Kmart filed for bankruptcy in 2002 due to inventory issues, price competition and poor customer service over many years. Sears acquired Kmart in 2004 to form Sears Holdings and benefit from Kmart's non-mall stores and scale. While the department store industry is mature, innovation continues and the merger positioned Sears Holdings for shared logistics savings and brand diversification.

1. Introduction
Kmart was a pioneer of the discount retailer industry. At the turn of the century, innovative tactics and
strong customer loyalty contributed to unprecedented corporate growth. The playing field changed
however, and Kmart had newer rivals to compete with. This report will focus on the attempts to
revitalize Kmart, what factors contributed to its bankruptcy, as well as the future for an acquired
Kmart.
Some Problems Just Don’t Go Away
Throughout Kmart’s recent history, it has been plagued by a series of problems. All management teams
attempted a variety of strategies to combat these. Listed below is the list of ongoing problems.i
Poor inventory management  Too often would popular products be out of stock, while others
collected 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 on
many goods.
Poor Customer Service  Too often did consumer reports, secret shops, and industry analysts report of
the apathy of Kmart sales staff. Poor Customer Service problems plagued Kmart on a consistent store
to 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 over
the two large rivals?
The Antonini Era
Kmart’s conception began in 1899 with a single five-and-dime store. Over the years, Kmart continued
to grow and evolve with the market. Under CEO Joseph Antonini, Kmart changed its basic strategy.ii
Strategy prior to 1987 Antonini Strategy (1987-1995)
Continue to grow company through Diversify assets into a variety of industries
additional store locations, renovating current that were deemed high growth, ripe for
stores, and analyze consumer demand to add market entrance, and profitable.
additional products and services.
Kmart acquired several established businesses in a variety of industries.iii
Builder’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)

2. Antonini was on a buying frenzy, continuously expanding Kmart’s portfolio. 3 start-up companies were
also initiated, as well as 100 Kmart stores in Mexico. Although international expansion was the
backbone for Kmart’s strategy, changes were also made to Kmart in the United States. Listed below are
the strategies Antonini put into effect during his tenure, and the outcome of such.iv
Strategy Outcome
Diversification Failure
Purchased a variety of businesses in several Acquisitions all performed poorly posting
retail 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 than
expand, 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 market
label brands. Logic: Cash Cow Fashion to conditions.
subsidize specific hardline products to be Wal-Mart continued to emphasis on being
low 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 Failure
State of the art GTE Spacenet satellite based Although an improvement from the previous
network. Implemented Central system, CMAR still did not meet
Merchandising Automated Replenishment expectations. Many contribute the vast
system (CMAR). Costs of revolutionary amount of inventory, and the high
technology = $160 million/annually complexity of the system for it’s failure.
New King is Crowned
In 1990, Kmart was dethroned as the leader of the discount retailer, by rival Wal-Mart. Sales growth
for Kmart from 1980 to 1990 was a mere 7.7%, compared to the skyrocketing Wal-Mart. Shown on the
following page is a time line of sales dollars (revenue) per each of the 3 large discount chains.v
The Wal-Mart
Advantage
Near perfection
distribution system.
Lowest operating
costs allowed for
being the low cost

3. leader.
Newcomer advantage
Source: Target, Wal-Mart, and Kmart’s Annual Reports (SEC Filings)
Hall Steps Up To Bat
After a failed corporate strategy by Joseph Antonini, the reins of Kmart were handed over to Floyd
Hall. Hall had industry clout due to his success at Target and Grand Union Supermarkets. Hall quickly
assembled a new board of top level managers with the intentions of, “…trying to build a team…get a
good succession plan and new policies in place.”vi The competitive environment in 1995 did not reflect
positively 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

4. With rival Wal-Mart defeating Kmart clearly in every key performance indicator, Hall declared that
complete 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 Asessment
Consolidated U.S. and Close 400 stores Positives
Canadian Operations Cleared out $700 million of
Capitalize on volume buying inventory 1,600 renovated stores
power to drive down employee Sold of previous acquisitions Martha Stewart sales = $1
health benefits (ex. OfficeMax & Sports Billion
Improve stores, “department Authority, etc) Sales per sq ft rivaled
by department” Eliminated some 2nd tier Target
Increase private labels brands, and all 3rd tier brands. Dropped Operational
Expand Martha Stewart Costs by $500 million
Collection Profit (shown in the table
Pantry Concept  Redesign below)
stores based on consumer
convenience. Negatives
More District Managers
Stock Options for Store Poor Customer Service
Managers remained
Inventory System
bottlenecked and flawed.
Poor Competitive Position
Source Walmart & Kmart SEC Filings
Who’s Next?

5. Hall’s dynasty ended in 2000, when Charles Conaway left CVS Corporation to head the sinking ship of
Kmart. Conaway elected to attack Kmart’s two rivals head on with an aggressive strategy to revitalize
Kmart, and to obtain rival market share.
Source: Company Annual Reports (SEC Filings)
Rival Strategy – “Kmart: The authority for moms, home, and kids”ix
Walmart (Low Cost) Capable? Target Capable?
(Differentiation)
Blue Light Always Blue Light Always Greater emphasis on Kmart’s private
Program  $1.7 didn’t have the private label brands. (vs. brands couldn’t match
billion investment to efficiency or cash Mossimo) Mossimo’s
be the low cost leader to compete with BlueLight.com (Target quality/style
on 50,000 products. Walmart shoppers statically 1% of visitors
Play 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 – 1/22/02
Bankruptcy 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 to
delay the inevitable.
Bankruptcy Contributors
$8.3 billion worth of
inventory
Blue Light Always Pricing

6. Strategy
Sales Decline
Unpaid vendors
Massive debt
Source: SEC Filings 2002
Source: SEC Annual Filings (1999-2001)
Kmart
Restructuring
Strategy
3/2002 – Close 284 stores &
eliminate 22,000 jobs
Liquidate $758 million of
inventory
Reduce overhead by $130
million
Utilize $2 billion financing
“The Stuff of Life”
advertising
Sell BlueLight.com
Develop New Store Layout
1/2003 Close 316 stores &
eliminate 25,000 jobs
The New Kmart
James Adamson was CEO a mere 5 days before Kmart declared bankruptcy. Adamson who has
handled a corporate bankruptcy restructuring before, put the following strategy into place.

7. Restructuring Recommendations
Address housekeeping/poor customer service concerns by frequent District
Manager visits & Mystery Shoppers
Hire Fashion experts to compete with Target on Fashion, including
releasing an entirely new private brand line
Open additional distribution centers across the nation, and work on a “just
in 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.
Consumer
Recommendation: Don’t
Buy Kmart
Wal-Mart continues to
grow momentum
Very small loyal customer
base
Accounting violations
taint brand image
Lack of Positioning
Closing stores limits
accessibility.
Underlying problems of
inventory management
have yet to find a solution

8. Source: SEC Filings 1992 through 2002
An Empire is Born
On November 17th 2004, the announcement was made that Kmart and Sears Roebuck Company would
merge to form the third largest retailer in the nation. Was this a strategically sound decision by Sears?x
Industry: I
Department Stores n
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:
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Industry Attractiveness
Factor Weight Rating Weighted
Market Size &Growth M 0.25 9 2.25
a
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k
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Intensity of Competition 0.15 5 0.75
Strategic Fit 0.1 7 0.7
Resource Requirements R 0.1 3 0.3
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11. R
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Emerging Opportunities/
Threats 0.1 7 0.7
Cyclical Threats 0.2 5 1
External Factors 0.5 2 1

12. Degree of Risk 0.5 6 3
Sum of Weights 1
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Industry Attractiveness
rating 9.7

13. Source: SEC Filings per perspective company
Competitive
Analysis
Indu
stry
Attr
activ
eness
Industry Fact
Attractiveness Factor or
Relative Market
Share 0.15 8 1.2
Costs relative to Costs 4 0.4
Competitors relati

14. ve to
Com
petit
ors
0.1
Match Rivals 0.1 4 0.4
Bargaining Leverage 0.05 3 0.15
Strategic Fit
Relationships 0.1 7 0.7
Innovative
Capabilities 0.2 5 1
How well matchs
KSPs 0.1 4 0.4
Degr
ee
profit
relev
ant to
Degree profit relevant to rivals
rivals 0.2 5 1
Sum of Weights 1
Indus
try
Attra
ctive
ness
Industry Attractiveness ratin
rating g 5.25

15. 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 better
department store/discount expensive enough to not do. off acquiring Kmart with
retail stores are a mature Value added services advantages in additional
market. There is constantly savings and strategic goals stores (non-mall) and
innovation in products and being assisted. Merges with economics of scale cost
services, and a demand will Kmart helps achieve their savings
always remain. strategic vision

16. Shareholder Initial
Response Mixed;
Invest in Sears
Holding (SHLD)
today.
Fits Strategic Plan for
Sears’ growth.
Inherits Kmart brands,
and improves Sears
brand distribution
Combining channels of
distribution, advertising
for cost benefit.
Diversified in same
industry is a win.
Source: NYSE/Morning Star 11/16/2004 – 06/09/2006
The New Face of Sears
Kmart pioneered the discount retailer industry, but with any good idea comes competition. Wal-Mart, a
pioneer in it’s own right, perfected a distribution/cost system that was second to none. With Target
embracing a differentiation strategy, where did that leave Kmart? Costly mistakes marked the end of a
flagship 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. Stockholders
should see potential in Sears Holdings in a thriving industry, for years to come.
i Gamble, John E. Kmart: Striving for a Comeback, 2003

17. ii Gamble, John E. Kmart: Striving for a Comeback, 2003
iii Gamble, John E. Kmart: Striving for a Comeback, 2003
iv Gamble, John E. Kmart: Striving for a Comeback, 2003
v Gamble, John E. Kmart: Striving for a Comeback, 2003
vi Gamble, John E. Kmart: Striving for a Comeback, 2003
vii Gamble, John E. Kmart: Striving for a Comeback, 2003
viii Gamble, John E. Kmart: Striving for a Comeback, 2003
ix Gamble, John E. Kmart: Striving for a Comeback, 2003
x Press Release: “Kmart Holding Corporation and Sears, Roebuck and Co. Agree to Merge”
11/17/2004
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