Byline: Vicki M. Young

NEW YORK — Kmart Corp. may have grave doubts about its future, but it at least thought it knew everything about its customers.
A consumer loyalty study just released by Brand Keys points out that the depth of its customers’ loyalty may be in question as well. The bankrupt retailer finished in last place among seven mass channel discounters, and even the electronics big box Best Buy beat Kmart for the first time. The survey, which was done during the first quarter of calendar 2002, focused on consumers who spent at least $75 at the store. Other retailers included in the group, not necessarily in the order of survey results, are Wal-Mart, Sears, J.C. Penney and Target.
“Kmart has been slowly descending in order since 1997,” Robert Passikoff, Brand Keys’ president, said. “Consumers who typically spend $75 are the top 20 percent of Kmart customers. They are still shopping there, but with the discounter now rated at the bottom, you know it means that Kmart is slowly disappearing from the consideration mindset of customer awareness.”
Passikoff recalled hearing from a Kmart executive nine months ago that the chain “knew everything it needed to know about its customers” because of database tracking capability that monitored consumer transactions.
“While that is great because it gives the perception of good inventory control, it is a negative because it really is a lagging indicator. It tells a retailer what customers did yesterday, not what consumers will buy tomorrow,” the Brand Keys executive noted.
To be sure, the jury is still out over Kmart’s ability to successfully restructure its operations, but in the last month there has been a growing concern from some members of the investment and vendor communities over the distressed retailer’s progress, or lack of it.
Three months and one week after Kmart’s voluntary Chapter 11 filing on Jan. 22, questions center on the absence of a retail-focused turnaround team, a lack of details about a turnaround strategy and its merchandising focus. While most in the financial community don’t expect Kmart to present any grand initiative until fall, some credit specialists and vendors tell WWD that, considering the ongoing erosion of its market share, six months is too long to wait for at least some indication on its plans.
While debtor-in-possession financing of $2 billion has enabled the discounter to continue to get goods from its vendors, the longer-term outlook remains unclear and suppliers’ options few.
One Kmart apparel vendor said, “We’re already selling to Wal-Mart and not likely to get any increase in orders. We’re also trying to get in the door at Kohl’s, but who isn’t these days? There aren’t that many retailers and so many competing apparel firms. We don’t know what’s going on at Kmart because they’re not telling us much.”
Citing their companies’ policies, several credit analysts and vulture fund managers declined to speak on the record about Kmart, and many vendors requested anonymity to avoid repercussions in their business relationships with the discounter. At least one vendor, attempting to secure new accounts, requested anonymity so it wouldn’t appear “desperate” in business talks with other stores.
Richard Hastings, credit economist at CyberBusiness Credit, said, “The results so far are a steadier business than many had expected, but that’s mostly due to the food and toy categories having a more stable price structure.
“The longer-term outlook is uncertain. If the company can’t come up with a plan and convince everybody that it will be profitable in 18 months, this restructuring won’t be going anywhere. The company needs more than just an exit strategy. At some point Kmart will need to sell junior debt to be able to support some form of debt capitalization. It issued bonds before and it will need to do it again.”
Alan Melamed, who heads up a credit reporting service under his name, was more blunt: “My feeling is that Kmart will not survive because their competitors are better run. I don’t like the way the stores look and I don’t see anything happening to refocus the stores. The only thing I see is Kmart trying to be competitive on price, but it can’t survive on price alone.”
Price, he pointed out, “attracts a certain type of cost-conscious consumer that is always there when the price is right, but because they’ll buy from any retailer that provides the best price, they won’t be loyal to Kmart.”
Emanuel Weintraub, an apparel consultant of the firm that bears his name, observed: “You wonder whether Kmart can reestablish a franchise whose stores are conducive to shopping, and whether it can do this quickly. Its survival formula has to include a niche such as Martha Stewart and beyond. What can Kmart bring to the marketplace to bring consumers into the stores? I don’t even know if Kmart knows yet.”
There even have been whispers about a prototype lab in the works, one using an unused site that Kmart is still renting. Some market sources have heard that maybe there might be some format change in the works come September, just in time for a back-to-school unveiling.
Passikoff described the lab as a variation of its Big K format, a work-in-progress that he said is a tactic better for department stores such as Macy’s and Saks Fifth Avenue, “where the store experience really comes into play.” He added that even if the format could work, Kmart would be hard-pressed to find the cash to retrofit its stores.
As reported, Montgomery Ward in August 1998, while in bankruptcy, debuted a racetrack layout that management loved but, because of lack of cash, was unable to move into most of its stores. The retailer announced in December 2000 that it would shutter its doors forever, 16 months after it exited from bankruptcy court protection.
An analyst for a vulture fund said of Kmart’s current management, led by chief executive James Adamson, “Clearly it is not what should be an incredibly focused turnaround team which understands mass market retailing. It knows a lot about bankruptcy and how to keep costs down, but there’s no chief merchant.”
As reported, former Ward’s ceo Roger Goddu is said to be in talks about joining Kmart as chief merchant, “but there doesn’t seem to be any movement yet,” the analyst said.
Not everyone thinks that Kmart is a lost cause.
Stanley Officina, president of Sterling Factors, said, “We continue to support Kmart with open account credit for clients. We are not put off by their $135 million loss in the first quarter because it was expected. It is the third largest retail chain in the country and you have to give the guys a chance to do what they are supposed to do.”
Leah A. Hartman, senior vice president of Credit Research & Trading, an investment banker that specializes in distressed situations, was hopeful that Adamson, a long-time Kmart director who led the Denny’s turnaround at Advantica Restaurant Group, would be able to put a good team together. “He left behind a knowledgeable operating team,” she said. “Hopefully, that will be his legacy at Kmart.”
Debt analyst Rosemary Sisson of UBS Warburg noted that most vendors only have started shipping again recently, and that it won’t be for a couple of months until anyone knows for sure how much of the Kmart customer base is totally lost.
“There’s always the danger that when a company is down and out that the other guy will take customers away and then it’s a question of how to get them back. Kmart has more of a problem with Target than with Wal-Mart. Historically, it is positioned a notch above the Wal-Mart customer and the Martha Stewart line brings in higher-income customers,” she said.
But unlike at Target, with Mossimo and many other special brands, Kmart doesn’t hold the hot hand in apparel. “Years ago, the Jaclyn Smith line was great, as was Kathy Ireland workout wear. Kmart needs a really good women’s line. There’s definitely an upside for them to beef up the apparel side of the business and probably a lot of designers who wouldn’t mind selling exclusively to Kmart,” she said.
As reported, designer Nicholas Graham’s Joe Boxer line will debut at Kmart stores in July. While hopes are high, whether the line can cash in on the Blue Light special a la Martha Stewart remains to be seen. As one brand expert observed, “Even if the line is a good one, it won’t matter if customers don’t want to shop at Kmart anymore.”
The nagging doubts linger. “No one cares about the company anymore,” said a former Kmart apparel vendor. “The only thing that matters is Martha Stewart. The retailers that are doing well are those that have a well-defined market. They know what their niche is and who is their core customer.”
While its market relevancy remains in doubt, so too have Kmart’s pre-petition practices drawn curiosity and, in some cases, ire. As reported, Kmart handed out more than $18 million to senior level executives, many of whom have since left the company on terms that included the forgiveness of the loans. For example, when former chief executive officer Chuck Conaway left last month, he left with his $5 million loan forgiven.
Another cash excess, according to one vulture fund manager, was the payout of $250 million a year for rent on stores that were closed before the leases expired. Those leases were rejected in February, shortly after the retailer filed for bankruptcy court protection in Chicago.

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