3100 W. Big Beaver Road
To become the discount store of choice for low- and middle-income families with children, and to do so by satisfying their routine and seasonal shopping needs&mdash well as or better than--our competitors.
Kmart Corporation, the second largest U.S. retailer (behind Wal-Mart) with over 2,100 outlets in 50 states, Guam, Mexico, Puerto Rico, and the Virgin Islands, once so dominated the discount store marketplace few believed any competitor could shake its mighty grip. Yet too much diversification and too little attention to its core business took its toll in the early 1990s, knocking an increasingly bloated and diffuse Kmart off its pedestal. By divesting its noncore assets, refinancing, and slashing costs by $900 million, Kmart returned to buoyancy in 1996 going head-to-head with Wal-Mart, Target, and a similarly revitalized Sears.
Kresge Red Fronts and Green Fronts, 1899 to 1929
The giant Kmart Corporation grew from a Detroit five-and-dime store opened in 1899. Its proprietor was Sebastian Spering Kresge, a former Pennsylvania tinware salesman, who along with a partner, John McCrory, adopted the chain-store idea first used by Frank W. Woolworth. When Kresge and McCrory dissolved their partnership, McCrory took over the stores in Memphis, and Kresge maintained those in Detroit. Kresge's eponymous outlet sold costume jewelry, housewares, and personal grooming aids. Its success encouraged him to open a second store in Port Huron, Michigan, the same year; others followed in rapid succession. By 1912, when Kresge incorporated his company in Delaware with a capitalization of $7 million, there were 85 stores producing annual sales of $10.3 million. Four years later he reincorporated in Michigan, this time with a $12 million capitalization.
Always in high-traffic, convenient locations, Kresge Red Front stores featured open displays of merchandise with items systematically associated. Following their founder's abhorrence of credit, they kept their prices to thrifty nickel and dime limits, until inflation after World War I made the cost of many items too high. Undaunted, Kresge opened a chain of Green Front units in 1920, all selling merchandise at prices ranging between 25¢ and $1. He also acquired Mount Clemens Pottery, to supply the stores with ever-popular inexpensive dinnerware.
In 1924 the company's 257 stores generated annual sales of $90 million. Convinced this success should go hand in hand with corporate responsibility toward the less fortunate, the company founder established the Kresge Foundation, making an initial contribution of $1.3 million plus securities worth $65 million.
The following year Kresge resigned the presidency he'd held since 1907 to concentrate on long-range goal-setting as company chairman. His planning bore fruit in January 1929, when a Kresge store opened in the United States' first suburban shopping center, Country Club Plaza, in Kansas City, Missouri, thereby anticipating a shift in shopping patterns by some 15 years.
Another long-range goal crystallized in September 1928, with the formation of a Canadian subsidiary that opened the country's first Kresge store the following May. Based in Kitchener, Ontario, the initial venture was so successful that the company's $5 million investment financed another 18 stores in locations from Winnipeg to Montreal by the end of 1929. These brought the total number of Kresge stores to 597, together yielding sales of $156.3 million.
Kresge Weathers the Depression, 1930 to 1940
The company's orderly expansion changed after 1929, when the Depression-era stock market plunged the price of Kresge stock from $57.50 per share to an eventual low of $5.50. This was a severe blow to company management, which had pledged its support by taking turns to buy the deflated stock, gambling on its bottoming out at $26. Kresge found himself at a loss, having promised to buy 100,000 shares he could no longer afford, and the company took them off his hands. By 1936, however, the chairman had bought back at cost his own shares plus the 251,306 others owned by the management.
The Depression also brought falling sales as well as inventory losses through the failure of suppliers' businesses. Competition also increased; the scramble for the retail dollar fueled rivalry from Sears, Roebuck and prompted other chains to open department store "bargain basements." Forced to broaden its inventory to meet this threat, Kresge had to raise its prices, so that Green Front stores had many items selling for up to $3 despite their former $1 ceiling.
With the Depression over by 1940, there were 682 stores in 27 U.S. states, plus 61 in Canada. Together, the stores produced 1940 sales of $158.7 million. As the decade advanced, many homeowners moved out to the suburbs from inner city locations; the retailers followed. Kresge management cautiously opened one suburban shopping center store in 1947, adding to the first one that had opened in 1929. Three more followed in 1948. By 1953 there were about 40 suburban stores in the United States, plus one in Canada.
Massive Expansion, the 1950s
By the mid-1950s chairman Sebastian Kresge was long retired from active company management. An operating committee of 16 executives appointed by the board of directors steered the corporate strategy. Although the committee frequently combined smaller stores in high-volume areas to provide better selection and more efficient service, there were 616 U.S. stores by 1954, plus 74 in Canada. Many of the units featured modern conveniences like air conditioning, self-service displays, and shopping baskets. All these operations combined to reach sales figures totaling $337.9 million in 1954--up from $223.2 million in 1945.
Although the variety store image still guided company activities during the 1950s, pricing limits were fading away, with the concept of discount retailing coming to the fore in its stead. Kresge offered economical private-label products ranging from clothing to house paint. The variety of brand name offerings also broadened to include electric appliances, radios, and lawn mowers.
In the late 1950s food grew into the largest single department, warranting training in food management for all store managers. Many stores had delicatessens, and Kresge in-store luncheonettes provided shoppers with a large assortment of snacks, lunches, and dinners devised by the test kitchen at the company's Detroit headquarters. By 1958 these mini-restaurants were so popular that at least one new or remodeled facility opened alongside a delicatessen counter in some Kresge store each week.
A wider variety of merchandise plus higher pricing brought a need for a layaway plan allowing customers to save for expensive items. It was, however, still against company policy to offer credit, although competitors were luring customers in this way.
In 1959, coinciding with the opening of the first Kresge store in Puerto Rico, Harry Blair Cunningham succeeded to the presidency of S.S. Kresge Company. Cunningham, aged 58, had been with Kresge since 1928. A former newspaper reporter, he had worked his way up from trainee status through the store manager ranks, eventually becoming general vice-president. Twin assignments went with this position: one was to tour all of Kresge's U.S. stores, assessing the future position of the company and its competitors in the variety store industry; the other was to prepare himself for the company presidency, when Franklin Williams would retire in two years' time.
Cunningham's travels convinced him that Kresge's competitors were not other variety chains, but the new discounters aiming for fast inventory turnover, which they could achieve by lower markups on a large assortment of small items. Discounting, in fact, was a return to Sebastian Kresge's basic merchandising philosophy, which would be a bulwark against competition in the future, just as it had been in the past. Cunningham, after a period of testing, concluded that higher sales volume, rather than higher markups, would boost the company's profits, which had dropped during the 1950s.
The Birth of Kmart, the 1960s
In 1962 the company opened its first discount store in a suburb of Detroit, calling it Kmart. Within a year, there were 17 others. Unlike Kresge stores, Kmarts were not placed in shopping centers but were built in plazas by themselves, to avoid internal competition and also to provide ample parking. To ensure a 25 percent annual pretax return on investment, each store featured decor that was pleasant, though not extravagant, and each aimed for eight inventory turnovers per year. The Kmart stores were an instant success; by 1963, there were 63 facilities, 51 of which provided repair and maintenance service for automobiles. Three years later, the number of Kmarts had swelled to 122.
The Kmart introduction still left the company with a number of older Kresge stores, still on long leases, which were too small to display Kmart's expanded merchandise lines. Numerous Kresge stores, mostly in deteriorating business areas, were renamed Jupiter Discount Stores and converted to facilities offering a limited variety of low markup, fast-moving merchandise like clothes, drugstore items, and housewares. By 1966 there were almost 100 Jupiter stores in operation.
In 1965 the company underwent several changes. One involved the sale of long-time subsidiary Mount Clemens Pottery. Another was the acquisition of Holly Stores, a retailer of women's and children's clothing that had been a Kmart licensee since 1962, and was operating clothing departments in 124 Kmarts, Kresges, and Jupiters at the time of the acquisition. The same year, the company acquired Dunhams Stores Corporation, a sporting goods supplier already operating under license in 42 Kmarts. Dunhams then became Kmart Sporting Goods, Inc.
S.S. Kresge Company's sales for 1965 reached a record $851 million, representing a 23.6 percent gain from 1964. There were 895 stores, of which 108 were in Canada. Although discount retailing had gained momentum somewhat later in Canada than in the U.S., the Canadian subsidiary had opened its first Kmart in London, Ontario, in 1963. At the same time, while inner-city deterioration in Canada had not reached the same level as in U.S. cities, the company turned some of its smaller, older Canadian stores into Jupiters.
The successful Canadian operations made a large contribution to the total sales figures for 1966, which topped $1 billion for the first time, reflecting a 28 percent rise over 1965. Company founder Sebastian Kresge did not live to see this triumph. He died in September 1966 at the age of 99, having retired from the company chairmanship only three months earlier. Spurred by its Canadian success, the company found another international opportunity in Australia, via a joint venture: Kmart (Australia) Limited, with retailer G.J. Coles & Coy, Limited. The 1968 undertaking, in which Kmart held 51 percent of the shares, produced five Australian Kmarts by 1970.
By 1969 S.S. Kresge Company had decided against purchasing the licensee of its automotive departments, instead opening another subsidiary called Kmart Enterprises, Inc., to operate the departments, now so popular that 56 had opened in that year alone. That year the number of company stores stood at 1,022, sales at $4.6 billion, and average profit per store at $42,358.
Further Diversification, the 1970s
As the 1960s ended, an economic slowdown posed challenges for S.S. Kresge. The company resorted to heavier-than-usual promotional markdowns in December 1969 and January 1970 that shaved profit margins. Other problems included the difficulty of keeping to a 25 percent annual rate of sales gain for an ever-expanding number of stores; the fact that the rate of sales growth in a store slowed as the store aged; and the increase in inventory that came from formerly licensed in-store departments. All these factors led to an earnings slowdown in 1970's first quarter, bringing company stock down 11.5 points in one day. Still, sales for 1970 reached almost $2.2 billion.
In 1972 Cunningham was succeeded as chief executive by Robert E. Dewar, a former company lawyer and president since 1970. The presidency was filled by Ervin Wardlow, whose forte was merchandising.
The three upper managers hurdled these challenges with strategies forged under Cunningham's tenure, like the centralized buying for both Kresge and Kmart stores that reduced possible in-house conflict between variety store and discount divisions. The company also expanded its management training program, so variety store managers could switch to discount facilities with ease. Meticulous crafting of the training program guaranteed each store manager could make decisions about products, promotions, pricing, and locations to ensure the store's competitiveness. Other policies included limiting each store to one entrance and exit, thus reducing staff needs and escalating sales per employee, and designing smaller stores of 65,000 to 70,000 square feet, adequate for smaller, more affluent shopping communities. All of these changes gave the company a chance to upgrade merchandise while phasing out leased departments on all items except shoes.
The course charted for the 1970s brought Kresge an annual sales growth of 22 percent from 1972 to 1976, with 1976 sales totaling $8.4 billion. The company, however, was not without its failures. A fast-food drive-in chain called Kmart Chef, set up in 1967, closed in 1974 after having peaked at just 11 units. The costly credit card operation, used by only 9 percent of Kmart's customers, was withdrawn the same year, while a $65 million purchase of Planned Marketing Associates, an insurance company renamed Kmart Insurance Services Inc., brought a loss of $8 million in 1975, although a modest profit of $344,000 was recorded for 1976. By this time the company's 1,206 Kmarts were accounting for almost 95 percent of sales. For this reason, shareholders changed the company name to Kmart Corporation in 1977.
Bolstering a Faded Image, 1978-89
The late 1970s saw changes in Kmart's seemingly impregnable position. New competitors with more inviting stores made company facilities seem shoddy, and specialty stores began to stock Kmart staples like sports equipment, drugs, and personal grooming aids. Changes in public taste showed up in lagging profits, which sank 27 percent in 1980 on record sales reaching $14.2 billion. Other warning signals showed in plunging inventory turnover, which dropped from the 8-times-annually level of the 1960s to 3.8 times by 1979. Utility bills, wages, and other overhead costs soared because of inflation, but fierce competition prevented the company from raising its discount prices.
Kmart responded by cutting the number of scheduled new stores in favor of remodeling existing units and restocking them with more fashionable merchandise. It also installed a computer system to handle inventories, orders, shipments, and other procedures that could speed up delivery times to each store. Other changes included the 1978 sale of the company's 51 percent interest in Kmart (Australia) Limited to Coles Myer for new Coles Myer shares, thus closing out Kmart's ownership of the Australian Kmart stores.
Bernard M. Fauber succeeded Dewar as chairman and chief executive in 1980. Fauber steered the company through an economic slowdown and into diversification that year, with purchase of a 44 percent interest in a Mexican discount chain, as well as a joint venture into Japanese mass-merchandising with Japan's biggest retailer, The Daiei, Inc. Kmart also bought Texas-based Furr's Cafeterias Inc., a 76-unit chain that was a natural outgrowth of the cafeterias in Kmart stores.
In 1984 Kmart expanded its acquisition program and diversified into specialty markets. Because Kmart had already been experimenting with its home improvement departments, a logical move was the $88.2 million purchase of a nine-unit Texas chain called Home Centers of America, Inc. Kmart made Home Centers' operations into warehouse-type stores, changing the name to Builders Square. Next came the Walden Book Company (Waldenbooks), costing $300 million for 845 stores that had produced sales of $417 million in 1983. An Oregon-based chain of 164 drugstores called PayLess joined the growing lineup in 1985.
There was another change in 1984--this one in Kmart strategy when apparel division president Joseph Antonini launched a new line of clothes named for actress Jaclyn Smith that helped turn apparel into the company's fastest-growing business. By the time he succeeded to the company chairmanship in 1987, Antonini's strategy had added racing driver Mario Andretti to the list for automotive accessories promotions, Fuzzy Zoeller for golf products, and caterer Martha Stewart for kitchen and housewares support. The celebrities helped the bottom line&mdash′ofits for 1987 rose 19 percent, to reach $692 million on total sales of $25.6 billion. Other factors in year-end figures were the sale of all U.S. Kresge and Jupiter stores to McCrory's, the $238 million sale of Furr's Cafeterias and another cafeteria chain called Bishop Buffets, Inc., to Cavalcade Foods, Inc., and the disposal of Mexican interests.
New ventures in 1988 included a partnership with Bruno's Inc., a food retailer, which generated the American Fare hypermarket near Atlanta in 1989; purchase of a 51 percent ownership interest in Makro Inc., which operated membership warehouses; and launch of Office Square, a discount office supply chain. In 1989 Kmart acquired PACE Membership Warehouse Inc. and the remaining 49 percent of Makro, converting Makro stores to PACE formats. It also opened Sports Giant, a group of sporting goods stores, and finished the year with sales of $27.7 billion and income of $800 million.
Beleaguered But Not Beaten, 1990s
The company changed its logo from red and turquoise to red and white, with "mart" written within the larger "K" in 1990. Next came the acquisition of The Sports Authority into which it rolled the Sports Giant stores. Kmart also began a long overdue six-year overhaul of its stores (including openings, closings, enlargements, and refurbishings) to help shore up its image. The following year, 1991, as the company opened its first Super Kmart Center, Wal-Mart emerged as a credible threat and soon overtook Kmart in sales and market share. Still believing diversification was a good investment, the company purchased a 21.6 percent interest in OfficeMax, an office supply chain, with intent to acquire the remaining shares later in the year. By 1992 Kmart was still in an acquisition mode, buying 13 stores in the Czech Republic and Slovakia's Maj department store chain; Borders book superstores as a complement to Waldenbooks; and Intelligent Electronic's Bizmart chain. Sales for 1992 hit $34.6 million, a healthy notch above 1991's $32.5 billion, and Kmart's workforce hit an all-time high of 373,000.
Realizing that Kmart's future lay in its core retail business, the company began shedding noncore assets and sprucing up its stores. In 1993 Kmart sold 91 of its 113 PACE membership Warehouses to Wal-Mart. In 1994 came the spinoff of OfficeMax and the Sports Authority (keeping a quarter interest in the former and 30 percent of the latter); the sale of PayLess Drug Stores (retaining 46 percent interest) and its 22 percent interest in Coles Myer Ltd.; an alliance to open stores in Mexico and Singapore; and the launch of Kathy Ireland's apparel line. Sales for 1993 had hit a high of $37.7 billion with income of $941 million; sales for 1994 fell to $34.6 billion but the big news was a staggering loss of $940 million.
More serious than ever in its reorganization, Kmart's newest journey began with the appointment of Floyd Hall, former chairman of Target stores, as president, CEO, and chairman of the board in June 1995. Next came the spinoff of the Borders Group (Borders and Waldenbooks' combined corporate name), the sale of its remaining interest in OfficeMax and the Sports Authority, and the divestment of 860 auto service centers to the Penske Corp. With widespread rumors of bankruptcy, the downgrading of its rating, and analysts predicting Kmart's demise, many wondered if the nearly 100-year-old retailer could survive increased competition from both Wal-Mart's and Target's newer, snazzier stores. Hall set out to prove Kmart not only wasn't going under--but had just begun to fight.
Leaner and Meaner, 1996 and Beyond
After closing 214 stores, disposing of its Czech, Slovak, and Singapore properties, and pledging to reduce expenses by $600-800 million, Kmart was ready to prove its retail mettle. Its new merchandising credo centered around four simple words: brands, consumables, convenience, and culture. To help achieve its goals came a new advertising campaign featuring comedian Rosie O'Donnell and director Penny Marshall, popular brand name expansion (especially the Martha Stewart line, which was absorbing Kmart's home textiles), and a massive shakeup in upper management. The company then announced the sale of its remaining interest in Thrifty PayLess to Rite Aid, refinanced its debtload, started leasing out hundreds of its largest parking lots, and built a hip new three-story Kmart in Manhattan near Greenwich Village.
Kmart's recovery began to show in its 1996 numbers--for the first three quarters of the year it reported sales of $23.7 billion with a loss of $56 million, while the previous year's figures were sales of just under $24 billion and a much heftier loss of $151 million. Costs for 1995 and 1996 were reduced by $900 million, and management gave the Kmart credit card (first introduced in the 1970s) another try--but there was still much more to be done. Could Floyd Hall could do for Kmart what Arthur Martinez did for Sears? Was Kmart the new comeback kid on the block? Only time would tell.
Principal Subsidiaries: Builders Square Inc.; Kmart Canada Limited; Kmart Fashions; Super Kmart Centers.
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