Like any new boss, Kmart Corp. Chairman and CEO Charles C. Conaway wanted to spend his first weeks on the job this summer getting to know the business better. But when staffers at Kmart's Troy, Mich., headquarters heard he was planning to visit some of Kmart's 2,100 discount stores, they tipped off local managers, who scrambled to spruce up their stores. Big mistake. The heads-up infuriated Conaway, who wanted to see Kmart unvarnished, warts and all.
Finding the warts isn't too tough at Kmart these days, even though the retailer has invested $1.1 billion to dress up stores since the company nearly went bust in 1995. And although Kmart has been proclaiming a successful turnaround for the past two years, its recent financial performance tells another story. Operating earnings for the first half of the year fell 47%, to $239 million. Investment firm Sanford C. Bernstein & Co. is estimating yearend operating income will be $986 million, down 24% from last year.
What went wrong? The turnaround was short-lived because it was only skin deep. The store remodeling helped, but didn't go far enough. For most of the 1990s, Kmart was struggling to survive following an ill-conceived expansion into specialty stores. "We were on the precipice of death," says Kmart director James B. Adamson. To fix the mess, Kmart brought in retail veteran Floyd Hall, who orchestrated a $3 billion financial restructuring and then overhauled the stores to a new Big K format, featuring pantry foods along with the usual discount store merchandise. "Floyd got us to Point B," says Adamson. "Now Chuck has got to get us beyond."
Conaway, a determined, no-nonsense 40-year-old who made his mark as a financial and operations whiz at drugstore chain CVS Corp., seems to know exactly how he intends to do that. He wants to take aim at the structural and cultural problems that have plagued Kmart for years: poor inventory management that leads to chronic empty shelves, a lack of focus on the customer, and a muddled marketing strategy that hasn't been able to differentiate Kmart from competitors. Says Conaway: "No turnaround is complete unless we solve those problems."
Investors, who have pushed the share price down 50% in the past year, to about 7, are applauding Conaway's candor in facing the difficult issues that previous executives shied away from. Analysts are also more upbeat. "He is nothing but open, honest, and straightforward about Kmart's problems," says Sanford C. Bernstein retailing analyst Emme P. Kozloff. "It's a shocker."
Conaway has set himself a tough 24-month timetable to fix Kmart. Since starting in June, he has already begun rebuilding management with a mix of old and new executives, closed 72 underperforming stores, and put Kmart's $100 million advertising account up for review. And over the next two years, he has earmarked $2 billion for new technology to improve inventory controls.
NO ILLUSIONS. Conaway knows Kmart's turnaround is no sure bet. But he's not starting from scratch. Despite its tarnished image, Kmart is a retailing icon. And unlike discount rivals Wal-Mart Stores Inc. and Target Corp., it has a strong lineup of private-label brands such as Route 66 casual clothing and Sesame Street children's clothing. The biggest private-label star, Martha Stewart, sold $1 billion worth of merchandise through Kmart last year and Conaway hopes to expand the line with home furnishings and accessories. Says Martha Stewart of Conaway: "It is so very pleasing to have someone at the helm who is more analytical and proactive" than previous executives.
Those brands are good building blocks. But Conaway has no illusions about the retailer's sizable problems. "This is a monumental task," he says. Kmart's disastrous supply chain may be the most vexing problem. Unlike Wal-Mart's highly efficient distribution system, Kmart's is outdated, full of bottlenecks. And those inefficiencies resonate throughout the company. Merchandise planners can't get a good handle on what's selling, leaving Kmart with too many items on clearance racks and not enough of what shoppers want. Meanwhile, store clerks are tied up with paperwork in the back room instead of waiting on customers.
That's where the $2 billion to fix the inventory mess comes in. The money is for new technology such as Web-enabled registers and scanners that Conaway claims will track inventory better and speed checkout time by up to 40%. He's also taking some low-tech approaches to root out bad practices throughout the organization. Conaway, for example, has assigned a team to simplify work in the stores and throughout the company. Inside Kmart, they call the initiative "This is dumb." Employees who contribute waste-cutting ideas are rewarded with Kmart stock.
Getting a grip on inventory snafus should lead to happier customers, since employees freed up from bureaucratic tasks can spend more time on the store floor. It's a critical problem for Kmart where, all too often, customers walk out grumbling. "When you're looking for help, you can't find anyone in certain areas," says Loraine Scudder, a 53-year-old retired bookkeeper from Dexter, Mich. "You have to walk the store or go all the way to the service desk." Scudder and others complain that once they do get help, advertised items are often not in stock.
Conaway vows to rid Kmart of such "deplorable" shopping experiences. He says he was astonished to learn that the average store clerk spends only 22% of his or her time interacting with customers. "That number should be 60% or 70%," says Conaway. To measure how well Kmart is doing on customer service, Conaway is introducing a customer feedback system that uses automated voice response technology. Shoppers will be encouraged to call a toll-free number on the back of their Kmart receipt and rate their shopping experience or share complaints. Already being tested in Ohio, the system will generate helpful feedback from 15 million customers a year, says Conaway. Local managers will see where their stores need improvement and their bonuses will be tied to how well they respond to customer complaints.
Such steps would go a long way toward improving store operations and service. Even so, that would still leave another gaping hole in Kmart's strategy: its marketing image. Squeezed between Wal-Mart's reputation for value and Target's hip fashion image, Kmart lacks a well-defined approach. Unlike Wal-Mart, which emphasizes everyday low prices, Kmart tries to woo customers with special sales on selected items through its weekly pull-out ad in Sunday newspapers. But stocking shelves with the featured sale items--and tearing down displays to prepare for the next week's promotion--is labor-intensive and puts Kmart at a pricing disadvantage.
Conaway says Kmart won't abandon its weekly circulars but will limit sales to special deals on items unique to Kmart. On everyday items, it will match Wal-Mart's prices. And the merchandise mix will change, too. Conaway wants a sharper focus on Kmart's core customer, women with children. So more floor space will be devoted to home furnishings and kids' toys and clothing and less to automotive supplies, hardware, and sporting goods.
It could be a year or more before it's known whether Conaway's overhaul will be successful. But Conaway's own passion for measurement and his promises to share results--good or bad--ought to provide early and clear signals. If nothing else, his store managers should now realize it's more important to please customers than to impress the boss.