buffets, Inc., to Cavalcade Foods, Inc., and the disposal of Mexican interests.

New ventures in 1988 included a partnership with Brunos, Inc., a food retailer, which generated the American Fare hypermarket near Atlanta in 1989; purchase of a 51% ownership interest in Makro Inc., which operated membership warehouses; and launch of Office Square, a discount office supply chain. In 1989 K mart acquired PACE Membership Warehouse, Inc. and the remaining 49% of Makro, converting Makro stores to PACE formats. It also opened Sports Giant, a group of sporting goods stores. The company dropped the space in its name between K and mart in 1990. In 1990 it bought The Sports Authority and converted the Sports Giant stores into Sports Authority. It also bought a 21.6% interest in OfficeMax, Inc., an office-supply chain. Kmart announced it would acquire the remainder of OfficeMax in October 1991. Also in 1990, the company began a six-year overhaul of all Kmart stores; including some openings, closings, enlargements, and refurbishings.

Principal Subsidiaries

Builders Square, Inc.; Kmart Canada Limited; PACE Membership Warehouse, Inc.; Pay Less Drug Stores Northwest, Inc.; The Sports Authority, Inc.; Walden Book Company, Inc.

Further Reading

S.S. Kresge Expansion is Costly, Barrons, September 7, 1936; Kresges, Fortune, June 1, 1940; Kresges Triple-Threat Retailing, Business Week, January 29, 1966; When 2 Cents = $380 Million, Forbes, April 1, 1970; Main, Jeremy, K marts Plan to be Born Again, Again, Fortune, September 21, 1981; Sellers, Patricia, Attention, K mart Shoppers, Fortune, January 2, 1989.

Gillian Wolf

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Kmart Corporation

Kmart Corporation

3100 West Big Beaver Road
Troy, Ml 48084
(248) 463-1000
www.kmartcorp.com

Kmart began as one of the first discount stores. They were also called "five-and-dimes" because each item in the store could be purchased for five or ten cents. Soon after it opened, because of good management and fair prices, Kmart became the top discount retailer in the United States. It was even more successful than Woolworth, the company that introduced the idea of variety discount stores. Eventually the success of Kmart caused the decline and the closing of Woolworth stores.

The story then repeated itself. Kmart became the leader of discount stores, but because of poor management and overspending, new discount stores on the block, including Wal-Mart and Target (see entries), began to take over, leaving Kmart with too many stores, too few customers, and not enough money to stay in business. The fate of the historic retailer, however, has yet to be determined. Plans to close unprofitable stores and revitalize older ones are the company's latest efforts to restore Kmart's fading image.

Nickels and Dimes Add Up to Millions

S. S. Kresge understood the value of a dollar. He worked hard for his money and spent it carefully. While working as a bookkeeper in a hardware store in 1889, Kresge noticed that customers who purchased store merchandise on credit, rather than paying cash, bought a lot of items without thinking because they were not handing over their hard-earned dollars right at the time of the sale. Kresge also believed that allowing customers to buy on credit caused the store to lose money because products went out but cash did not come in.

He was impressed by the way the new discount stores did business. Frank W. Woolworth (1852-1919) was the founder of the first "Great 5-Cent Store" and John McCrory (1860-1943) later established McCrory discount stores. At both businesses, customers had to pay cash for their purchases. According to Kresge, this would make customers spend their money more wisely.

Kresge wanted to go into business with Woolworth, but Woolworth turned him down. Instead, he joined McCrory, who had a chain of six "bazaar" stores and two five-and-ten cent stores. In 1897, Kresge gave McCrory $8,000 and became an equal partner in his business. They opened stores in Memphis, Tennessee, and Detroit, Michigan. Two years later, Kresge became sole manager of the Detroit store and eventually paid McCrory $3,000 to end their partnership and give up his share of the Memphis store.

Kmart at a Glance

  • Employees: 252,000
  • CEO: James B. Adamson
  • Subsidiaries: BlueLight.com, LLC
  • Major Competitors: Wal-Mart Stores, Inc., Target Corporation, Sears
  • Notable Stores: Kmart stores; Kmart Supercenters

Soon Kresge found another partner, his brother-in-law Charles J. Wilson. He also established his headquarters in Detroit. From 1900 to 1907 the partners opened stores in eight cities: Detroit; Port Huron, Michigan; Toledo, Ohio; Cleveland, Ohio; Columbus, Ohio; Pittsburgh, Pennsylvania; Indianapolis, Indiana; and Chicago, Illinois. By 1912 Kresge bought out Wilson, changed the company's name to S. S. Kresge, and expanded to eighty-five stores with annual sales of $10 million. Second only to Woolworth dime stores, Kresge's had become a household name for cost-conscious shoppers throughout the Midwest and Northeast.

Timeline

1899:
S. S. Kresge establishes S. S. Kresge Company.
1912:
Kresge has eighty-five stores and $10 million in sales.
1962:
First Kmart store opens in suburb of Detroit, Michigan.
1966:
S. S. Kresge dies; sales top the $1 billion mark.
1977:
Kresge name changes to Kmart Corporation.
1984:
Kmart acquires Walden Book Company and Builders Square.
1987:
Martha Stewart is introduced as Kmart's entertainment and lifestyle spokesperson and consultant.
1990:
Company purchases Sports Authority and acquires OfficeMax.
1992:
Company acquires Borders.
1997:
The new Big Kmart format and logo is launched.
1999:
Company introduces BlueLight.com.
2000:
Charles Conaway becomes CEO.
2001:
The Blue Light Special is reintroduced.
2002:
Kmart files for Chapter 11 bankruptcy protection; company undergoes management reorganization.

After World War I (1914-18), inflation caused prices everywhere to rise quickly, which made it difficult for dime stores to maintain their low prices. To stay in business, Kresge opened "green front" stores, selling items for twenty-five cents to one dollar, next to the traditional five-and ten-cent "red front" stores. Kresge's and Woolworth's, which also had red and green front stores, were most often located in high-traffic downtown areas. This was before suburban areas were developed in areas surrounding larger cities. By the mid-1930s, Kresge opened his first store in a suburban shopping center in Kansas City, Missouri, eventually selling items for hundreds of dollars.

The First Kmart

By the 1950s, five-and-dime stores had become known as variety stores because they sold a variety of items at low prices. Kresge's was one of many variety stores, and competition was fierce. In 1959, a thirty-year Kresge employee, Harry B. Cunningham (1907-1992), was promoted to company president. Under his leadership the company made some changes that would eventually make it the number one discount store.

Cunningham researched other discount stores and visited all of the Kresge stores. He determined the company would make more money if it purchased large amounts of a small number of items and discounted their prices. With this innovation, the Kresge company invested $80 million to build a chain of discount stores. The chain was called Kmart, and in 1962, the first store opened in Garden City, Michigan, a suburb of Detroit.

The 1960s and 1970s were times of great expansion. In 1966, the year Sebastian Kresge died, S. S. Kresge Corporation owned 162 Kmart stores, 753 Kresge stores, 100 Jupiter stores (Kresge stores located in deteriorating business areas that were renamed "Jupiter"), and 108 Canadian stores. In 1977, because the Kmart stores provided more than 90 percent of Kresge sales, the company changed its name to the Kmart Corporation.

The Five-and-Dime

A customer went to a five-and-dime store to purchase all sorts of items contained under one roof. Adults might find purses, animal soap, shaving brushes, or police whistles. Children could purchase supplies like pencils, tablets of paper, a box of sixteen crayons, white paste, boy's ties, girl's hair ribbons, and pocket combsall for ten cents or less. Dime stores were also popular for their lunch counters where customers could sit on stools at a counter and enjoy lunch, drinks, and sweets for twenty-five cents or less. In 1899, the typical wage earned by a five-and-dime counter girl was $2.50 to $3.00 per week.

By the beginning of 1980, Kmart's rapid expansion started taking its toll on the existing stores. They began losing customers to businesses that offered lower prices, were better organized, and sold higher quality merchandise. To stay competitive, Kmart began to upgrade their stores and the quality of their products. The company also implemented a modern computer system and improved the way it distributed its merchandise.

Spread Too Thin

In another effort to boost the company's income, Kmart Corporation began to expand by purchasing other companies. From 1984 to 1992, Kmart acquired Walden Book Company, Builders Square (a chain of home improvement stores), Payless Drugs Northwest, PACE Membership Warehouse, The Sports Authority, OfficeMax, and Borders bookstores. In addition, they introduced Designer Depot stores, which specialized in off-price apparel, or brand-named merchandise reduced to very low prices. In 1987, the company began one of the most important associations in its history: introducing Martha Stewart (see Martha Stewart Living Omnimedia, Inc. entry) as Kmart's entertainment and lifestyle spokesperson and consultant.

Even with the help of Martha Stewart and her products, Kmart continually fell behind its competitors. Wal-Mart had become the nation's number one retailer in January 1991. Throughout the 1990s and into 2000, Kmart tried to win back old customers and attract new ones. In 1991, it opened Kmart Supercenters, which carried both groceries and general merchandise and was open twenty-four hours, seven days a week. In 1997, the company introduced a new Big Kmart store format and logo for renovated and updated stores, and in 1999, BlueLight.com was launched, which provided free Internet access.

In order to make enough money to complete all of the renovations, Kmart had to sell the retail chains that it had purchased earlier in the decade like Borders, OfficeMax, and Builders Squares. The company also tried new advertising campaigns, including chatty television commercials featuring popular comedian and talk-show host Rosie O'Donnell (1962-) and director Penny Marshall (1943-).

In the spring of 1998 it looked like Kmart might be revived. The company reported earnings of $47 million, which was triple the amount that had been reported in 1997. According to financial analysts, however, the growth was partially due to the strength of the consumer economy. Kmart still had a long way to go to surpass its competitors and resume its number one position.

Kmart will always be recognized as the home of the Blue Light Special, an in-store advertising campaign where a flashing blue light, accompanied by the announcement "Attention, Kmart shoppers," alerted customers about a spontaneous sale. This technique was copied from the blue plate special in 1940s restaurants.

Struggling to Survive

After the period of expansion and growth ended, Kmart needed a new plan for survival. In 2000, they recruited Charles Conaway, an executive from drugstore chain CVS, to help with reorganization. "Kmart has been in need of some new blood, and I think this is a step in the right direction," financial analyst Jeffrey Edelman said in a 2000 New York Times article.

One of the ways Conaway tried to compete with Wal-Mart was to reintroduce the "Blue Light Special" in 2001, ten years after it was discontinued. This time it was promoted as the "Blue Light Always" campaign, with disco-dancing blue lights and $25 million worth of ads saying that prices had been cut on thirty-eight thousand items. Prices for almost all items, however, were still lower at Wal-Mart. The campaign failed, and Kmart was in worse shape than ever.

By January 2002, customers were complaining. They claimed that advertised items were not always in stock, Kmart stores were messy, Wal-Mart had better prices, and Target offered more stylish options. The company had lost so much money that Kmart decided to file for Chapter 11 bankruptcy protection. Filing Chapter 11 bankruptcy gives the company time to form a business plan to get back up on its feet. Part of Kmart's plan involved closing its most unprofitable stores, which included over two hundred Kmart discount stores and twelve Kmart Supercenter retail outlets in forty states, and one Kmart store in Puerto Rico.

The Martha and Kmart Partnership

In 1987, when Martha Stewart joined Kmart as the company's spokesperson, the store was the nation's biggest discount chain with sales of $23.99 billion. Ten years later, Kmart introduced Martha's Everyday Collection. A 1997 Time article reported that the collection offered "Kmart's shoppers (median income: $35,000) the kind of items that Martha might buy, at an affordable price." The collection consisted of bed and bath fashions and a 256-color paint line. Later, the collection expanded to include such items as garden tools, patio furniture, live plants and seeds, houseware essentials, storage helpers and organizers, and home decorating products.

The relationship between Stewart and Kmart became strained after the company filed for bankruptcy in 2002. The celebrity and the discount retailer agreed, however, that as long as Kmart was able to pay Stewart's company for the products it sold, Stewart's contract would extend until 2008. To show her support and boost sales, Stewart appeared in a TV commercial directed by Spike Lee (1957-). The "Stuff of Life" ad, which aired in May 2002, promoted Stewart's Everyday product line and urged viewers to go to Kmart.

A few months later, Kmart reported a $2.4 billion loss from the previous year and an additional $1 billion loss for a five-week period ending May 1, 2002. "The challenge is tougher than ever," said Keith Naughton, author of a 2002 Newsweek article, "now that Kmart's identity crisis has morphed into a financial crisis." But troubles only got worse. In May, the FBI announced that it was investigating the company for "possible criminal violations." Many of Kmart's former management team were also being investigated.

That same month CEO Charles Conaway was replaced by James B. Adamson, and as of June 2002, the company continued to undergo reorganization. Adamson and other Kmart executives remained hopeful and projected a revival for the company by spring 2004. According to Adamson in Supermarket News, "While there is still much hard work ahead, we are pleased with the progress we are making in addressing in-stock levels, customer service and store traffic."

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Kmart Corporation

Kmart Corporation

founded: 1899


Contact Information:

headquarters: 3100 w. big beaver rd.
troy, mi 48084 phone: (248)643-1000 fax: (248)643-5249 toll free: (800)635-6278 url: http://www.kmart.com

OVERVIEW

Kmart Corporation is the third largest retail chain in the United States behind Wal-Mart and Sears. After reporting staggering losses in 1995 and 1996, Kmart returned to profitability in 1997. Its strategy of returning to its core business as a discount retailer and mass merchandise retailer seemed to be paying off. Since 1993 the company has sold off all its non-core businesses as well as all of its international operations to focus on serving customers in the United States as well as Puerto Rico, Guam, and the U.S. Virgin Islands.

According to the Kmart Fact Book 1997, "Kmart's primary target customer group is women between the ages of 25 and 45 years old, with children at home and with household incomes between $20,000 and $50,000 per year." To better serve its core customers, Kmart introduced new product lines such as the Martha Stewart Everyday and Sesame Street lines in 1997, while it implemented hundreds of initiatives aimed at improving customers' shopping experience and the overall performance of the company.

As Kmart refocused itself on its core business, it converted many of its traditional stores into a new prototype called "Big Kmart." Big Kmart stores feature a new layout, an expanded consumable goods section, brighter lighting, wider aisles, and a bigger assortment of goods. By the end of 1997 there were 670 Big Kmart stores operating in several major markets. The company planned to open an additional seven new Big Kmart stores with 520 conversions in 1998. In addition, the company had 99 Super Kmart stores in operation at the end of 1997, with plans to open 3 more in 1998. The Super Kmart centers have about 12.5 million square feet of selling space and offer full-service shopping convenience from groceries to general merchandise. They are open 7-days-a-week, 24-hours-a-day.


COMPANY FINANCES

After reporting net losses of $571 million in 1995 and $220 million in 1996 on relatively flat sales of $31.7 and $31.4 billion, Kmart completed its financial turnaround in 1997 with a net income of $249 million on sales of $32.2 billion. Sales per square foot grew from $201 in 1996 to $211 in 1997, due primarily to the successful conversion of an additional 458 traditional Kmart locations to the Big Kmart format. Successful product introductions, such as Martha Stewart Everyday home fashions and Sesame Street children's apparel, also contributed to the company's improved financial performance.

From 1992 to 1996, Kmart's stock lost more than half its market value as share prices plunged from around $24.50 at the end of 1992 (after reaching an all-time high of $28.14 in November 1992) to $10.39 at the end of 1996 (after reaching a low point of $5.89 in early 1996). In 1997 the stock was trading in the $10-$15 range, buoyed by the company's return to profitability. The company's fourth quarter profits in 1997 were the best in five years, prompting analysts to begin recommending Kmart stock.


ANALYSTS' OPINIONS

Analysts and others who followed Kmart appeared convinced the company had been successfully turned around under Floyd Hall's leadership, especially after its strong financial performance in 1997 and the first quarter of 1998. For example, William Armstrong, an analyst with Fahnestock & Co., was quoted in the Detroit Free Press after Kmart announced its 1998 first quarter results: "Kmart was really screwed up a few years ago, but they've made comprehensive improvements in management and store-level management, in streamlining national brands and editing their entire merchandise assortment into fewer but better brands."

Kurt Barnard, president of Barnard's Retail Trend Report and one of Kmart's harshest critics, said, "Kmart really has managed a turnaround. It's very real, and Kmart has become a formidable competitor in America's retail market place. They've not only plugged the hole in the sinking ship, the engines are going full-speed ahead."


HISTORY

Sebastian S. Kresge founded the S.S. Kresge Company in 1899. It became one of the largest dimestore chains in the United States. The company opened the first Kmart discount department store in 1962 in Garden City, Michigan, a suburb of Detroit. In 1966 company sales topped the $1 billion mark for the first time. There were 162 Kmart stores and 915 total stores in operation. In 1976 S.S. Kresge opened a record 271 Kmart stores in one year. The next year, 15 years after opening the first Kmart store, the company name was changed from S.S. Kresge Co. to Kmart Corporation.

In the late 1970s the company bought the Walden Book Company and in the 1980s bought Builders Square, a chain of home improvement stores. In 1981 the two-thousandth Kmart store was opened. By 1985 Kmart owned PayLess Drug Stores Northwest and Bargain Harold's Discount Outlets in Canada. Kmart also ventured into warehouse club retailing, opening PACE Warehouse with a company called Makro. In 1987 it sold most U.S. Kresge and Jupiter stores. Kmart bought The Sports Authority in 1990 and sold PACE Warehouse to Wal-Mart in 1994.

In the early 1990s Wal-Mart leaped ahead of both Kmart and Sears as the leader in the industry. By 1991 Kmart's older and less attractive stores with slimmer merchandise couldn't keep up with Wal-Mart's ultra-modern reputation. Kmart's sales and market share fell behind this mega-merchandiser.

Kmart fought on and bought a large portion of OfficeMax in 1991. In 1992 Kmart purchased 76 percent of Maj, a Czechoslovakian department store. It also announced plans to build 100 stores in Mexico with Grupo Liverpool. Also in that year, the company bought Borders, a chain of book stores. In 1994-95, Kmart spun off OfficeMax and The Sports Authority as public companies through initial public offerings (IPOs) of stock. Proceeds to Kmart were $1 billion for OfficeMax and $405 million for The Sports Authority. It also sold its interest in Coles Meyer in Australia. Facing falling profit margins, Kmart continued to sell its investments. In 1995 Borders Group became a publicly traded company through an IPO; proceeds to Kmart were $566 million.

Searching for a new strategy, Kmart brought in a new CEO, Floyd Hall, and a new management team and board of directors were put in place. More than 200 stores were closed by the mid-1990s, and the company set about to restructure itself and focus on its core business. Rumors of bankruptcy swarmed Wall Street, but Kmart put out a letter in 1996 stating it had no intention of filing such a claim.

In 1996 and 1997 Kmart continued to divest itself of its non-core businesses and its international operations, including its Czech and Slovak stores. Thrifty Payless was spun off as a public company in 1996. In 1997 Kmart sold its interest in Kmart Mexico and all of its Kmart Canada stores. Finally, it divested itself of Builders Square in 1997.


STRATEGY

Kmart was originally a general merchandise discount store. The company got into financial trouble when it tried to diversify into a variety of specialty stores, from book stores to home improvement centers. Since Floyd Hall became head of the company in 1995, Kmart has refocused on its core business. Hall conducted a study to determine a profile for the target Kmart shopper. He found out that Kmart's primary target customer group was women between the ages of 25 and 45 years old, with children at home and with household incomes between $20,000 and $50,000 per year. Of the 180 million people that shop at Kmart each year, 57 percent are women and 43 percent are men. The core Kmart shopper visited the store an average of 4.3 times a month and made an average purchase of $40 each visit. These core shoppers accounted for 60 percent of total store revenues.

According to Kmart's annual report, the company is focused "on improving our customers' shopping experience through stronger assortments, better stores, convenient service and quality products at great prices." The company's merchandising strategy was focused on three areas: frequently purchased goods, popular national brands, and high-quality private label offerings. Its strategy was to improve its assortment of dominant national brands and be aggressive in pricing them. It wanted to complement that with a strong line of private label products, which included the Martha Stewart Everyday line of home fashions, the Sesame Street collection for children, and Jaclyn Smith and Kathy Ireland apparel, as well as Penske Automotive products and more.

Part of the company's strategy of improving its customers' shopping experience was to convert its older stores into Big Kmart stores, with brighter lighting, wider aisles, bigger assortments, and an expanded consumable goods section. Super Kmart centers have opened, which feature about 12.5 million square feet of selling space, a broad selection of general merchandise and apparel, and a full assortment of groceries. Super Kmart centers are open 24-hours-a-day, 7-days-a-week. The first Super Kmart center opened in 1991 and numbered nearly 100 by the end of 1997.

Another aspect of Kmart's real estate strategy was to develop a five-year plan for each of the company's top 30 metropolitan markets. Within each of those regions, made up of both urban and suburban areas, Kmart planned to expand its presence.


INFLUENCES

Kmart's poor financial performance of 1995 and 1996 was attributed to overdiversification and a lack of focus. With the company returning to profitability in 1997, Kmart's strategy is driven by the lessons it learned from the past. It is focused on providing its core shoppers with a better shopping experience. It will continue to do what it does best, namely, to provide an assortment of general merchandise at discounted prices.

The company is also influenced by the strong performance of other mass merchandisers, especially Wal-Mart and Sears. It will compete with them in the area of general merchandise, attempting to offer a bigger and better assortment that is more aggressively priced than its competitors. It is unlikely that Kmart will again try to branch out into specialty stores.


CURRENT TRENDS

Now that Kmart has divested its specialty stores and all of its international operations, it is focused on implementing initiatives that will improve customers' experience in the stores and the overall performance of the business. In 1997 the company entered into a strategic alliance with Little Caesars and unveiled a new "KCafe" prototype in about 750 stores.

The company had a more aggressive marketing program in 1997, issuing its first-ever toy catalog. Online shopping and other electronic in-store services were planned for 1998. In 1997 the company introduced an on-line application process for the Kmart credit card. It also introduced an electronic swipe card called the Kmart Cash Card, which replaced Kmart's paper gift certificates and includes a calling card feature provided by AT&T.

FAST FACTS: About Kmart Corporation


Ownership: Kmart is a publicly owned company traded on the New York, Chicago, and Pacific Stock Exchanges.

Ticker symbol: KM

Officers: Floyd Hall, Chmn. of the Board, Pres., & CEO, 58, $2,749,500; Donald W. Keeble, Exec. VP Store Operations, 48, $861,200; Laurence L. Anderson, Exec. VP & Pres., Super Kmart, 55; Warren F. Cooper, Exec. VP, Human Resources & Administration, 52

Employees: 265,000

Chief Competitors: Kmart's primary competitors are other discount retailers, especially: Wal-Mart; Target; J.C. Penney; and Sears.


PRODUCTS

The company's new products consist of private label brand merchandise and apparel. One of the successes of 1997 was the rollout in March of the Martha Stewart Everyday line of home fashions. In August the Sesame Street line of children's apparel was introduced. It includes clothes for newborns, infants, and toddlers as well as products such as toys, books, and accessories for all ages.


CORPORATE CITIZENSHIP


Kmart has an impressive record of sponsorship, particularly in the March of Dimes WalkAmerica. Kmart has participated faithfully and has consistently been the nation's leading team in this program since 1985. Kmart alone raised $2.5 million for the March of Dimes in 1997.

Kmart also hosts the Kmart Kids Race Against Drugs program. Kids between the ages of 7 and 13 race a converted lawn tractor on a specially designed track at a chosen Kmart location. The racer with the fastest time in each age group receives a 5-foot trophy and a $10,000 scholarship. Stars have been known to make appearances during the event such as Kathy Ireland (model and actress), Michael Andretti (Kmart CART driver), Jeremy Mayfield (Kmart NASCAR driver), Sam Jones (NBA Hall-of-Famer), and Terrell Buckley (Miami Dolphin quarterback). D.A.R.E. (Drug Abuse Resistance Education) representatives have made appearances as well.

Kmart has also been rewarded for its development of the ConSern Loans for Education™ program. This program provides education financing for Kmart associates and their families. The company has assisted over 2,600 individuals in their education and has provided almost $16 million in their efforts.

CHRONOLOGY: Key Dates for Kmart Corporation


1962:

S.S. Kresge opens the first Kmart discount department store in Garden City, Michigan

1966:

Sales top $1 billion for the first time

1976:

Kresge opens a record 271 stores in one year

1977:

The S.S. Kresge Co. becomes Kmart Corporation

1984:

Kmart acquires Walden Book Company and Builders Square

1990:

Purchases The Sports Authority

1992:

The first Super Kmart opens; Purchases Borders Group

1994:

The company begins to sell off its non-core business by spinning off Office Max and the Sports Authority

1995:

Sells Borders Group

1997:

Enters into an agreement with Little Caesars for its KCafe


SOMETHING FOR EVERYONE

You're taking care of the last-minute packing for your spring break trip, and suddenly you realize you forgot to pick up suntan lotion. Chances are you're included in the 80 percent of the U.S. population who are within a 15-minute drive of a Kmart store. Over 180 million people shop each year at Kmart, and odds are they're carrying what you need. Each year, Kmart stores stock more than 100,000 items, everything from candy bars to camping gear. Need to do some planting? Kmart sells 83,000 tons of potting soil each year, the equivalent of 342 blue whales. Or perhaps your house is just screaming for a fresh coat of paint. Kmart sells enough paint each year to paint a foot-wide line around the globe 35 times. So when you're looking for that certain something, you just might find it at Kmart.


GLOBAL PRESENCE

As of 1998, Kmart stores were located only in the United States, Puerto Rico, Guam, and the U.S. Virgin Islands. In 1997 Kmart Canada was sold to the Hudson's Bay Company, involving 112 Kmart stores at a price of $54 million. The company's Czech and Slovak operations were sold off in 1996 for $115 million.

EMPLOYMENT

With some 265,000 Kmart associates, Kmart was the sixth largest employer in the United States at the end of 1996. With a renewed emphasis on customer service, Kmart is committed to attracting, retaining, and developing the most talented and highly motivated associates in retailing. Associates may work in a store, distribution center, or at Kmart's headquarters. They are hired and retained on the basis of high standards of performance. Kmart recognizes that its employees are one of its most valuable resources and that success is attained through teamwork. Kmart provides equal employment opportunities regardless of race, religion, color, national origin, sex, or disability.


SOURCES OF INFORMATION

Bibliography

brauer, molly. "kmart earnings point to recovery." detroit free press, 14 may 1998.

"for kmart, cost-cutting pays off." the new york times, 6 march 1997.

"kmart announces turnaround strategy." gazette telegraph online, 17 february 1996. available at http://www.gazette.com.

"kmart corporation." hoover's online, 16 march 1997. available at http://www.hoovers.com.

"kmart corporation announces first quarter 1998 earnings; net income increases 236 percent to $0.10 per share." pr newswire, 13 may 1998.

"kmart corporation honored for its commitment to providing education opportunities for its associates and their families."

yahoo! on the money, 3 december 1996. available at http://www.yahoo.com.

kmart fact book 1997. troy, mi: kmart corporation, 1997.

kmart home page, 16 march 1997. available at http://www.kmart.com.

olijnyk, zena. "bay snaps up kmart." financial post-toronto, 7 february 1998.

pollock, james. "kmart hustles to get back in the game." marketing magazine, 9 december 1996.

preddy, melissa. "kmart growth continues: emphasis on revamped stores, lower prices is paying off, hall says." detroit news, 27 february 1998.

preddy, melissa, and david howes. "kmart crafts a comeback team." the detroit news, 2 february 1996.

robinson, edward a. "america's most admired companies." fortune, 3 march 1997.

"s&p revises kmart corp. (k mart corp.) outlook to stable." yahoo! on the money, 14 march 1997.

sellers, patricia. "kmart is down for the count." fortune, 15 january 1996.

white, george. "k-ching!; kmart trying to boost image, products." los angeles times, 20 february 1998.


For an annual report:

telephone: (248)643-1040 or write: investor relations, kmart corp., 3100 w. big beaver rd., troy, mi 48084-3163


For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. kmart's primary sic is:

5331 retail-variety stores

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Kmart Corporation

Kmart Corporation

founded: 1899 as s.s. kresge company



Contact Information:

headquarters: 3100 w. big beaver rd.
troy, mi 48084 phone: (248)643-1000 fax: (248)643-5249 toll free: (800)635-6278 url: http://www.kmart.com

OVERVIEW

Alternately praised and ridiculed for its "blue-light" special offers, and oft-criticized for extremely generous salary and benefits to its top company officers, Kmart Corporation is a large discount retail chain in the United States. In 2002 the struggling corporation had numerous detractors, and The New York Times speculated whether the company would be bought out by an international conglomerate, miraculously find a way to redefine itself and stop its expanding losses, fold, or merely continue to flounder as Wal-Mart and Target collectively steal away Kmart's once-impressive market share. Kmart has never been able to quite shed its low-status image, although it has been actively trying to do so.

Just a few years ago, it looked as if the company had reversed its ill fortune. After reporting staggering losses in 1995 and 1996, Kmart returned to profitability in 1997, only to flounder badly in the 2000s. Its strategy of returning to the company's core business as a discount retailer and mass merchandise retailer seemed to be paying off for a brief time, but Wal-Mart's intense competition, and Kmart's inability to rekindle enough former customer loyalty, proved to be the company's financial undoing. In January 2002, Kmart Corporation filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code, claiming that it intends to rebound by 2003, a date that company officials and Kmart creditors soon acknowledged was likely unrealistic to meet. On March 9, 2002, then-Kmart Chairman Charles C. Conaway resigned under fire, drawing statewide headlines when it revealed his last estimated compensation package could be worth as high as $11 million.

The news that the company filed for bankruptcy was disappointing for investors who had hoped that Kmart had already rebounded from its economic woes of the 1990s after it decided in 1993 to sell all its non-core businesses and nearly all its international operations to focus on serving customers in the United States. Puerto Rico, Guam, and the U.S. Virgin Islands. Among the biggest changes customers noticed was the closing of all Penske Auto Centers located at 550 Kmart stores and their conversion to additional space for shopping items; the move led to 4,000 jobs lost by Penske employees. All told, analysts predicted that Kmart would close up to 600 of its least profitable stores in the early 2000s-a substantial chunk of the 2,114 stores that were open in January 2002. In March 2002, Kmart officials confirmed that at least 284 stores would be closed in an "orderly" fashion, but a nationwide network of about 1,000 employees formed an Internet site to express their grievances against Kmart management.

According to the annual Kmart Fact Book, "Kmart's primary target customer group is women between the ages of 25 and 45 years old, with children at home and with household incomes between $20,000 and $50,000 per year." To better serve its core customers and to attempt to lose a reputation for stocking "cheap" products, Kmart introduced new product lines such as the Martha Stewart Everyday and Sesame Street lines in 1997, while it implemented hundreds of initiatives aimed at improving customers' shopping experience and the overall performance of the company. By 2002 the company had expanded its partnerships with celebrity and name brand product lines; it attracted other name brands such as Hewlett Packard computer products and Black & Decker electrical tools for home workshops. The company did away with its automobile repair alliance with the Penske Corporation, instead concentrating on expanding grocery shopping operations and sales merchandising areas to attract Kmart customers. In March 2002 the company parted ways with Mark S. Schwartz, its president and chief operating officer for less than one year; a bankruptcy court ruled that Kmart could retain its working agreements with partners such as Martha Stewart Everyday, Jaclyn Smith apparel, Kathy Ireland exercise equipment and clothing line, JOE BOXER apparel, and Disney's line of children's and infant's clothing. To replace Schwartz, on March 11, 2002, Kmart hired its non-executive chairman of the Board of Directors, 53-year-old James B. Adamson, best known for restoring the reputation of Denny's after he assumed control as CEO of the parent company Advantica in 1995. After Adamson took control, more than one dozen top national executives with the companies were terminated and received unusually high severance packages of three years' pay (plus bonuses and some forgiven loans), and Julian C. Day was appointed President and Chief Operating Officer.

In the 1990s, Kmart converted many of its traditional stores into a new prototype called "Big Kmart." Big Kmart stores feature a new layout, an expanded consumable goods section, brighter lighting, wider aisles, and a bigger assortment of goods. In addition, the corporation's Super Kmart centers have about 12.5 million square feet of selling space and offer full-service shopping convenience from groceries to general merchandise. They are open 7-days-a-week, 24-hours-a-day.

FAST FACTS: About Kmart Corporation


Ownership: Kmart is a publicly owned company traded on the New York, Chicago, and Pacific Stock Exchanges.

Ticker Symbol: KM

Officers: James B. Adamson, Chmn. of the Board, Pres., and CEO, 53, $1.5 million salary , $2.5 million signing bonus (additional incentive bonuses up to $5.2 million will be paid if Kmart emerges from bankruptcy in timely fashion); Julian C. Day, Pres. and COO, 49, base salary $775,000, $2.66 million bonus; Albert Koch, 59, EVP and CFO, employed through Jay Alix & Associates at $640 an hour; Ted Stenger, 44, Treas., employed through Jay Alix & Associates at $620 an hour

Employees: 250,000

Chief Competitors: Kmart Corporation's primary competitors are other discount retailers, including Wal-Mart and Target.


COMPANY FINANCES

After reporting net losses of $571 million in 1995 and $220 million in 1996 on relatively flat sales of $31.7 and $31.4 billion, Kmart attempted a financial turnaround in 1997 with a net income of $249 million on sales of $32.2 billion. Successful product introductions, such as Martha Stewart Everyday home fashions and Sesame Street children's apparel, also contributed to the company's improved financial performance. In 1997 the stock was trading in the $10-$15 range, buoyed by the company's short-term return to profitability. The company's fourth quarter profits in 1997 were the best in five years, prompting analysts to begin recommending Kmart stock. However, the company's profits plummeted from 2001 to 2002 when stock closed at a low of $1.60 in January, compared to a 2001 high of $13.55. In 2001 Kmart disclosed a second-quarter loss of $22 million and, over the course of the next year's meetings, the board of directors agreed to make wholesale changes in company leadership in 2002.



ANALYSTS' OPINIONS

Early in 2002, analyst Wayne Hood of Prudential Securities strongly urged dumping Kmart stock and rightly forecast almost-certain bankruptcy ahead for Kmart. Shortly, Kmart stock closed down 13 percent at $4.74. After Kmart hired a marketing firm to revamp its tattered image following Chapter 11 hearings, Matt Miller, a media analyst for The Daily Deal and one of Kmart's many harsh critics, wrote this: " Word this week that bankrupt Kmart Corp. is hiring Creative Artists Agency for a marketing makeover left us momentarily nonplussed. Isn't CAA a talent agency primarily for over-paid movie stars? Isn't Kmart a retail store primarily for underpaid workers?"



HISTORY

Sebastian S. Kresge founded the S.S. Kresge Company in 1899. It became one of the largest dime-store chains in the United States. The company opened the first Kmart discount department store in 1962 in Garden City, Michigan, a suburb of Detroit. In 1966 company sales topped the $1 billion mark for the first time. There were 162 Kmart stores and 915 total stores in operation. In 1976 S.S. Kresge opened a record 271 Kmart stores in one year. The next year, 15 years after opening the first Kmart store, the company name was changed from S.S. Kresge Co. to Kmart Corporation.

In the late 1970s the company bought the Walden Book Company and in the 1980s bought Builders Square, a chain of home improvement stores. In 1981 the two-thousandth Kmart store was opened. By 1985 Kmart owned PayLess Drug Stores Northwest and Bargain Harold's Discount Outlets in Canada. Kmart also ventured into warehouse club retailing, opening PACE Warehouse with a company called Makro. In 1987 it sold most U.S. Kresge and Jupiter stores. Kmart bought The Sports Authority in 1990 and sold PACE Warehouse to Wal-Mart in 1994.

In the early 1990s, Wal-Mart bounded ahead of both Kmart and Sears as the leader in the industry. By 1991 Kmart's older and less attractive stores with slimmer merchandise shelves couldn't keep up with Wal-Mart's ultra-modern reputation. Kmart's sales and market share fell behind this mega-merchandiser.

CHRONOLOGY: Key Dates for Kmart Corporation


1962:

S.S. Kresge opens the first Kmart discount department store in Garden City, Michigan

1966:

Sales top $1 billion for the first time

1976:

Kresge opens a record 271 stores in one year

1977:

The S.S. Kresge Co. becomes Kmart Corporation

1984:

Kmart acquires Walden Book Company and Builders Square

1990:

Kmart purchases The Sports Authority

1992:

The first Super Kmart opens; Purchases Borders Group, a book chain

1994:

The company begins to sell off its non-core business by spinning off Office Max and the Sports Authority

1995:

Sells Borders Group

1997:

Enters into an agreement with Little Caesars for its KCafe

1999:

Kmart initiates partnerships with food giants Supervalu Inc. and Fleming Companies Inc. to stock Kmart shelves with groceries

2000:

Ex-CVS exec Charles Conaway takes over from Floyd Hall as chairman and chief executive officer and shuts down 72 Kmart stores

2001:

In November Kmart's $224 million loss leads to Standard & Poor's reduced rating of Kmart in view of staggering debts

2002:

Stock analysts nationwide suggest in January that clients unload Kmart stock in view of apparently irreversible debt service problems; Kmart changes executive leadership and files for Chapter 11 bankruptcy protection


Kmart fought on and bought a large portion of OfficeMax in 1991. In 1992 Kmart purchased 76 percent of Maj, a Czechoslovakian department store. It also announced plans to build 100 stores in Mexico with Grupo Liverpool. Also in that year, the company bought Borders, a chain of bookstores, but that venture proved ill advised. In 1994-1995, Kmart spun off OfficeMax and The Sports Authority as public companies through initial public offerings (IPOs) of stock. Proceeds to Kmart were $1 billion for OfficeMax and $405 million for The Sports Authority. It also sold its interest in Coles Meyer in Australia. Facing falling profit margins, Kmart continued to sell its investments. In 1995 Borders Group became a publicly traded company through an IPO; proceeds to Kmart were $566 million.

Searching for a new strategy, Kmart brought in a new CEO, Floyd Hall (who stayed at the helm only to 2000), and a new management team and board of directors, either highly paid or overpaid depending on one's view, were put in place. More than 200 stores closed by the mid-1990s, and the company tried to restructure itself and focus on its core business, but stock prices fell even more. Rumors of bankruptcy swarmed Wall Street, but Kmart seemed to right itself for a time.

In 1996 and 1997 Kmart continued to divest itself of its non-core businesses and its international operations, including its Czech and Slovak stores. Thrifty/Payless was spun off as a public company in 1996. In 1997 Kmart sold its interest in Kmart Mexico and all of its Kmart Canada stores. Finally, it divested itself of Builders Square in 1997. In 1999 the company signed an agreement with Martha Stewart Retail to carry her line of products. Hoping to reclaim past glory, the Blue Light Special sales gimmick so popular in the 1980s was restored after a decade-long absence in 2001. Mark S. Schwartz, a former Wal-Mart executive, became the president and chief operating officer of Kmart in March 2001, but he stayed barely long enough to use his shopper discount at Christmas, getting the heave-ho in January 2002 when Kmart became the largest retail chain in history ever to file for Chapter 11, according to The New York Times. His replacement, James B. Adamson, has earned a reputation by turning around beleaguered companies. In 2002, with rumors swirling through the business community that Kmart was a company ripe for purchase by a conglomerate or rival retail chain, Adamson was charged with the responsibility of trying to find a way to keep the now slimmed-down 1,900-store chain in business first, then to restore it to profitability. Adamson in 2002 found few analysts who thought the bankrupt company could regain the shopper and investor confidence Kmart once enjoyed. If Adamson can not pull off a minor financial miracle, his last job as chief executive officer might be to extinguish Kmart's famed blue lights.


STRATEGY

Kmart was originally a general merchandise discount store. The company sputtered financially after it tried to diversify into a variety of specialty stores, from book stores to home improvement centers. However, even after Floyd Hall became head of the company in 1995, and Kmart refocused on its core business, it became readily apparent that rivals Wal-Mart and Target had fashioned too big a lead to catch. Kmart conducted a study to determine a profile for the target Kmart shopper: women between the ages of 25 and 45 years old, with children at home and with household incomes between $20,000 and $50,000 per year. Of the 180 million people that shop at Kmart each year, 57 percent are women and 43 percent are men. The core mart shopper visited the store an average of 4.3 times a month and made an average purchase of $40 each visit. These core shoppers accounted for 60 percent of total store revenues. In 2000, when Charles C. Conaway took the top Kmart position, he pushed to strengthen marketing efforts to serve mothers and their children, but failed when the store took too long to replenish out-of-stock items. In short, Conaway tried, but not without failing, and he was quickly replaced as CEO. The Kmart chain reported a $244 million net loss for the fiscal year ending Jan. 31, 2001.

According to Kmart's annual report, the company is focused "on improving our customers' shopping experience through stronger assortments, better stores, convenient service and quality products at great prices." The company's merchandising strategy was focused on three areas: frequently purchased goods, popular national brands, and high-quality private label offerings. Its strategy was to improve its assortment of dominant national brands and be aggressive in pricing them. It wanted to complement that with a strong line of private label products, which included the Martha Stewart Everyday line of home fashions, the Sesame Street collection for children, and Jaclyn Smith and Kathy Ireland apparel, as well as Penske Automotive products and more. In 2002 the company kept all of the above except for Penske which proved an unprofitable partnership.

Part of the company's strategy of improving its customers' shopping experience was to convert its older, gone-to-seed stores into Big Kmart stores, with brighter lighting, wider aisles, bigger assortments, and an expanded consumable goods section. Super Kmart centers now feature about 12.5 million square feet of selling space, a broad selection of general merchandise and apparel, and a full assortment of groceries. Super Kmart centers are open 24-hours-a-day, 7-days-a-week. The first Super Kmart center opened in 1991 and numbered nearly 100 by the end of 1997, a number that dipped in 2002 as the company dumped many of its least profitable store operations nationwide.

Another aspect of Kmart's real estate strategy was to develop a five-year plan for each of the company's top 30 metropolitan markets. Within each of those regions, made up of both urban and suburban areas, Kmart planned to expand its presence. The 2002 store closings, however, demonstrated certain patterns of regional sales weaknesses. Kmart closed 33 stores in Texas; 21 in Illinois; 18 in Michigan; 16 in both California and Florida; 14 in Georgia; and 10 in Ohio.



INFLUENCES

Kmart's poor financial performance and bankruptcy in 2002 was attributed to poor management and an inability to cut the huge sales advantage Wal-Mart and Target had built since the 1990s. Kmart's strategy in 2002 was yet to be announced by yet another CEO, James B. Adamson, but most analysts agreed that the company needed to learn from mistakes of the past or die. Stores had to keep better inventory, not sending customers away disappointed with rain checks tucked inside their purses or wallets. It must focus on providing its core shoppers with a better shopping experience and surprise them with brighter, cleaner stores and helpful clerks hovering somewhere in plain sight. It must continue to provide an assortment of general merchandise at discounted prices, but some analysts feel that the company must play its Martha Stewart trump card more often and a whole lot better to compete with Target and Wal-Mart.

The company is also influenced by the strong performance of other mass merchandisers, especially Wal-Mart, Target and to a lesser extent, Sears. It will compete with them in the area of general merchandise, attempting to offer a bigger and better assortment that is more aggressively priced than its competitors. It is unlikely that Kmart will again try to branch out into specialty stores, and it even has cut loose from its Penske in-store auto repair operations. However, as of 2002, the company continued to retain its in-store Kmart Pharmacy Centers to fill prescriptions, a holdover from Kmart's attempt to take business away from the large drugstore chains such as CVS.

In spite of reverses, Kmart remains an extremely high volume retail store. Its 2000 sales amounted to $37 billion and its earnings the same year were $244 million. But losses in the third quarter of 2001 compared to the same quarter of 2000 were problematic as net sales declined 2.2 percent from $8.2 billion to $8.0 billion.



CURRENT TRENDS

In the mid-to-late 1990s, Kmart divested its specialty stores and all of its international operations, and in 2002 the company continued its practice of shutting down unprofitable store operations across the United States. First and most important, the company must shed its bankruptcy status by 2003 as first announced, or no later than 2004 if it hopes to maintain what is left of fast-dwindling creditor, supplier, and customer confidence. Whatever strategies Adamson's new marketing team in 2002 chooses to adopt, Kmart must implement initiatives to draw customers into stores and heighten their positive experiences while shopping.

The company had a more aggressive Internet marketing program in the 2000s, selling low-cost goods and even $12,000+ luxury Toshiba televisions through a Bluelight.com Web site. In the 2000s it offered customers a special Kmart MasterCard with 0 percent interest for six months on Kmart-purchased merchandise. However, the company's best-known marketing strategy was its return to the Blue light special, "unannounced" in-store sales on merchandise, but this strategy clearly was insufficient to stop Kmart's downward spiral into bankruptcy court.



PRODUCTS

The company continues to tout its Martha Stewart Everyday line of home fashions, Black & Decker workshop electric tools, and Sesame Street and Disney lines of children's apparel. Other specialty lines the company prominently displays in its print and online advertising include DeLonghi, Nickelodeon, Panasonic, Philips, and Hewlett Packard.

SOMETHING FOR EVERYONE

You're taking care of the last-minute packing for your spring break trip, and suddenly you realize you forgot to pick up suntan lotion. Chances are you're included in the 80 percent of the U.S. population who are within a 15-minute drive of a Kmart store. More than 180 million people shop each year at Kmart, and odds are that if you're a middle-income parent, they're carrying what you need. Each year, Kmart stores stock more than 100,000 items, everything from candy bars to camping gear. Need to do some planting? Kmart sells 83,000 tons of potting soil each year. Or perhaps your house needs a fresh coat of paint. Kmart sells enough paint each year to paint a foot-wide line around the globe 35 times. On the other hand, Kmart never has shed a popular misconception that it is a place where "losers" go to shop. That image caused movie goers in 1988 to crack up hysterically when a character played by Tom Cruise uttered an expletive about Kmart quality in the movie Rain Man. Can Kmart, which for some years has stocked well-known lines such as Black & Decker, find a way to demolish this stereotype that rightly or wrongly has stuck to it? It better.


CORPORATE CITIZENSHIP

Kmart has an impressive record of sponsorship, particularly in programs that support infant and child health such as the March of Dimes WalkAmerica. Kmart has participated faithfully and has consistently been the nation's leading team in this program since 1985, raising $33 million through 2001. Kmart alone raised $3.3 million for the March of Dimes in 2001. Kmart, since 1999, has been a major supporter of the American Red Cross and supplied store space and supplies to help life-saving and cleanup efforts in New York following the September 11, 2001 terrorist attacks.

Kmart also hosts holiday programs for the raising of funds at Christmas by encouraging the in-store fundraising efforts of the U.S. Marines and local law enforcement authorities.

A self-proclaimed supporter of K-12 education, Kmart in 2001-2002 began a new fund-raising opportunity for enrolled schools called the Kmart School Spirit Program. The program donated about $10 million to member schools during the 2001-2002 school year.


GLOBAL PRESENCE

As of 1998, Kmart stores were located only in the United States, Puerto Rico, Guam, and the U.S. Virgin Islands. The company divested itself of international holdings in Canada, Mexico, and Europe during the 1990s. The company clearly has positioned itself in the 2000s as an American-owned and run company that serves the interests of lower- and middle-income families. It also has strongly positioned itself as a corporate good citizen to back causes that aid in the fight against children's diseases.


EMPLOYMENT

With some 275,000 Kmart employees (called "associates" by the company) through 1999, Kmart was the sixth largest employer in the United States. That number dropped dramatically in the spring of 2002 as the company announced plans to let go of more than 20,000 employees in addition to earlier mass layoffs in the decade, With a renewed emphasis on customer service, Kmart has demonstrated that it is committed to attracting, retaining, and developing the most talented and highly motivated associates in retailing. Associates may work in a store, distribution center, or at Kmart's headquarters. They are hired and retained on the basis of high standards of performance. Kmart provides equal employment opportunities regardless of race, religion, color, national origin, sex, or disability. However, in 2002, a Web site devoted to the concerns of disgruntled Kmart employees boasted nearly 1,000 members, a sign that the company has a long way to go before employee confidence in management can be restored. Much of the employee anger was directed toward multi-million dollar settlements with top management officials in spite of their roll in leading the company to Chapter 11 bankruptcy status.

Bibliography

brauer, molly. "kmart earnings point to recovery." detroit free press, 14 may 1998.

gaffney, john. "kmart's marketing miscues." business2.0, 28 january 2002. available at http://www.business2.com.

hays, constance l. " is kmart out of stock in answers?" the new york times, 17 march 2002.

"kmart's bright idea." businessweek online, 9 april 2002. available at http://www.businessweek.com.

"kmart cutting 22,000 jobs." cnnmoney online, 8 march 2002. available at http://money.cnn.com.

kmart fact book. troy, mi: kmart corporation, 1999.

kmart home page, 11 may 2002. available at http://www.kmart.com.

miller, matt. " singing the blue light special." the daily deal, 1 may 2002.

preddy, melissa, and david howes. "kmart crafts a comeback team." the detroit news, 2 february 1996.

strom, stephanie, and leslie kaufman. "kmart is on verge of filing a claim for bankruptcy." the new york times, 22 january 2002.


For an annual report:

telephone: (248) 643-1040 or write: investor relations, kmart corp., 3100 w. big beaver rd., troy, mi 48084-3163


For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. kmart corporation's primary sics are:

5261 retail nurseries and garden stores

5331 variety stores

5411 grocery stores

5651 family clothing stores

5912 drug stores and proprietary stores

also investigate companies by their north american industry classification system codes, also known as naics codes. kmart corporation's primary naics codes are:

444190 other building material dealers

444220 nursery and garden centers

445110 supermarkets and other grocery (except convenience)stores

446110 pharmacies and drug stores

448140 family clothing stores

452990 all other general merchandise stores

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