TPMA Outlook: Where Did Kmart Go Wrong?
By Bob Houk
Through a special arrangement, presented here for discussion is
a summary of an article from TPMA Outlook, the weekly newsletter for
Trade Promotion Management Associates.
An interesting article in dbusiness,
the Detroit business magazine, attempts to explain how Kmart blew the huge
lead it had in the discount channel and collapsed into bankruptcy. The article
is based on opinions from former managers and executives whose non-disclosure
agreements have expired. As such, it needs to be read with caution — anybody
in such a position will naturally look back and say, "None
of that would have happened if they had just listened to me." But nonetheless,
the article makes for fascinating reading to anyone involved in channel issues.
It’s much too long to summarize in any detail, so I’ll
just bullet-point some of the main problems the Kmart veterans present:
- The company was insular and inbred. From the earliest days into the eighties,
no outsider was hired into the executive ranks.
- They underestimated the competition (perhaps a result of the previous point). "I
remember an executive meeting where they said, ‘Wal-Mart is a regional
discounter, leave them alone.’"
- Their logistics were inferior. One of the executives compared them unfavorably
to Wal-Mart. "Wal-Mart developed systems for ordering on-time merchandising
(in the mid-1970s), and spent a lot of money on that. And their transportation
systems were just unbelievable. They figured out how to get product to the
stores a lot quicker."
- Merchants had compensation structures based on perverse incentives. Once
such was ‘theoretical gross’ – calculations of the profitability
of a SKU were based on its full mark-up, rather than on its actual selling
price. Thus, over-priced items which had to be severely marked down at the
store level continued to be carried because they were contributing mightily
to the buyer’s theoretical gross.
- Because they used gross margin percentages instead of sales per square
foot as their primary measure, Kmart often stocked high-margin SKUs in many
categories and gave less space to high-volume items. An executive cites deodorants,
where he said Kmart carried 80-100 SKUs, with the data showing that they
were often out of stock on the top brands. He said "he could guarantee
that the top-five-selling deodorants would be out of stock by 8 p.m. on Sunday
because there wasn’t enough shelf space allocated to cover the volume
of their sales over the weekend."
- They ignored data. When one of the early scanner reports showed that much
of the candy in the stores was selling below cost, the report was tossed
aside. "The divisional manager said to me, ‘You cannot issue
that report.’ She said it was obviously flawed." It took two
more years of data before change came to the candy aisle.
Discussion Questions: In hindsight, what were the main reasons that Kmart
lost its leadership position in the discount channel? Where do you see the
most important lessons for other retail chains?