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Case Study_  K-Mart.doc Case Study_ K-Mart.doc Document Transcript

  • IntroductionKmart was a pioneer of the discount retailer industry. At the turn of the century, innovative tactics andstrong customer loyalty contributed to unprecedented corporate growth. The playing field changedhowever, and Kmart had newer rivals to compete with. This report will focus on the attempts torevitalize Kmart, what factors contributed to its bankruptcy, as well as the future for an acquiredKmart.Some Problems Just Don’t Go AwayThroughout Kmart’s recent history, it has been plagued by a series of problems. All management teamsattempted a variety of strategies to combat these. Listed below is the list of ongoing problems.iPoor inventory management  Too often would popular products be out of stock, while otherscollected dust on the shelves, and in some cases stored in trailors outside of the stores.Price Competition  Wal-Mart had successfully found a way to offer the lowest price possible onmany goods.Poor Customer Service  Too often did consumer reports, secret shops, and industry analysts report ofthe apathy of Kmart sales staff. Poor Customer Service problems plagued Kmart on a consistent storeto store level.“Niche”less  While Walmart reigned supreme as the low cost leader, Target was perceived as being a“higher quality” retailer. Where did this leave Kmart? What was Kmart’s competitive advantage overthe two large rivals?The Antonini EraKmart’s conception began in 1899 with a single five-and-dime store. Over the years, Kmart continuedto grow and evolve with the market. Under CEO Joseph Antonini, Kmart changed its basic strategy.iiStrategy prior to 1987 Antonini Strategy (1987-1995)Continue to grow company through Diversify assets into a variety of industriesadditional store locations, renovating current that were deemed high growth, ripe forstores, and analyze consumer demand to add market entrance, and profitable.additional products and services.Kmart acquired several established businesses in a variety of industries.iiiBuilder’s Square (1984)Walden Book Company (1984)Payless Drug Stores, Inc (1985)Harold’s Discount Outlets {Canadian} (1985)The Sports Authority (1990)90% interest in OfficeMax (1991)Borders, Inc (1992)Czech Republic/Slovakian Discount Stores (1992)Bizmart (1992)Joint Venture into Singapore (1994)
  • Antonini was on a buying frenzy, continuously expanding Kmart’s portfolio. 3 start-up companies werealso initiated, as well as 100 Kmart stores in Mexico. Although international expansion was thebackbone for Kmart’s strategy, changes were also made to Kmart in the United States. Listed below arethe strategies Antonini put into effect during his tenure, and the outcome of such.iv Strategy OutcomeDiversification FailurePurchased a variety of businesses in several Acquisitions all performed poorly postingretail industries including internationally. minimal net income or losses. Distracted management from core business.Renewal Program Mixed Results$3.5 billion program intended to modernize, Super Kmarts sales were 23% higher thanexpand, or relocate Kmart’s 2,435 stores. traditional stores.Increase sq ft (800K to 100K), and open 500 Fashion strategy was a disappointment.Super Kmarts. Improve quality of private Antonini blamed the failure on marketlabel brands. Logic: Cash Cow Fashion to conditions.subsidize specific hardline products to be Wal-Mart continued to emphasis on beinglow price leader. the local cost leader, at any cost. Customer’s View of Kmart: dirty, poorly stocked, and rude staff. Many stores did not receive substantial renovations.Modernize Inventory Methods FailureState of the art GTE Spacenet satellite based Although an improvement from the previousnetwork. Implemented Central system, CMAR still did not meetMerchandising Automated Replenishment expectations. Many contribute the vastsystem (CMAR). Costs of revolutionary amount of inventory, and the hightechnology = $160 million/annually complexity of the system for it’s failure.New King is CrownedIn 1990, Kmart was dethroned as the leader of the discount retailer, by rival Wal-Mart. Sales growthfor Kmart from 1980 to 1990 was a mere 7.7%, compared to the skyrocketing Wal-Mart. Shown on thefollowing page is a time line of sales dollars (revenue) per each of the 3 large discount chains.v The Wal-Mart AdvantageNear perfectiondistribution system.Lowest operatingcosts allowed forbeing the low cost
  • leader.Newcomer advantageSource: Target, Wal-Mart, and Kmart’s Annual Reports (SEC Filings)Hall Steps Up To BatAfter a failed corporate strategy by Joseph Antonini, the reins of Kmart were handed over to FloydHall. Hall had industry clout due to his success at Target and Grand Union Supermarkets. Hall quicklyassembled a new board of top level managers with the intentions of, “…trying to build a team…get agood succession plan and new policies in place.”vi The competitive environment in 1995 did not reflectpositively for Kmart, as shown below. Competitive Match-Up in 1995vii Kmart Wal-Mart Customers averaged 15 visits a year Customers averaged 32 visits per year Sales/sq ft = $185 Sales/sq ft = $379 19% loyal customers 46% loyal customers
  • With rival Wal-Mart defeating Kmart clearly in every key performance indicator, Hall declared thatcomplete surgery was needed, no band-aid could revive this company.Hall’s strategy can be defined as: Divest noncore activities, drastically improve all core principles,and drive down cost wherever possible. A “use it or loss it” style was put into effect.viii Use It Lose It Overall AsessmentConsolidated U.S. and Close 400 stores PositivesCanadian Operations Cleared out $700 million ofCapitalize on volume buying inventory 1,600 renovated storespower to drive down employee Sold of previous acquisitions Martha Stewart sales = $1health benefits (ex. OfficeMax & Sports BillionImprove stores, “department Authority, etc) Sales per sq ft rivaledby department” Eliminated some 2nd tier TargetIncrease private labels brands, and all 3rd tier brands. Dropped OperationalExpand Martha Stewart Costs by $500 millionCollection Profit (shown in the tablePantry Concept  Redesign below)stores based on consumerconvenience. NegativesMore District ManagersStock Options for Store Poor Customer ServiceManagers remained Inventory System bottlenecked and flawed. Poor Competitive PositionSource Walmart & Kmart SEC FilingsWho’s Next?
  • Hall’s dynasty ended in 2000, when Charles Conaway left CVS Corporation to head the sinking ship ofKmart. Conaway elected to attack Kmart’s two rivals head on with an aggressive strategy to revitalizeKmart, and to obtain rival market share.Source: Company Annual Reports (SEC Filings) Rival Strategy – “Kmart: The authority for moms, home, and kids”ixWalmart (Low Cost) Capable? Target Capable? (Differentiation)Blue Light Always Blue Light Always Greater emphasis on Kmart’s privateProgram  $1.7 didn’t have the private label brands. (vs. brands couldn’t matchbillion investment to efficiency or cash Mossimo) Mossimo’sbe the low cost leader to compete with BlueLight.com (Target quality/styleon 50,000 products. Walmart shoppers statically 1% of visitorsPlay To Win Supply higher income purchased a product.Chain Management Play to Win was a consumers, early internet $55 million poorly failure due to “too adopters) invested much to fast”.The White Flag – 1/22/02Bankruptcy was inevitable for Kmart due to countless failed strategies over the previous two decades.Conaway’s actions solidified the bankruptcy, although in truth there was little he could do, but hope todelay the inevitable.Bankruptcy Contributors$8.3 billion worth ofinventoryBlue Light Always Pricing
  • StrategySales DeclineUnpaid vendorsMassive debtSource: SEC Filings 2002Source: SEC Annual Filings (1999-2001) Kmart Restructuring Strategy3/2002 – Close 284 stores &eliminate 22,000 jobsLiquidate $758 million ofinventoryReduce overhead by $130millionUtilize $2 billion financing“The Stuff of Life”advertisingSell BlueLight.comDevelop New Store Layout1/2003 Close 316 stores &eliminate 25,000 jobsThe New KmartJames Adamson was CEO a mere 5 days before Kmart declared bankruptcy. Adamson who hashandled a corporate bankruptcy restructuring before, put the following strategy into place.
  • Restructuring RecommendationsAddress housekeeping/poor customer service concerns by frequent DistrictManager visits & Mystery ShoppersHire Fashion experts to compete with Target on Fashion, includingreleasing an entirely new private brand lineOpen additional distribution centers across the nation, and work on a “justin time” inventory approach.DO NOT attempt to be the low cost provider.Compete head to head with Target.“Open Door/Open Books” Policy regarding accounting letters. ConsumerRecommendation: Don’t Buy KmartWal-Mart continues togrow momentumVery small loyal customerbaseAccounting violationstaint brand imageLack of PositioningClosing stores limitsaccessibility.Underlying problems ofinventory managementhave yet to find a solution
  • Source: SEC Filings 1992 through 2002An Empire is BornOn November 17th 2004, the announcement was made that Kmart and Sears Roebuck Company wouldmerge to form the third largest retailer in the nation. Was this a strategically sound decision by Sears?xIndustry: IDepartment Stores n d u s t r y : D e p a r t m e n
  • t S t o r e s I n d u s t r y A t t r a c t i v e n e s s F a c t o rIndustry AttractivenessFactor Weight Rating WeightedMarket Size &Growth M 0.25 9 2.25 a r k e t S
  • i z e & G r o w t h I n t e n s i t y o f C o m p e t i t i o nIntensity of Competition 0.15 5 0.75Strategic Fit 0.1 7 0.7Resource Requirements R 0.1 3 0.3 e s o u r c e
  • R e q u i r e m e n t s E m e r g i n g O p p o r t u n i t i e s / T h r e a t sEmerging Opportunities/Threats 0.1 7 0.7Cyclical Threats 0.2 5 1External Factors 0.5 2 1
  • Degree of Risk 0.5 6 3Sum of Weights 1 I n d u s t r y A t t r a c t i v e n e s s r a t i n gIndustry Attractivenessrating 9.7
  • Source: SEC Filings per perspective companyCompetitiveAnalysis Indu stry Attr activ enessIndustry FactAttractiveness Factor orRelative MarketShare 0.15 8 1.2Costs relative to Costs 4 0.4Competitors relati
  • ve to Com petit ors 0.1Match Rivals 0.1 4 0.4Bargaining Leverage 0.05 3 0.15Strategic FitRelationships 0.1 7 0.7InnovativeCapabilities 0.2 5 1How well matchsKSPs 0.1 4 0.4 Degr ee profit relev ant toDegree profit relevant to rivalsrivals 0.2 5 1Sum of Weights 1 Indus try Attra ctive nessIndustry Attractiveness ratinrating g 5.25
  • Source: New York Stock Exchange (www.NYSE.com) 2006 Industry Attractive? Cost to Enter? Better off?Yes, although the K-Mart merger was not Sears shareholders are betterdepartment store/discount expensive enough to not do. off acquiring Kmart withretail stores are a mature Value added services advantages in additionalmarket. There is constantly savings and strategic goals stores (non-mall) andinnovation in products and being assisted. Merges with economics of scale costservices, and a demand will Kmart helps achieve their savingsalways remain. strategic vision
  • Shareholder InitialResponse Mixed;Invest in SearsHolding (SHLD)today.Fits Strategic Plan forSears’ growth.Inherits Kmart brands,and improves Searsbrand distributionCombining channels ofdistribution, advertisingfor cost benefit.Diversified in sameindustry is a win.Source: NYSE/Morning Star 11/16/2004 – 06/09/2006The New Face of SearsKmart pioneered the discount retailer industry, but with any good idea comes competition. Wal-Mart, apioneer in it’s own right, perfected a distribution/cost system that was second to none. With Targetembracing a differentiation strategy, where did that leave Kmart? Costly mistakes marked the end of aflagship American enterprise, but spun the birth of something new. Sears enjoys the benefits of non-mall stores, wider array of products, and shared value chain systems for a cost benefit. Stockholdersshould see potential in Sears Holdings in a thriving industry, for years to come.i Gamble, John E. Kmart: Striving for a Comeback, 2003
  • ii Gamble, John E. Kmart: Striving for a Comeback, 2003iii Gamble, John E. Kmart: Striving for a Comeback, 2003iv Gamble, John E. Kmart: Striving for a Comeback, 2003v Gamble, John E. Kmart: Striving for a Comeback, 2003vi Gamble, John E. Kmart: Striving for a Comeback, 2003vii Gamble, John E. Kmart: Striving for a Comeback, 2003viii Gamble, John E. Kmart: Striving for a Comeback, 2003ix Gamble, John E. Kmart: Striving for a Comeback, 2003x Press Release: “Kmart Holding Corporation and Sears, Roebuck and Co. Agree to Merge”11/17/2004 1