TPMA Outlook: Where Did Kmart Go Wrong?

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Jul 22, 2010
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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?

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12 Comments on "TPMA Outlook: Where Did Kmart Go Wrong?"


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Alison Chaltas
Guest
Alison Chaltas
10 years 9 months ago

This debate is perfect for Monday morning quarterbacks. Having worked with Kmart since the late ’80s, our point of view is consistent with the article’s author but with a little different spin:

First, Kmart was built on a mall-dependent real estate game that did not anticipate the rise of big-box, stand-alone, category-specific outlets.

Then, Kmart got squeezed by Walmart’s logistics superiority and operations on one end and Target’s superior merchandise and merchandising on the other.

The perfect storm came when Kmart couldn’t see the future, think differently and act fast enough. Execution never was a Kmart strength and under financial pressure, things just got worse.

There were some great ideas along the way. Take the concept of the Martha Stewart line. Brilliant concept, but too little, too late, and poorly executed.

David Livingston
Guest
10 years 9 months ago

The article pretty much covers it all. Not much to add. Kmart wasn’t the only discount store failure in the ’80s and ’90s to succumb to Wal-Mart. Off the top of my head I recall Ames, Big Wheel, Hecks, Woolco, Zayre, and a few others that dropped like flies.

Somehow, through some divine grace, Kmart is still around. Sure they might be nothing more than a retail museum right now, but they are still open. If Kmart were to shut down everything tomorrow, the big story would be how they have managed to hang on this long. They appear hopelessly beaten and most other retailers in their position would have closed long ago, considering their sales per square foot levels. Yet Kmart has done what many other discount retailers could not do, and that is to simply stay open.

Mark Johnson
Guest
Mark Johnson
10 years 9 months ago

You should read the book “How the Mighty Fall.” They have great insight into the challenges that Kmart faced. They and Ames were begun about the same time as Wal-Mart, and now Ames is gone and Kmart is rebuilding.

Focus is the key; Wal-Mart was always focused on everyday low prices and Sam Walton was always studying the competition, both domestically and internationally. Family vacation meant going to Kmart stores to see what they were doing right and wrong. He would also fly in corporate leaders from all over the world to meet with him and he would pick their brains, not the other way around.

Bill Emerson
Guest
Bill Emerson
10 years 9 months ago

The points raised, in and of themselves, are contributors to Kmart’s downfall. In my view, each of these are symptoms. The root cause is that the executive management and board of Kmart, like the other regional discounters, became complacent with their success and stopped “looking out the window” at how the industry and their competition were evolving and then reacting to these changes. Their world was defined by the 4 walls of the corporate office and, by the time they realized they were becoming irrelevant, it was too late to catch up.

This phenomena is not specific to discounters. Not so long ago, there were over 130 department store marquees in this country. In the last couple of years, we’ve seen several $multi-billion national chains disappear. In each case, there is an element of this same refusal to adapt to a new environment. Darwin was right–adapt or die.

Carol Spieckerman
Guest
10 years 9 months ago

And adding insult to injury, Kmart had a reputation for slapping suppliers with punitive fees that were intentionally indefensible. They basically defined charge back-as-profit-center. When they went on the skids, suppliers ran for the hills.

Charles P. Walsh
Guest
Charles P. Walsh
10 years 9 months ago

Forensic analysis is always interesting but sometimes the answers will slap you right in the face with their simplicity.

The largest reason for Kmart’s fall is the identical reason for all of the dozens of other once prosperous regional discount chains failed.

Walmart.

Walmart’s approach which combined broad assortments with EDLP, store level operational discretion in merchandising and pricing, was simply unstoppable. Add to that the company’s extreme focus on change, testing, logistics and systems improvements and they became nearly impossible to compete with.

High/low discount pricing and merchandising, older stores, and urban locations were no match for the machine. The reasons for Kmart’s fall have less to do with the “family secrets” revealed in the article and more to do with the inability of chains like them to compete with Walmart’s formula.

Ed Rosenbaum
Guest
10 years 9 months ago

Don’t you just love a discussion involving hindsight when you can’t be anything but right in your response? This is one of those discussions.

Kmart is a company I have followed from a distance even before they took the big nose dive. Prior to the downfall, I had a company that did occasional maintenance work for them, floor cleaning to be more specific. The management seemed to be insulated from the outside world of competition then. In fact, from my view they never came around until it became fiscally too late.

They underestimated Wal-Mart from the beginning. Wal-Mart had their game face on before becoming the national force they are now. They had plans in place and executed them to near perfection.

Meanwhile, Kmart was standing around literally watching their customer base drive across street to shop at the competition. Wal-Mart targeted (pun) retail space to be in position to take Kmart’s business. Kmart never saw it coming and was never in position to recover. To this day Kmart is no better than a very distant third.

Gene Detroyer
Guest
10 years 9 months ago
Thirty years ago Kmart was my largest customer. Despite that, their buyers were awful and their buying practices were strange. They had no interest in what the market was buying. They had no interest in quality items. They had no interest or understanding of brands. All they were interested in was how “good” they could buy the product. “Good” was basically defined, in their terms of what discounts and deals they could get. We could call it arrogance in that they thought they were more important than the products they sold in their stores and bigger than their customers. We can call it insular management. We can talk about their inability to manage their supply chain. But, in fact, history tells us that the trail Kmart has followed is followed by most industry leaders. Woolworth was once the largest retailer in the U.S. and a member of the DJI. Sears was once the largest retailer in the U.S. and a member of the DJI. Should we look outside of retail? Kodak was once the largest… Read more »
David Biernbaum
Guest
10 years 9 months ago

Kmart blew the huge lead it had in the discount channel and collapsed for a number of reasons on many levels but here are my factors in order of importance:

1. Ineffective upper level management; complete with all the right ingredients; corruption, arrogance, lack of vision, and instability with frequent changes.

2. Outworked, outwitted, and outplayed by Walmart, and to a lesser degree, Target.

3. Very poor relationships with vendor partners. Kmart didn’t realize it was no longer “Kmart” until it was too late. The arrogance, superiority complex, and rude behavior continued on way too long.

4. Lack of any clear mission, direction, or marketing plan (at least not anything that was obvious, clear, or easy for consumers and vendor partners to understand.)

5. Properties/upkeep that didn’t seem to keep up with competition.

6. Poor shelf management and lack of good management over out of stocks, good assortment, the right mix, etc.

Other than that Kmart did a great job and it’s hard to understand how it didn’t stay in the lead over its competitors!

Craig Sundstrom
Guest
10 years 9 months ago

Reading through the article and thinking about the question, two words came to mind: “everywhere” and “Wal-Mart.” Appearance of the latter is of course no surprise as it appears in almost every discussion whose focus is either retailer failure or success.

But why was Wal-Mart successful? It’s easy to point out the HOWs, but what were the WHYs? One possible answer of course is luck (they guessed right at every fork in the road) but another is that they had a single highly capable individual in charge. Who was in charge at Kmart? If a name doesn’t immediately come to mind, then I think we’ve come to the problem.

Doug Stephens
Guest
Doug Stephens
10 years 9 months ago

I think Gene Detroyer nailed it.

There are three forms of “vision” a business can become adept at employing–hindsight (what happened yesterday), insight (what’s happening today), and foresight (what will happen tomorrow). From my experience, less than 10 percent of all businesses have developed a culture of foresight. Most are too busy dwelling on yesterday and today and putting out fires. Most are working incrementally to squeeze another dollar out of the existing model.

Wayne Gretsky said it best…”I skate to where the puck is going to be, not where it has been.”

Jack Pansegrau
Guest
Jack Pansegrau
10 years 9 months ago
Just to add two additional observations – corporate culture and RENT… I was fortunate enough to visit both Walmart and Kmart Realty in their former locations. What a stark difference. At Kmart, every real estate officer had their own office with secretary all housed within a lavish corporate HQ in the Detroit suburbs. This was completely different from the old Walmart Realty building in Bentonville with the payphone and ‘honor coffee bar’ in the lobby that made the basement in the Pentagon look lavish. The focus was not on the trappings but on the business of making deals. And when it came to RENT (over the years I reviewed a number of various Offering Memorandums and wherever I had an opportunity to compare), the RENT paid by Walmart for a better building in a better location was typically less than the older Kmart building, typically in an inferior County Seat location. Walmart paid attention to details and had a very tight control on negotiating rental rates and insuring their buildings were well constructed AND delivered… Read more »
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