Kmart needs swift changes to survive

NEW YORK -- Would consumers miss Kmart if it went away?

Capri DeMarco, a mother of three from Duanesburg, N.Y., has a frank answer.

"No. Their customer service rots," she said. "We have Wal-Mart. Wal-Mart has taken over."

Shoppers like DeMarco offer proof that the nation's third-largest discounter -- squeezed by low-price operator Wal-Mart and cheap chic purveyor Target -- needs to change dramatically and fast as it reorganizes in Chapter 11 bankruptcy proceedings.

Others have failed

If it doesn't, analysts say, Kmart could find itself joining the retail scrap heap that's expected to pile higher in this recessionary environment.

Bradlees and 128-year-old Montgomery Ward tried to use Chapter 11 bankruptcy to restructure but ended up liquidating after failing to come up with a new formula that would set themselves apart from their rivals.

And analysts believe Ames Department Stores, which filed for bankruptcy last August -- its second time around -- might meet the same fate. In December, it announced it would close another 54 stores, leaving it with 333. Ames hopes to exit bankruptcy by the second quarter.

Other big names that have disappeared include discounter Caldor, which called it quits in 1999, and Merry-Go-Round Enterprises, which ruled teen apparel retailing with 800 stores at its heyday in the late 1980s and early '90s but ended up liquidating in 1996.

As Conor Reilly, a senior partner at the New York law firm Gibson, Dunn & Crutcher, who specializes in bankruptcy, puts it, "I just don't think consumers will miss Kmart in its current format. If they don't have a big plan, they just won't come out" of bankruptcy intact.

In announcing the Chapter 11 filing Tuesday, Kmart offered few clues as to what exactly the restructuring would entail. It only said it will evaluate store performance and lease terms by the end of the first quarter of 2002 and will close unprofitable or underperforming stores. Kmart also said it would reduce staff.

Plenty of competitors

Analysts say Kmart, with sales last year of $37 billion, could close anywhere from 250 to 700 of its 2,100 stores.

Plenty of competitors are available to fill the void. With Merry-Go-Round's disappearance, rivals like Gap, Abercrombie & Fitch and American Eagle Outfitters quickly moved in. Meanwhile, such powerful players as Wal-Mart, Target and Kohl's snapped up real estate from Bradlees and Montgomery Ward.

But unlike many of its now-extinct discount rivals, which lacked powerful exclusive brands, Kmart does have several unique attributes, analysts note. For one, the retailer has exclusive partnerships with such names as Martha Stewart, its top-selling brand; Sesame Street and Jaclyn Smith.

For some customers, like Michele Tekler of Wausau, Wis., Martha Stewart is the "No. 1 priority" at Kmart.

"It's the reason I do come," said Tekler, who was buying household items Friday morning at one of the two Kmarts in her town.

Some shoppers also prefer Kmart over its competitors because of its convenience and variety.

"I can find what I want easily here, even more so than at Wal-Mart," said Jeannie Dinoto, from Ventnor, N.J. "I can get something for the baby, something for myself, something for the house, and it's easy."

Kmart also has established roots in the urban market, with two-thirds of its store base in cities, according to Burt Flickinger III, managing director of Reach Marketing, a Westport, Conn.-based retail consulting firm.

However, in order to survive, Kmart needs to come up with a specific marketing niche, and analysts are hard-pressed to come up with solutions.

Furthermore, just as Kmart helped bring about the demise of Bradlees and Caldor's when it moved into the Northeast, the discounter now faces similar competitive pressures as Wal-Mart and Target continue to expand.

"The fight will definitely be in the urban area" that Kmart has dominated, Flickinger said.

Some analysts believe Kmart's future might lie in fortifying its relationship with Hispanic and black consumers. Flickinger said Kmart must de-emphasize food retailing, an area that's dominated by Wal-Mart, and eliminate electronics.

Kmart also needs to make sure its key brands, particularly Martha Stewart, don't leave. Sharon Patrick, president and chief operating officer of Martha Stewart Living Omnimedia said in a statement Tuesday it would continue to sell Martha Stewart's line of home and garden products to Kmart under the terms of its contract for the "forseeable future."

But she also left open the possibility that the label might have to eventually find other mass retail outlets.