NEW YORK — Welcome to the new Kmart — slimmer, better stocked and better designed.
This story first appeared in the August 20, 2002 issue of WWD. Subscribe Today.
In fact, the strategy being put together by James B. Adamson, Kmart’s chairman and chief executive officer, very much resembles those being adopted by the bankrupt retailer’s larger competitors, Wal-Mart Stores and Target Stores. Adamson, in an exclusive interview, revealed Kmart is hard at work on a new prototype store, which it will begin to test this fall and which, in his view, will ensure the retailer has a future.
Meanwhile, Kmart announced Monday that it will cut almost 700 jobs as it continues to trim its operations. The job losses darkened a retail job market that already had been hit by last week’s announcement that Ames Department Stores plans to liquidate, affecting 22,000 employees.
The majority of the job losses at Kmart, 400, are from corporate headquarters, with the remaining 50 coming from positions located nationally that provide corporate support. In addition, the retailer has eliminated 100 current open positions and will begin phasing out 130 contract positions.
The reduction in its workforce was expected as Kmart said last month that it would review its operations and “align” staffing levels with corresponding sales levels following the shuttering of 283 stores. The remaining Kmart stores and distribution centers are not impacted by the latest cost-reduction initiative. The company is exploring other ways to “aggressively” reduce costs, including eliminating low-priority projects, reengineering work processes and consolidating workloads.
“This cost-reduction initiative is absolutely critical to our reorganization,” Adamson said in a statement. “We had no alternative but to take this action, the company continues to take the steps necessary to return to financial health and regain the confidence of its many stakeholders.”
Adamson, who had been a Kmart director, was named chairman in January, just before the firm’s Chapter 11 filing, and became ceo in March.
So far, since the retailer’s filing of its Chapter 11 petition in January through the announced closure of 283 stores, over 22,000 jobs have been lost at Kmart.
The completion of the latest staffing reductions will save Kmart $66 million for fiscal 2002 and $130 million annually.
Kmart has a $2 billion debtor-in-possession financing facility, but last week asked Detroit bankruptcy court permission to change its loan agreement to give it the ability to report a larger loss from $100 million to $400 million so that it won’t fall below a loan covenant. The end of Kmart’s first required reporting period since entering Chapter 11 is Aug. 31. In addition the retailer is seeking to increase its line of credit by an amount “not to exceed $500 million,” a move that would give Kmart some breathing room and its vendors some measure of confidence that they would get paid.
The layoffs are unlikely to be the last cost-cutting action at the struggling retailer, which still has to carve out a niche in the increasingly competitive marketplace against the onslaught of Wal-Mart, Target and Kohl’s. Kmart is understood to be planning to close another 200 stores within the next year to help get its cost structure under control. It also is said to be looking at a possible real-estate deal with Kimco Realty. With Ames going and Bradlees and Caldor’s already gone, the bankrupt chain is looking to keep its distance from what has now become an ill-fated “ABC Club” of once-thriving, but now extinct, retailers.
As WWD reported last month, the 200 stores are expected to close by the end of Kmart’s fiscal year in January, after holiday sales receipts are in. Kmart is working on the closures with Gordon Brothers Group and its real estate advisory division, DJM Asset Management, sources close to the company said. Gordon Brothers is a longtime adviser to Kmart. Executives at the Boston-based group declined comment. There is no indication of how many jobs would be lost when the next round of store closures is announced. Kmart currently operates 1,830 stores. In contrast, Wal-Mart operates 1,611 Wal-Mart stores and 1,156 Supercenters. J.C. Penney operates 1,068 department stores, while Kohl’s trails behind with over 420 sites.
While the stores have been identified, but not yet publicly disclosed, apparel vendors on Seventh Avenue are questioning whether the 34th Street site here, across the street from Macy’s, will be among those to be shuttered. As reported, the location was originally on a list of stores to be closed in 2000. A retail source said that the plans changed when a new store manager hired three months before the targeted closure date turned around operations.
But observers still question the long-term future of the 34th Street store. While the unit gets good crowds and sales, the three-level, 140,000-square-foot location, adjoining Penn Station on the south side of the street between Seventh and Eighth Avenues, is difficult to shop and stock, and costly to operate. Moreover, it also does not resemble the Kmart showcase at 770 Broadway, near Eighth Street.
Kmart earlier this year said it was shuttering 283 stores. While many of those stores were profitable, they were not at a high enough level to warrant continued operation. Some of those sites, 54 real estate leases, were eventually sold to a joint venture headed by Kimco Realty Corp. Schottenstein Stores Corp. and Klaff Realty, along with Kimco, paid $43 million for the leases, which were bundled together. During the bankruptcy auction earlier this year, however, 209 properties failed to solicit bids.
Sources in the real estate market said that Kimco was exploring the possibility of picking up some more choice Kmart locations, possibly tied in with the next round of cuts. Kimco has a history of cherry-picking the choicest locations held by bankrupt retailers short of cash, including past picks such as the now defunct Venture Stores and a financing and sale and leaseback arrangement with Ames. Kimco executives did not return phone calls Monday seeking comment.
And what does Kmart plan to do with the 1,630 stores it will have left after the next round of closures? Adamson is hard at work on a new store prototype, details of which are to be unveiled early this fall. The design features conjure up images of its competitors, and Adamson’s former workplace, Target, now considered the number two purveyor of discount merchandise.
Sources who have seen pictures of the site are enthused about its layout and design features.
While keeping details close to his chest at this stage, Adamson said in an interview that the company will begin construction soon on the prototype in an existing store. “It is a fantastic store, with the first one outside Detroit,” the ceo said.
Adamson said there’s much that Target does well, from well-lit stores to wide, easy-to-shop aisles. Both are on the agenda for a revamped Kmart, he acknowledged.
While Kmart’s bankrupt status raises questions about the availability of funds for renovations and roll-outs, Adamson pointed out that much of the improvements won’t “cost a lot of money.”
The full rollout is expected to take several years. The current plan is to test market the first site and then take the best of the ideas to the other stores in the chain.
Of course, Montgomery Ward came up with its own new format — the racetrack — but that still didn’t save the chain from liquidation.
To be sure, every Kmart ceo from Joseph E. Antonini to Floyd Hall to deposed Chuck Conaway has his own idea of how to reconfigure the troubled chain. Each attempt also failed to correct problems with supply-chain logistics.
According to Adamson, Ward’s problem may have been that the idea came into play a little too late in its bankruptcy, a scenario that doesn’t apply to Kmart. “This idea started for us two weeks after I got here,” he explained.
Bob Carbonell, director of credit for the Sands division of CyberBusiness Credit, a credit reporting firm, observed, “There are big differences between Montgomery Ward and Kmart. Ward didn’t have a strong geographic identity anywhere in the U.S., nor did it have a customer. Kmart is everywhere, has thousands of stores and a loyal customer base.”
But the new store look isn’t the only thing on Kmart’s plate. Adamson said he is hopeful that the company will be able to announce in mid-September the signing of a new brand partner, one that will be centered on the Hispanic and African-American communities. A second partner targeting those markets could also be announced before the end of the year, he said. The first will focus on apparel, fragrances and cosmetics, Adamson said. The Kmart ceo has said a key part of the retailer’s future strategy will be to appeal to urban, ethnic customers not currently served by other mass-market retailers. In some senses, Kmart has little choice but to pursue such a strategy, since many of its stores are located in urban locations.
It’s a move that could work, however, as evidenced by Stage Stores Inc., where in certain locations as much as 30 to 40 percent of its customers are Hispanic. Those customers, Jim Scarborough, Stage’s chairman, president and ceo, told WWD, are particularly loyal shoppers. Stage Stores emerged from bankruptcy court protection in August 2001.
In addition, Martha Stewart’s Everyday line will have a cousin popping up in December, her new Holiday collection. Peter Arnell, chairman and chief creative officer of the Arnell Group, is expected to work on Stewart’s new product launch. He is already the brains behind the advertising for Kmart’s Martha Stewart collections. Arnell is part of the Omnicom Group Inc.
As reported, Arnell’s ties to Kmart go much deeper. He is already working with Kmart on strategic store initiatives, helping with Kmart’s new store concept from revamping fixtures to rethinking the entire shopping experience. Arnell could not be reached for comment.
A sister company to Arnell, also part of Omnicom, is TBWA Worldwide, which was involved in Kmart’s back-to-school campaign last month that highlighted the launch of the new Joe Boxer line.
Joe Boxer is bringing in “dollars and unit sales,” Adamson stated. He added that one “nice” problem surrounding its success has been the difficulties in keeping the shelves stocked with inventory — although, as reported, logistics have been a perennial problem at Kmart stretching back to the Eighties. The launch coincided with the heavily trafficked back-to-school season, and sources said that sales of the Joe Boxer lines have trended “two to three times higher than plan.”
To help solve some of Kmart’s long-standing supply-chain ills, Adamson is charting a course where the company will use software to track a product’s performance, with the goal of being able to expand and shrink categories based on sales in a particular location. One store, for example, might carry depth in beauty care products, while another site might focus more on children’s apparel.
Under another part of the software program, the retailer is testing its 100 top-selling items in 10 stores in the Chicago area. The plan is to make sure those items are on the shelves at all times. Kmart is using the test to determine what needs to be retooled, and then will slowly add a new round of stores to the tracking program.
And vendors remain, for now, optimistic about Kmart’s future. William Sweedler, chief executive officer of Joe Boxer and president of Windsong Allegiance Group, the Westport, Conn.-based firm that bought Joe Boxer Corp. in March 2001, said that the brand has “tremendous awareness among those ages 12 to 34.”
Since the purchase, the brand has been extended to accessories and footwear, as well as an increased depth in home goods in both softlines and hardlines, all exclusively available at Kmart. In addition, a complete line of tops and bottoms are now part of the apparel assortment.
The retailer’s expectations for Joe Boxer, its biggest brand launch ever, is a sales volume that could ultimately compare in size with the Martha Stewart Everyday collection, which does $1.6 billion a year. To put it in perspective, Mossimo, the popular apparel line sold at Target, which is outperforming Kmart, had first-year sales of about $750 million.
According to Sweedler, Kmart needs more brands unique to the discounter, a priority for Adamson. “Jim is in the process of addressing those issues such as the merchandise mix in the stores. He is building a whole new Kmart. Jim has definitely dug his heels in and is making it happen.”