Commentary: Kmart's Shopping List for Survival

The longer the new CEO takes to make a plan, the harder it will be to woo back customers

By Joann Muller

It's hard to remember when Kmart Corp. (KM ) wasn't in turnaround mode. It's certainly been true for the six years that James B. Adamson has been on the board of the lumbering retail giant, including the last two months as chairman. Yet Adamson, a turnaround specialist who was thrust into the job of chief executive on Mar. 11, says he needs until the end of the year to develop a new strategy for the bankrupt retailer. "The issue is who is Kmart," he says.

Adamson is simply the latest in a string of Kmart CEOs to confront that problem over the past decade. But following the company's Chapter 11 bankruptcy filing Jan. 22, he may be the last if he doesn't come up with a strategy that can produce growth. While he says he will focus first on fixing finances and store operations, ultimately he has one task: giving consumers a reason to shop at Kmart.

To his credit Adamson has put the Troy (Mich.) company on stronger financial footing. On Mar. 6, it received critical approval from the bankruptcy court for $2 billion in financing. And on Mar. 8, Adamson announced plans to close 284 stores and lay off 22,000 workers. The move will boost cash flow by $550 million this year and improve earnings by $31 million annually. He also brought in top-notch financial experts from the turnaround firm of Jay Alix & Associates.

Certainly he's smart to be wary of jumping into another ill-considered restructuring plan. And Adamson must avoid the quick-fix mistakes of his predecessors, like Charles C. Conaway, whose aggressive price-cutting strategy touched off an unwinnable price war with Wal-Mart Stores Inc. (WMT ) "I want to make sure it's very thoughtful and that we have something that works," he says.

But with each day that Kmart flounders, rivals like Wal-Mart and Target (TGT ) steal more of its customers. It will also become harder to convince shoppers they need another retailer. If Kmart is to have a chance at surviving, Adamson must address several core marketing problems--and fast:

-- Strengthen private brands. Kmart needs to expand its successful relationship with lifestyle queen Martha Stewart. The $1.5 billion in sales of Martha Stewart Everyday merchandise make up 4% of Kmart's revenues. With new product lines including crafts and holiday decor in the pipeline, sales are expected to grow at least 20% a year. But Kmart also needs to beef up fledgling brands like Sesame Street, Joe Boxer, and Disney. And while older customers will appreciate an upcoming makeover of Kmart's Jaclyn Smith clothing line, Adamson still has to find a way to connect with young mothers, its core customer.

-- Create an urban strategy. Kmart executives have boasted for years about the retailer's unique popularity among African American and Hispanic customers thanks to its urban stores. Yet Kmart has never capitalized on this strength. Adamson says he intends to give store managers more autonomy to stock merchandise that suits their customers' tastes. He needs to better target Kmart's higher margin clothing lines to such customers. More important, he should forge ahead with plans he is considering to add fashion lines named after popular black or Hispanic icons.

-- Fix groceries or get out. Conaway hoped shoppers would visit Kmart stores more often if they could buy groceries alongside electronics, toys, and apparel. Now Adamson has hired former Sears, Roebuck & Co. executive Julian C. Day--the former chief financial officer at Safeway Inc.--as Kmart's president and chief operating officer precisely because of his experience in food retailing.

But selling groceries adds a level of complexity to Kmart's already overburdened distribution system. Adamson needs to set specific profitability goals for food sales--and if they aren't met, he should get out of the business altogether. Indeed, that sort of tough-mindedness--long missing at Kmart--would go a long way to solving its many problems.

Muller covers Kmart from Detroit.

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