KMART’S CYBER-PLAY: RETOOLED E-COMMERCE AND FREE NET ACCESS
Byline: Valerie Seckler
NEW YORK — Kmart is putting a new glow into its blue light icon.
The mass market giant, with sales of $36 billion annually, said Wednesday it is seizing an opening it believes will net a new group of shoppers: By late spring or early summer, it will open an e-commerce site, called BlueLight.com, that will provide users with free Internet access, plus all services currently offered by Yahoo, a strategic, technological and financial partner in the project. The site is currently under construction and succeeds kmart.com, the retailer’s first cyber-store.
The project is being bankrolled by Softbank Venture Capital, an aggressive Silicon Valley player that has sunk $62.5 million into the effort, and Martha Stewart Living Omnimedia, whose investment, like Yahoo’s, was not disclosed.
Kmart is contributing non-financial resources, and will retain a 60 percent stake in the new venture.
“The way we see it, our customers shouldn’t have to pay to visit a Kmart store or Web site,” said Floyd Hall, Kmart’s chairman, president and chief executive officer, during a briefing for media members and retail analysts Wednesday at the Waldorf-Astoria hotel.
In contrast, America Online, the country’s largest Internet service provider, charges users a monthly membership fee of $22.95 for the bundling of various services, such as e-mail, and access to the e-commerce site, Shop@AOL.
Following his formal presentation, Hall was questioned about the impact the Kmart-Yahoo venture might have on AOL. “America Online is a well managed company with a lot of intelligent people,” Hall said. “I suspect that in this very competitive world, they will implement some new programs. Our object is not to wreak havoc, but to leapfrog the competition.”
Asked of the competitive threat posed by free Internet access and Yahoo’s services, via BlueLight.com, a spokeswoman for America Online responded: “We’ve seen, over the past 18 months, the emergence of a value segment online, so we have positioned AOL as a premium brand. We have positioned our CompuServe unit as a more value-oriented brand, with the more aggressive offer of special rebates.”
Also participating in the briefing, led by Hall, were some of BlueLight’s new management team, plus executives of Yahoo, Martha Stewart Omnipoint and Cisco Systems, another of Kmart’s technology partners in the new Web strategy, along with Spinway.com. Spinway and Cisco are building the server and infrastructure technology to support BlueLight.com’s free Net service.
A deal between Kmart and Yahoo had been anticipated on Wall Street this week, as rumors circulated of a similar marketing alliance between Wal-Mart and America Online. Retail observers contacted following the Kmart-Yahoo media briefing, citing the breadth and strength of Kmart’s partners in its new Internet venture, projected it could propel the country’s third-largest retailer ahead of $200 billion behemoth Wal-Mart in cyberspace.
“With this Internet strategy, in one leap, Kmart has probably taken itself from behind the curve online to being in line with the curve, or a little ahead,” said Daniel T. Binder, retail analyst at Brown Bros. Harriman, in an interview following the presentation. “Kmart has struck a new e-commerce strategy, with a set of strong Internet investors and strategic partners.
“It is possible that, online, Kmart could move ahead of Wal-Mart,” Binder projected.
It was probably no coincidence, analysts noted, that Kmart and Yahoo announced their plans on Wednesday, following speculation that arch-rivals Wal-Mart and AOL are on the verge of announcing some sort of marketing venture. As of Wednesday morning, neither Wal-Mart nor AOL had commented on those rumors.
“Wal-Mart and AOL look like they got caught with their pants down,” quipped one analyst.
In addition, observers pointed out that BlueLight.com provides Kmart with a new platform from which to pay off shareholders with a more vigorous return on their investment in years ahead: a potential spin-off of the cyber-venture, should it prove successful.
“Over the past 18 months, we have been developing an e-commerce strategy that will also leverage our store presence,” Hall told the gathering of roughly 400 media representatives and retail analysts. “Our new Internet strategy enables us to extend the reach of our 2,177 Kmart stores in the U.S., and allows us to create special promotions aimed at the 85 million U.S. households in our proprietary database. Plus, it gives us a new path to pursue the 72 million households that get our weekly ad circulars, as well as the 30 million customers who shop our stores each week.”
The latter will be achieved via Kmart’s in-store kiosks, which have been installed in 1,200 of its stores and are expected to be available throughout the chain by the summer. “We have temporarily suspended the rollout of our Kmart Solutions kiosks to enable Internet access,” Hall explained. “The rollout process is relatively quick and simple, and we hope to be through by summer.”
Currently, shoppers can shop electronically, via Kmart’s kiosks, for various products, including certain high-ticket items that are not sold in the chain’s stores, but they cannot use them to gain access to the Internet.
Hall estimated BlueLight eventually will offer between 10,000 and 20,000 items — like large-screen TVs, boats and swimming pools — that are “not usually available in the discount channel” and are not carried in its stores.
“So far we have identified 10,000 of these products, and it has had a domino effect,” Hall stated. “The more of these items we’ve added [to Kmart Solutions], the more we’ve been contacted by new suppliers.”
According to a study conducted for Kmart by McKinsey & Co., Hall said 51 percent of Kmart’s customers currently are online; 19 percent are “transitioning” to the Internet, and 30 percent are not online. These figures show that Kmart’s cyber-shoppers mirror the online population in the U.S., which, McKinsey found, amounts to 52 percent of American consumers.
“BlueLight is delivering an Internet offering to mainstream America,” said Rex Golding, managing director for Softbank’s technology fund. “Kmart, Yahoo, Martha Stewart Living Omnimedia and Softbank have joined forces with a seasoned management team to revolutionize the Internet experience for the mass market.”
And although Hall anticipated that BlueLight will not have a “material” effect on Kmart’s sales and profits in 2000, observers voiced optimism over the potential for an eventual spin-off of all, or part, of the new Net unit.
BlueLight.com’s roughly 20 employees, including engineers from Net stalwarts like Sun and Oracle, are based in San Francisco and spearheaded by a new management team: Mark H. Goldstein, president and chief executive officer; Fran Maier, vice president of marketing, and Brian Sugar, chief Web officer. Prior to joining Kmart’s new unit, Goldstein founded four Net ventures: Impulse, Buy Network, NetAngels and Reality Online; Maier was senior vice president of marketing at Women.com, a content and community site that recently opened its first e-commerce area, She Gets Dressed, and Sugar was J.Crew’s executive vice president of e-commerce.
BlueLight.com will feature specialty shops for brands such as Martha Stewart Everyday and Penske Auto Service, and an array of services and promotions, including e-banking; $5 Kmart cash cards to be given with every online transaction; free shipping, and the ability to return to Kmart stores goods that are purchased on the Web site.
Initially, back-room operations like fulfillment will be outsourced to third-parties, like Fingerhut, Submit Order and PFS Web, Goldstein said. “Over time, we will be bringing it in-house,” he added.
Effectively executing operations like customer service and fulfillment — particularly with the heavy traffic promised by free Internet access — plus the ability to leverage its customer database, will largely determine whether BlueLight.com succeeds early on, observers projected.
“They can probably get through the first stage — the site’s launch and establishing a presence online — and then the question becomes, ‘How well can they penetrate the market?”‘ said Stephanie Shern, global vice chairman for retail and consumer products at Ernst & Young. “One of the things Kmart has going for it is Softbank, which is a very aggressive company. Wal-Mart is the driving force behind its online effort, and it is taking a more cautious, conservative approach.”
The BlueLight name was chosen, Hall said, because of its “worldwide association with Kmart and with value.” However, Sugar pointed out, the new team will attempt to imbue it with a “jazzy” and perhaps kitschy sensibility, rather than the old-time image of dingy fluorescent glare.