Kmart's Bright Idea

Can revamped stores and the revival of the Blue Light Special bring back customers and profits?

When Charles C. Conaway went to Kmart Corp. (KM ) last summer, he brought along a mania for performance-based analysis. Today, it's hard to miss the point: Conaway's office is dominated by a 20-foot-long mural upon which the CEO tracks quarterly progress on nearly 100 restructuring initiatives, from replenishing shelves to implementing price changes within 48 hours. Beside each project is the cost and benefit to date, plus the name--and phone number--of the manager in charge. "It's the ultimate accountability," Conaway says.

Accountability has been in short supply for years at the foundering discounter, which has seen one turnaround effort after another sputter out as its chronically understocked shelves, tacky merchandise, and poor service drove shoppers to rivals like Wal-Mart Stores Inc. (WMT ) and Target Corp. (TGT ) The Troy (Mich.)-based chain racked up a $244 million net loss for the fiscal year ended Jan. 31, on a meager 3.1% sales gain, to $37 billion.

But Conaway, a 40-year-old operations whiz recruited from drug retailer CVS Corp. (CVS ), where he was president and COO, says he's the one to change all that. Since his arrival, Conaway and his band of young management recruits from Wal-Mart, Target, and Coca-Cola (KO ) have been attacking the structural problems that led to Kmart's decline. Now that they claim to be making progress on those fronts, they're ready to issue a blue-edged invitation to consumers to try the stores again.

On Apr. 2, Conaway will unveil a new marketing strategy that draws heavily on the one icon of Kmart's past that still resonates with consumers: the Blue Light Special, which was discontinued in 1991. Store managers used the flashing blue police light in the 1960s, '70s, and '80s to direct shoppers to unadvertised bargains. By offering a contemporary take on that old device, company officials hope to restore a sense of excitement and reward to shopping at Kmart. "There's a funness to it that, frankly, Kmart didn't have [recently]," says Steve Feuling, chief marketing officer for Kmart's Blue Light efforts.

The return of the Blue Light via a $25 million advertising blitz, the biggest such initiative in Kmart history, is just a piece of Conaway's overall strategy. After all, the marketing come-on will be wasted if consumers enticed into the stores suffer the same old frustrations. So Conaway has been taking sweeping--and costly--steps to raise service levels, ensure that popular items are in stock, and brighten up the stores.

Conaway's elaborate chart notwithstanding, the payoff still isn't clear. That's why all the resuscitation efforts are overshadowed by a big question: Is there still a role for Kmart between Wal-Mart and Target? "I'm not sure there's room for them," bluntly says the CEO of a major supplier to all three. But Conaway vows it's not too late--as long as Kmart does a better job of staking out its turf between low-price leader Wal-Mart and cheap-chic purveyor Target. Conaway insists the middle ground is wide open for a retailer that relentlessly focuses on moms and two of their key priorities: their kids and their homes. Kmart can meet those priorities with exclusive brands like Martha Stewart and Sesame Street and new licensing and promotional tie-ins with everyone from Walt Disney Co. (DIS ) to World Wrestling Federation Entertainment Inc. (WWF ) creating a buzz. With research showing that shoppers still have fond memories of the Blue Light Special, the discounter is putting the blue hue at the center of its effort to entice them into the stores more often. TBWA\Chiat\Day, the ad agency best known for its cutting-edge work for Apple Computer, will herald that "The Blue Light Is Back" with ads that place a blue glow in such unexpected settings as the Statue of Liberty's torch or fireflies buzzing in a kid's jar. Kmart's e-commerce effort already has shown that the theme can click even with more cutting-edge consumers.

Consumers intrigued enough to pay a visit will find that once-dreary stores have been splashed with blue and animated by "celebrity" announcers--Homer Simpson is a possibility--directing shoppers to a central "Blue Light Zone" for the deals. This time around, they're not junky clearance items but coveted products like Sony Playstations, TVs, and Coca-Cola. Also new: a "Blue Light Always" pricing strategy that will slash tags on everyday basics like shampoo, diapers, medicines, and groceries by 2% to 5% to make them competitive with Wal-Mart prices. "Now we're saying we're there for everything you need," says Conaway.

Kmart's stock has run up a sharp 60%, to around $9, since early this year, thanks in part to a 6% equity stake taken by California supermarket magnate Ronald W. Burkle. But that's still down 48% from two years ago, and Wall Street has ample reason to be skeptical of Kmart's turnaround promises. Conaway has been careful not to repeat the mistake made in previous Kmart regimes of making grandiose promises to win back Wal-Mart stalwarts. Instead, he's focusing on garnering more visits from the 66 million households that already shop the stores but are prone to act like "cruise missiles"--cherry-picking an advertised special or two, picking up some Martha Stewart linens, and then bolting for the door.

Just getting Kmart's best customers to increase their visits from 3.2 per month to 4, as Wal-Mart's core shoppers do, would add $2.8 billion to the top line, says Kmart's chief marketing officer Brent Willis, a recruit from Coke's Latin American unit. "We don't have to take a single customer from Wal-Mart," he says.

To make sure shelves are kept fully stocked, Kmart is spending nearly $2 billion on technology to overhaul its inventory controls. Since October, it's also taken an unusual tack to upgrade service by entering all shoppers willing to dial a hotline in a $10,000 sweepstakes to rate their overall shopping experience. Some 20 million already have responded, generating a database that enables managers to pinpoint performance at the store level and reward cashiers at popular units with as much as $1,200 in quarterly bonuses. Since the program began, Kmart says its satisfaction rating has climbed from 40% to 55%. Conaway's goal is 70%.

Shoppers like Dolores Ronzani, who still smiles at the recollection of booty scored from Blue Light Specials of decades ago, seem receptive to the idea. These days, the 70-year-old widow from Highland Park, Ill., frequents Target, Marshalls, and T.J. Maxx but finds they don't measure up to Kmart in its heyday: "The excitement of the Blue Light Special is missing." If it's excitement she craves, Conaway and Co. aim to provide it in spades.

By Joann Muller in Detroit, with Ann Therese Palmer in Chicago

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