Seasonal and promotional beauty companies, such as sun care manufacturers and cosmetic kit makers, expect to escape relatively unscathed. Larger manufacturers, such as Unilever, L’Oreal and Procter & Gamble, with a significant year-in-year-out business, have more to lose.
As reported, Kmart filed for Chapter 11 bankruptcy protection in Chicago on Tuesday. Downsizing and a comprehensive comeback strategy are necessary for the nation’s third-largest retailer to lift itself up from its current position, which it estimates it can pull off by 2003.
Solar Cosmetics Labs, the Miami-based maker of NO-AD sun care products, for example, considers itself lucky. “We had nothing outstanding to Kmart,” said Joseph Letzelter, Solar’s chief financial officer. Sun care buying orders were finalized in the third quarter of last year. Many companies have already been paid and won’t have to face reordering until the third quarter of this year. “We’ll be cautious when Kmart places orders next July,” said Letzelter.
Promotional companies also report that their bottom lines have not been damaged. Bill George, senior vice president of sales for Markwins International Corp., a supplier of cosmetics gift sets, typically runs quarterly promotions and holiday assortments with Kmart. Business has been good, George noted, especially during the six weeks before Christmas. “It’s a big business that blows up for a short period of time and we got paid in full. Their filing had no repercussions on us.”
George is optimistic about Kmart’s situation in the short term, saying: “Long term will depend largely on management’s view of the marketplace. They have to define where they fit in between Wal-Mart and Target.”
As for future plans, and how Markwins might be affected, George said: “We will work with the buying team on terms that are mutually beneficial. We have every intention of moving forward.” But, “given the financial circumstances and uncertainty of store closures, practically speaking, it would be best for [both of] us to proceed cautiously. “If they close 500 stores, we’ll both have to be conservative.”
Helen of Troy Ltd., a midsized maker of blow dryers and curling irons under the Revlon and Vidal Sassoon brands, issued a release stating that its fiscal earnings are intact despite Kmart’s filing and the monies owed to them. Helen of Troy’s outstanding receivable balance from Kmart is approximately $1 million on sales of $14.4 million to the retailer in 2001.
David Swenson, vice president, sales and marketing for Norstar, a small beauty company that makes Sweet Spa, regards the filing as a plus. “Actually, for a small company, Chapter 11 is a guarantee [Kmart] will pay their bills.”
Many large Kmart suppliers, such as Unilever and P&G, earlier this week released statements to assure the industry its businesses wouldn’t be affected by the filing, which is the largest in retail history.
Larry Pesin, president of Lamaur, which manufactures Willow Lake and B In10se hair care lines, said bigger suppliers are always harder hit. “The bigger the company, the bigger the accounts receivable, the bigger the exposure.” But a Unilever spokesman said that despite Unilever’s “financial exposure, we will continue to ship+as they reorganize.” L’Oreal, one of Kmart’s largest beauty suppliers, will “find a way to work with Kmart through these difficult times,” according to Joseph Campinell, president of L’Oreal’s Consumer Products Division.
Lamaur’s Pesin considers himself fortunate that his company’s exposure “is not that monumental” and he is optimistic that Kmart will turn itself around. “We don’t see this as a long-term problem for them, just a short-term one.”
It has been reported that Kmart made several blunders over the past year that landed it in its current financial condition. One of the many mistakes includes aggressive expansion. However, Myra Solomon, vice president of beauty company Petunia, believes that certain expansion decisions were a good choice. “When Kmart first opened on 8th Avenue [in Manhattan] I thought, ‘There goes the neighborhood.’ Then I became a real fan of the store and Kmart. They tapped into what Manhattan needed without Manhattan knowing it. By filing, they are giving themselves protection so manufacturers will feel confident selling to them.”
One manufacturer said Kmart’s downfall began as long as 10 years ago.
“It’s a symptom of the recession and long-term problems with Kmart,” said the source from a prominent beauty company, pointing to difficulties in coordinating operations and merchandising. “It didn’t happen overnight.”
The source said it’s too soon to tell whether his company’s bottom line would be affected by the filing, but it hinged on “how quickly Kmart gets back to business. They’re a significant amount of volume for us, one of our top 10 retailers,” among others including Wal-Mart, Target, CVS, Eckerd, Rite Aid and Walgreen.
On the bright side, the source said, the Chapter 11 filing gives Kmart the chance to get out of 350 underperforming leases, which have been a drag on business by tying up funds that could be used for a significant marketing plan.
On the other hand, the source noted: “Those stores, even though they may be underperforming, contain inventory and you never get that back one-for-one. That does affect your business.”
He added that future shipments to the retailer would occur “as soon as they straighten out the debtor-in-possession” financing. “We had a great year last year, a significant increase” with Kmart, the vendor continued. “But my fear is that when something like this happens, consumers have a tendency to see empty shelves and leave.”
The filing also halts plans announced in May to grow the Health & Beauty Aids sections of Kmart’s top 400 volume stores. HBA is a key destination area in Kmart, which appeals directly to its target customer: moms. Chuck Conaway, Kmart’s chief executive officer, described the chain’s HBA section in a conference call with analysts as a “vastly undersized” department, that’s “short on assortment, not competitively priced and underpromoted.”
Kmart did not respond to queries regarding future plans for its HBA sections of stores. – Andrea M. Grossman with contributions by Matthew W. Evans and Faye Brookman.