Online Extra: Q&A with Kmart's New CEO

James B. Adamson talks about his strategy for figuring out Who is Kmart?

On Mar. 11, bankrupt Kmart (KM ) named turnaround specialist James B. Adamson as its new CEO, its fifth in seven years. A six-year veteran of Kmart's board, Adamson was elevated to the top job after being named nonexecutive board chairman two months earlier. He replaces Charles C. Conaway, whose 19-month effort to revive Kmart fell short, resulting in the largest bankruptcy filing in retailing history on Jan. 22.

Adamson, who began his career in apparel retailing at both Gap and Target, engineered bouncebacks at Revco drugstores, Burger King, and Advantica Restaurant Group, parent of the Denny's chain, before joining Kmart. On Mar. 13, he sat down with several BusinessWeek editors and reporters to discuss what went wrong and his strategy for rebuilding Kmart. Here are edited excerpts from their conversation:

Q: You were supposed to be retired. Are you a reluctant draftee?

A: I was reluctant to be nonexecutive chairman because I saw it was going to be a full-time job without operating responsibility. I wasn't running the company. And it makes it sort of awkward to insert yourself in a business.

Having full line responsibility for the company now, I am very excited. I mean, how many times in your life do you have a chance to run a $37 billion company in trouble, that you think you can bring people in and add value and turn it around? Those opportunities don't come along very often.

Q: Was that a factor that weighed in the board's decision [to replace Conaway as CEO]?

A: Actually, Chuck started the process. If you go back to January, right before we filed, I was named nonexecutive chairman. Chuck lost a title. That's a pretty big hit for someone's ego. Then I asserted myself on the job Day One, and I was there five days a week. So he kind of had a new boss around.

I think he realized he was probably not the right leader at this point in time to take the company forward. That, coupled with his personal situation, drove him to that decision. I think it would have been easier on everybody, including himself, if he had made it prior to the filing, when I was named chairman.

The reality is, when you're in the mid-part of your career -- and Chuck is young [41] -- and you're labeled as the person responsible for putting this company into bankruptcy, you maybe want to be a part of the solution to save your career and to save your own inner peace. I think that was the driving factor behind him staying around and trying to make a potential wrong right. I would react the same way if I were him.

Q: Did the board consider taking a more decisive step at that point?

A: The board discussed Chuck's future in Jaunary. That's a very difficult decision to make for a board. What they ended up deciding was, let's put someone in closer every day to oversee him, and see if that will work to help salvage Chuck and his management team. There was spirited discussion.

Q: If Conaway hadn't embarked on the somewhat quixotic attempt to challenge Wal-Mart directly on price, would the rest of his strategy have worked?

A: To clear the record, Chuck and his management team did not take on Wal-Mart only. They took on Wal-Mart, Target, and anyone else in the market with signs that [compared prices]. That was a marketing campaign before the Blue Light Always low-price strategy.

We at the board said, it's logistically, humanly impossible to do. You put a sign up, your competitors change their price, and you have to put a new sign up. So you can't even manage it. If you'll recall, Target sued us. And we ended up settling that case. That was the beginning of a flawed marketing strategy that wasn't aimed just at Wal-Mart.

Q: The predictable reaction from the market leader [Wal-Mart] was to reduce prices further.

A: Absolutely. You look back and say, when you're going to forge your competitive niche, you don't want that to be your competitor's strength. You'd like to look for their weakness. And obviously, price at Wal-Mart has always been their strength. So it would have failed Day One to try to take them on, because you're right, they'd just lower their price. You don't win that game. So that was mistake number two.

Former CEO Conaway "could have done a better job picking people"

But neither one of those failed strategies in and of itself was the downfall of this company. The issue is that Chuck could have done a better job picking people. There have been four CFOs in the last few years, there's a president in and out, a marketing executive in and out. If you truly believe people make a difference in managing a business, that was the most problematic issue at Kmart over the last 18 or 19 months.

Q: Should the board have taken a more active role to head off some of the people problems?

A: The board did take an active role in challenging the people decisions, particularly when you look at the CFO role. But at the end of the day, the board's job is to manage, hire, and fire the CEO, it is not to run the business. And it is not to micromanage his decisions. The day the board steps in and starts telling the CEO what to do, you might as well get a new CEO.

Q: As a longtime board member who is now CEO, you've already been criticized for not having a clear strategy in mind. Is it not a case of just picking up Conaway's strategy and executing better? Do you feel you have to start over?

A: We have very rich consumer data. The best source of information about what this company should do is within the stores themselves. I don't want to compete with Wal-Mart and Target directly.

The issue is: Who is Kmart? I want to take the time and figure it out, and analyze the research, what our store managers are saying, what our employees are saying about why do customers come to Kmart? Where do we let down? And what are our strengths? Because as you go through that process, which is going to be an exhaustive process, it affects every tentacle of this company.

We already have exclusive brands within our company. We already have a presence in the urban market. We have pieces, but the issue is how do they all fit together, and what makes sense going forward?

"Should we carry a little bit of everything for everybody?"

Q: What about exiting the fresh grocery business?

A: That's the one we're always asked. You can't make that decision today. Would that be looked at? As many things would be looked at, of course. There's one thing we do have, that we now have to take very careful decisions on. We now have sales by store, by day, by category. So we know what the customers are coming in and buying.

One of the key things we have to decide is, should we carry a little bit of everything for everybody, or do we really have to be more dominant in categories the customers are coming to us for? And that we have to answer very quickly.

Q: Are you confident that there's actually room for another healthy, thriving, fast-growing discount chain?

A: Yes, there is room for Kmart to thrive. I believe we could fix this company by getting customers to come back to our store one more time [per month]. How were the in-stocks? How clean was the store? How friendly were the employees? How quickly did they get through the cash register?

You don't have to borrow customers from other retail operations. We just have to do a better job of satisfying our existing ones and then potentially adding new ones. It's back to the basics. Fix the execution.

Q: In the mid-1980s, you played a role in helping Target carve out a niche as a trendy discounter. Finding Kmart's niche seems tougher. How will the turnaround efforts at other companies help you?

A: At Burger King, I learned that it's not necessarily about your knowledge and skill base in that specific industry. It's your ability to understand people, to motivate people, to communicate with people, and to hire the right people with the skill sets that offset your flat side, or weakness.

I didn't fix Burger King without having a lot of restaurant people around. We didn't fix Revco without having strong drugstore people. And the mix of industries and knowledge and skill sets was responsible for those turnarounds, and we'll do the same thing here.

We've brought [former Safeway and Sears executive] Julian [Day] in as Kmart's new president and chief operating officer. One of the reasons I liked Julian -- besides that he's very bright, and very thoughtful, and will help a lot on our strategy going forward -- is that he knows food. I don't know a lot about food. With [Chief Financial Officer] Al Koch and his team coming in [from turnaround firm Jay Alix & Associates], we now have a very strong financial team.

Q: Kmart is upgrading its Jaclyn Smith line of apparel this spring. Does Jaclyn Smith remain a relevant icon? Should you develop brands targeted toward younger women, particularly African-Americans and Hispanics?

A: You need all of the above. The Jaclyn Smith line, when done right, does extremely well. But there is plenty of room in our market going forward for someone that Hispanic people can look up to, or a line that would be more appropriate to the Hispanic population, and the same is true for the African-American population.

Q: Do you have anyone in mind?

A: Yes. Am I going to tell you? No.

"If we do another store-closing process, it will be very small"

Q: Are you confident that Kmart has targeted enough stores to close?

A: Absolutely not. The store closings we announced last Friday [Mar. 8], with great human toll, were financially oriented only. The next look will be maybe a year from now, when [we] come up with the strategy. Do you have the right-size stores? Do they fit the strategy? If we do another store-closing process, it will be very small because we will not be allowed to close profitable, cash-generating stores.

Besides the strategy, we have to look at whether our regional spread is too thin for the cost of distribution. At least for a year, you're not going to see any major store closings.

Q: Is Martha Stewart locked in for this year?

A: Yes, she's locked in very well for a long period of time, assuming the bankruptcy court gives its approval [on Mar. 20]. Martha Stewart is so integral to our business going forward, there's no way that's not going to get through the bankruptcy court.

Q: How would you characterize your relationship with Fleming Cos. [for grocery distribution]?

A: It's one of those relationships that has good days and bad days. But I think we've agreed we have a contract in place. There was supposed to be value-added there. Well, let's go find how to do it. Because stabilizing the company right now is Job One, Two, and Three. [Ending the Fleming relationship] right now would be harmful from a stability point of view. And I don't think we've given the contract enough time.

Q: Should you just fix this company up to sell it?

A: As we go through this, I have to look at all solutions that will provide the greatest return to our creditors and shareholders. That's my obligation. But I don't even think about it. What I think about is fixing this company. And whatever happens, happens. I just care about the people there and getting that business fixed. If you fix it up, you did your job.

Q: Have you had any discussions with any potential suitors?

A: Absolutely not. It's way too early in the process. Until there's a business plan put in place and some performance that says what the value would be in this company, no one's going to look at you. Besides, it's a $37 billion company with a few problems right now.

Those need to be addressed, and at the end of the day, it's still a huge company. And the ability of somebody to come in is small because of our scale. I don't think about it. I think about getting our company fixed. I believe if we do that, the right things will happen.

Edited by Joann Muller

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