Case Analysis
Kmart
Marie Janz & Kris Ruth
Introduction
Historical Overview
In 1987 Sebastian S. Kresge, the founder of Kmart opened his first five-and-dime store. In 1962 Kresge had opened the first Kmart discount department, followed by 17 other Kmart stores that same year. (4)
In 1966, Kresge died, leaving 735 Kresge variety stores and 162 Kmart stores with combined annual sales greater than $1 billion. Management replaced all Kresge stores with Kmarts and continued to build more Kmarts. (4)
In 1977 Kmart Corporation was established with 95% of sales coming from Kmart department stores. In 1981, the 2,000th Kmart was opened.(4) (For other significant historical facts see Appendix 1.)
Kmart Corporation began diversifying their business strategy in the early 1980’s by acquiring many different companies. (For a complete listing of Kmarts History of Diversification see Appendix 2.)
Beginning with Antonini’s stay as CEO, president, & Chairman of the Board and continuing into this year, Kmart has been divesting these businesses. This divestiture strategy has left Kmart with only % shares of the shoe store that currently stocks their shoes (Kmart does not own the shoes it sells). Kmart after several years of negative income have chosen to concentrate on their core business.
Currently Kmart is undergoing a reconstruction strategy. This strategy includes constructing Super Kmarts to compete with Wal-mart’s Super-Centers and grocery stores. Super Kmarts are open 24 hours. For their current stores, they are closing down the smaller ones and remodeling the larger ones into Big Kmarts. The Big Kmart is designed with a "pantry", which is like a convenient store set-up, near the registers. The "pantry" is the central point with other items radiating out in terms of frequency of purchase. Kmart is opening Big Kmarts at the rate of 600 stores per year. Big Kmarts will include Kcafes which will carry Little Ceasars, Tyson, Coca Cola and Sara Lee items on the menu. (1, 2) "The Big Kmart format [ has] received the 1997 SPARC/3M (Supply Performance Award by Retail Category Program) award."(1)
As of November 12, 1998, Kmart has 2,160 retail outlets. (1)
Mission Statement and strategic goals
Floyd Hall was appointed as CEO/President/Chairman of Board in March 1995. Under Hall’s direction Kmart has undergone a restructuring strategy.
The goals of this strategy include: increasing the frequency of Customer visits, improving image and appearance, eliminate stock-outs, improve their inventory management, improve customer service, promoting of Private-Label Merchandise, eliminating some brands in order to have shelf space for a wider variety of merchandise.
Commitment to Quality Customer Service Mystery shoppers make 24 visits to every Kmart & Big Kmart each year and 36 visits per year to Super Kmarts. The quality ratings received from the mystery shopper account for 40% of the store managers’ bonuses.(2)
Identifying customers, markets, products & competitors
Kmart’s current customers include middle income families. The primary customer group is women between the ages of 24 and 45, with children at home, and with household incomes between $20,000 and $50,000 per year. It is estimated that 180 million people shop at Kmart each year. The typical customer will shop and average 4.3 times per month. Usually spending about $40 during 95% of all visits. 57% of customers are female, 46 years old and almost half have children younger than 18.
Their markets exist in the United States, Guam, Puerto Rico, and the Virgin Islands. Kmart has pulled out of their Canadian, Mexican, Czech and Slavic markets.(1)
Kmart’s main product lines include: Martha Stewart Everyday, Jaclyn Smith women’s apparel, Kathy Ireland’s women apparel, Kgro horticultural products, Sesame Street, Penske Automotive, Route 66, Bench Top and American Fare.(2) They also carry market dominant brands such as General Electric, Huffy, Sara Lee, Rubbermaid, Procter & Gamble, Fruit of the Loom, Nabisco, Hallmark, Gillette, etc. (2) In the Big Kmarts they have also set up on-line service terminals, "Kmart Solutions", that allow for orders to placed; items include flowers, toys, Whirlpool appliances and Western Union services. (1)
Kmart’s product lines also include on-line shopping. Not only can you purchase items at their web-site; but they have just expanded their presence on the Internet with the launching of www.musicfavorites.com.(1)
Kmart’s main competitors are in the general merchandise segment of the retail industry, namely Wal-Mart and Target. They also have to compete with department stores and specialized stores (a.k.a., "category killers") in the retail industry.
Company Analysis
Strategic Performance Indicators
The retail industry compares the leading companies in terms of sales per square foot, comparable sales growth, EBIT (Earnings Before Income Tax) Margin, Total Selling Square Feet, Total Stores and EPS. (2)
SWOT
Kmart’s internal strengths include their current CEO Floyd Hall and their current Restructuring plan. Floyd Hall has demonstrated himself to be of great value to Kmart. He saved them from near bankruptcy in January 1996. He negotiated with leaseholders, vendors and creditors not to force them into bankruptcy in spite of the junk bond rating they had received.
Their internal weaknesses include their inability to compete with Wal-Mart on price, their image, and inability to implement goals and strategy, and their corporate culture. Kmart’s image is so negative that 49% of Wal-Mart’s customers indicated in a survey that they drive past a Kmart to get to a Wal-Mart. The reasons cited for perceiving Wal-Mart as better included the perceptions that Wal-Mart’s prices are cheaper and that their products are better both in quality and value.
The external opportunities for Kmart are their private-label merchandise, which has improved in both quality and value. Overseas Expansion is another opportunity for all companies within the retail industry. Although Kmart has recently pulled out of some global markets and ventures, they are still active in others. Also, when they are through restructuring, they will probably have other opportunities for global opportunities.
The external threats facing them include Wal-Mart’s competitive pricing strategy. Wal-Mart will not be undersold; they will beat any price by 5%. Wal-Mart also has such strong supplier relations they are able to stronghold them into lower prices.
Industry Analysis
Identifying Competitors and Market Shares
The discount retail industry consists of several segments: full-line discount stores, specialty discounters, warehouse clubs and others. There is overlapping for any store between the different segments. For the purpose of this analysis we examined Kmart in the general merchandise segment of the retail industry.
This segment of the retail industry grossed $253 billion in sales in 1997. Kmart currently ranks second in this segment with 12.7% of the market, which is $32,183 million of sales for 1997. The leading competitor in the industry is Wal-Mart (who is currently "America’s largest revenue measured by total revenues" (1)) with 46.6% share of the market and $117,958 million in sales, which is 3.67 times larger than Kmart’s sales. Dayton Hudson Corp (who owns Target and Mervynn’s) ranks third with 10.9% market share and $27,757 in sales for 1997. (5)
Dominant Economic Characteristics of Industry
The retail industry’s dominant economic characteristics include growth in GDP, growth in disposable income, the consumer price index, and interest rates. These variables indicate the sales that can be expected.
Because in the recent past both GDP and disposable income have been increasing, the retail industry has enjoyed positive growth. However, in the first and second quarter of 1998 the economy has slowed causing sales to slump. GDP is also directly related to retail spending. Consumer spending is approximately two-thirds of GDP. The recent slow down in GDP can be related to the economic turmoil in Asia and Russia. This has dampened the export market and put a drag on the American economy.
The recent reduction in interest rates by the Federal Reserve Board is an attempt to off set some of the adverse effects of the global economic slow down. This is also meant to help spur consumer spending and use of credit.
General Economic Conditions affecting Industry
Other general economic conditions affecting the retail industry include, for all segments include consumer confidence, changes in consumer’s demand and shopping preferences. The current trends in the retail industry indicate that consumers perceive shopping as a chore, it is no longer "fun" as in the 1980’s. Consumers are shopping more at general merchandise stores, because they can eliminate trips. The Big Kmarts & Super Kmarts both will help minimize trips for the consumer. Because consumers perceive shopping as a chore, if retailers want to get them in the door, then they need to focus on making shopping more "entertaining". (7)
Porter 5-Forces Model
The rivalry of the competition is incredibly fierce. We currently our "over stored" as a whole. We have 22-sq. ft. of store space per person in our country. The only real way to gain any significant share of the market is by under cutting the price of the competition.
The power of the suppliers is strong. Retailers must maintain good relations with their vendors. If their reputation is soiled with the suppliers, then they risk losing their source of merchandise and will be driven out of business.
The power of the buyers is also strong. Retailers are at the mercy of the consumer’s demand and preferences. Currently consumers find shopping to be a chore. The convenience of the general merchandise store allows customers, to buy more items in fewer trips. The trick is getting them to come to your store—a pleasant and entertaining atmosphere is the push today.
The power of new market entrants is weak. The market is extremely easy to enter into, but it is hard to compete at the levels of economies of scale that the larger chains possess.
The power of substitutes is very strong. This force includes the specialized discount stores, the "category killers", these stores are able to undercut the prices of their items and simultaneously provide a wider variety of merchandise for their category.
Industry Prospects and Overall Attractiveness
The overall attractiveness of the industry is good, because it is relatively easy to enter. However, the industry is also over stored. In order for a new entrant to compete for any significant share of the market they will need to achieve economies of scale, in terms of cost-to-price ratios, consumer appeal—in terms of service and store appearance.
Performance Analysis
Financial Trends
Kmart’s five-year sales figures are relatively flat. Sales for years 1993-1997 all came in about the $30 billion range. Compared to the continual growth that Wal-Mart is experiencing, Kmart isn’t even a threat.
Net Income for Kmart has been minimal. In 1993 and 1995 the figures were negative. The other years were below $300 million, compared to Wal-Mart and Kmart’s own sales figures, this amount is negligible. EPS growth trends for both Kmart and Wal-Mart parallel that of their Net Income.
Kmart’s overall Sales, Net Income and EPS growth over the last five years is not very good. The poor figures for 1993-the first half of 1995 is the reason Mr. Antonini resigned as CEO. By January 1996, Kmart was under the verge of bankruptcy, which is not surprising given the figures. However, for 1997 and 1998, we see an obvious improvement from the efforts of CEO Floyd Hall. His negotiating skills are what saved Kmart from bankruptcy.
Ratio Analysis
Kmart’s productivity ratios, ROE and ROA, are negligible compared to Wal-Mart. For years 1993 and 1995, these figures were not measurable.
Kmart’s liquidity ratios, current ratio and quick ratio, are greater than Wal-Marts. However, Kmart’s current ratios are sporadic. Wal-Mart’s ratios are nice and even, indicating that they have a better handle on their cash flows.
Kmart’s leverage ratios indicate that Wal-Mart has higher Debt-to-Asset ratios than Kmart. However, Kmart has higher Debt-to Equity ratios. Kmart’s D/A & D/E ratios are both steadily declining.
Kmart’s Activity ratios indicate that Wal-Mart’s TAT & FAT ratios are both higher. But there is a steady increase in both TAT & FAT for Kmart, indicating that they are improving. (For actual Figures on Kmart see Appendix 3; for Wal-Mart see Appendix 4.)
Recommendations to Corporation
For Kmart we recommend that they establish a sinking fund for retail technological advancements. Thus allocating funds on an annual basis, that will allow them to purchase retail technology as soon as becomes available. This will allow them to compete with Wal-Mart, who works with technological research companies to test the technology. This allows Wal-Mart to be the first in the industry with the new technology if it is feasible. Establishing a sinking fund will cut down the lag time for Kmart to also have the technology.
We are currently seeing communication systems and teams being placed at the corporate and managerial levels. We recommend that they create a "trickle-down-effect" by having team meetings at the associate level. This will allow all employees to be involved in the Total Quality Management and Strategic program, which will also help to boost morale and overcome their current Corporate Culture.
Our third recommendation to Kmart is for them to continue to improve their bond rating. (There bond rating was upgraded to BB as of October 6, 1998.) Improving their bond rating will allow them to have access to better capitol for future endeavors.
Stock and Investment Evaluation
As of Tuesday, November 24, 1998, Kmart Corporation’s stock price closed at 14-11/16 ($14.69). The P/E ratio is currently 20. This is a faire historical market average for any given stock. Kmart’s stock price over the last year has both risen above and fallen below the S&P 500. (1)
The current P/E ratio indicates a hold position for the stock for the long-term investor who is risk tolerant, given Kmart’s past performance.
However, we will stretch our recommendation to a buy position given in light of Kmart’s current restructuring strategy, recent upgraded bond rating, increase in sales for 1998, and low stock price; we recommend buying Kmart’s stock. This is a good opportunity for the long-term risk tolerant investor to get in at a low price.
Floyd Hall’s career history indicates that he likes to strengthen a company financially and move on to another. For the risk-adverse investor, Floyd Hall’s retirement should signal a buy position, because Kmart should be out of financial trouble.
Bibliography
2. Kmart, www.kmart.com.
3. Wal-Mart, www.wal-mart.com.
Historical Overview
1897 Sebastian S. Kresge & John McCrory formed a partnership
Detroit, Michigan Memphis, Tennessee
1899 Dissolved Partnership
and >$10Mil Annual Sales
1929 S.S.Kresge Company expanded to Canada (19 stores)
Missouri
1950’s Suburban Shopping Centers & full-line discount stores are growing
1962 Kresge opened 18 Kmart department stores
1966 Kresge died; leaving 735 Kresge variety stores & 162 Kmart stores
Management replaced Kresge stores with Kmarts, and built more Kmart stores.
1977 Kmart Corporation was founded (95% of sales from Kmart)
1981 Opened the 2,000th Kmart
History of Diversification
1980 & 1983 2 cafeteria chains acquired, both divested in 1986
1992 Bizmart (105 office supply stores)
1992 50-50 Joint venture with El Puerto de Liverpool to open 100 Kmart stores in Mexico