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Tuesday, 22 January, 2002, 15:00 GMT
Kmart: Death of a retailing icon?
New York Kmart store
Shoppers are little concerned about Kmart's fortunes
David Schepp

Shoppers in a Manhattan Kmart store this month seemed little concerned that one of the US' largest retailers was on the verge of bankruptcy.

Kmart store front
Bargains are an easy find at this Manhattan Kmart
Bargain-hunters at this store in the heart of New York's Herald Square neighbourhood were more concerned with whether a top could be had in the right colour and size or if unwieldy assemble-it-yourself furniture could be hauled home on the underground.

Nevertheless, a "sell" rating on US stocks, such as the one issued for Kmart by Prudential Securities, is a rare thing.

So, while Kmart shoppers may still be buying, its shareholders have been selling.

In the first two days of trading in the New Year, shares of the Troy, Michigan-based retailer fell 25%, mostly in response to the cut by Prudential analyst Wayne Hood who forecast a cash crunch for the retail giant.

He warned the shortfall could lead to bankruptcy. The shares continued falling, touching more than 30-year lows while business partners began to cut off supplies.

Seeking bargains

One might think customers in the Herald Square store would be a bit more concerned that their favourite place to find a good deal could soon fall victim to better-managed Wal-Mart.

After all, the closest Wal-Mart to Manhattan is 26 miles away in far-flung Union, New Jersey.

You had things where the cash registers were actually older than the people running them

Eric Beder, retail analyst Ladenburg Thalmann

Besides, long before archrival Wal-Mart ever graced suburban countrysides outside the South, there was Kmart, an icon of American discounting since the 1960s.

The Kmart concept was the product of the SS Kresge Company, the operator of Kresge's five-and-dime stores, the first of which made its debut in Detroit in 1899.

It is those deep roots, which include older stores and more urban locations with little space for expansion, that have wreaked havoc on Kmart's modernisation plans, says retail analyst Eric Beder of Ladenburg Thalmann, a New York investment bank.


Previous management at Kmart, Mr Beder says, also let the firm's systems grow antiquated. "You had things where the cash registers were actually older than the people running them," Mr Beder says.

While that may be a quaint story, he says, the fact that those registers could not run independently of one another proved calamitous.

Kmart just seems to be the third choice for consumers behind Wal-Mart and Target

David Sowerby, portfolio manager Loomis Sayles

"If one cash register went down, the entire store would have to close because all the registers went down," Mr Beder says of Kmart's checkout system, a by-product of its 1960s expansion.

Stiff competition

Adding to Kmart's woes are stealth competitors Target and Wal-Mart that feature newer, larger stores, which give the perception of better-quality merchandise.

"Kmart just seems to be the third choice for consumers behind Wal-Mart and Target," says David Sowerby, portfolio manager for Loomis Sayles.

That despite considerable effort by Kmart in adding well-known trade names to its stable, including Martha Stewart for home furnishings, Jaclyn Smith, of "Charlie's Angels" TV-show fame, for a line of fashions and former shoe-retailing giant Thom McCann for its footwear.

But even with well-marketed names in place, consumers seem to care little. As one astute shopper put it, "It's Kmart. What do you want?"

That comment exemplifies the struggle the discount chain, known for its "blue light" specials that sent shoppers scurrying down aisles for a limited-time bargain, has had to endure in modernising its image.

To do that, Kmart has laid out $1bn (700m) to upgrade and streamline its processes, although it is still no match for Wal-Mart's state-of-the-art warehousing and distribution systems.

That hamstrings Kmart's ability to compete on price - and offer its customers better value.

Some respite

For its part, Kmart issued statements following Prudential's downgrade, saying it had "sufficient" funds to muster its turnaround plans, adding that the changes it was seeking were more akin to a marathon than a sprint.

Tuesday's Chapter 11 filing gives the store some respite from creditors, allowing it to continue in business while it tries to implement what must now be a swift restructuring.

The bottom line is that Kmart's behind-the-scenes upgrades need to start producing concrete results - and soon.

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See also:

02 Jan 02 | Business
Kmart slumps on bankruptcy talk
02 Jan 02 | Business
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13 Dec 01 | Business
US retail sales plunge
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US corporate woes continue
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US interest rates cut again
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US retail results poor
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