CHICAGO – Kmart Corp. faces huge hurdles in its struggle to emerge from bankruptcy and take on rivals Wal-Mart Stores Inc. and Target Corp., which are spending billions on growth plans, analysts and academics said on Wednesday.
Kmart on Tuesday became the largest retailer ever to file a voluntary Chapter 11 bankruptcy petition. Kmart found itself strapped for cash after weak holiday sales and tough competition from other discount chains.
Some believe that Kmart can emerge from bankruptcy with the help of an improving economy, but the danger that it might fail again is real. Ames Department Stores Inc., for example, was unable to turn around its business and has twice filed for bankruptcy -- once in 1990 and again in 2001.
``I think Kmart is gone,'' said Sayan Chatterjee, a professor at the Weatherhead School of Management at Case Western Reserve University in Cleveland. ``As a discount store, they don't have what it takes to compete, and that market share is going to Wal-Mart and Target.''
Armed with $2 billion in new financing, Kmart is planning to close a number of unproductive stores and focus more intently on those that make money. Kmart currently has 2,114 stores, and analysts say it could close as many as 500. The review of its store base is expected to be completed by April.
SMALL IS BEAUTIFUL - BUT MAYBE NOT FOR KMART
But not everyone believes a smaller Kmart will be more successful, because the retailer still faces monumental challenges, including rapid growth of its competitors and inventory management problems that date back to the 1970s.
``Every day, Wal-Mart and Target are adding stores, and it takes away Kmart's convenience advantage that they may have had in certain markets,'' said Steven Roorda, retail analyst with American Express.
Kmart has stores in large cities like New York and Chicago, providing a slight edge over Wal-Mart in some areas. Wal-Mart stores generally are located on the outskirts of cities or in smaller towns.
But in 2002, Wal-Mart plans capital expenditures of $10 billion, up from about $9 billion in 2001. The world's largest retailer plans to add as many as 310 new stores, adding 46 million in square footage. Wal-Mart also plans to build seven new distribution centers.
Target has budgeted capital expenditures of about $3.3 billion to $3.5 billion in 2002, about the same as 2001. The funds will be used in part to open 75 to 85 new Target discount stores and convert 35 Montgomery Ward stores.
``Kmart is getting spent into the ground,'' Roorda said. He estimated that Kmart will have $600 million at the most for capital spending in 2002.
Kmart did not provide a capital spending figure.
INVENTORY MANAGEMENT SEEN AS BARRIER TO RECOVERY
Retail profits are helped by the way a company handles the flow of goods from suppliers and warehouses to stores, and while Wal-Mart has excelled in this area, Kmart has had a tough time squeezing profits out of its supply chain, Chatterjee said.
When Charles Conaway was named chief executive officer in May 2000, he made upgrading Kmart's computer systems and supply chain a top priority. But his efforts came too late, Chatterjee said.
``He (Conaway) really couldn't do a whole lot,'' Chatterjee said. ``The organization was not set up to streamline the inventory management, which really had to be done from the ground up in the early 1980s.''
He said Wal-Mart's supply chain technology and operating systems have outdone those at Kmart since the 1970s.
WHO IS KMART'S CUSTOMER?
Kmart, which tried to woo price-conscious consumers away from Wal-Mart with its ``BlueLight Always'' marketing plan and tried to lure more affluent consumers with its Martha Stewart Everyday brand housewares, needs to figure out who its customer is, analysts said.
``In some sense Kmart has a kind of schizophrenic personality,'' Chatterjee said. ``They are trying to go after the same group of people that Wal-Mart is trying to draw, but I don't know that a family of four with an annual income of $50,000 is that interested in Martha Stewart.''
Lifestyle icon Martha Stewart, chairman of Martha Stewart Living Omnimedia Inc., said on Tuesday her company had no immediate plans to end its partnership with Kmart.
Wal-Mart is generally considered to have the lock on low prices, while Target has been successful attracting more upscale shoppers.
But on Tuesday, Conaway said future marketing initiatives would emphasize Kmart's exclusive brands like Joe Boxer underwear and sleepwear and its Walt Disney Co. brand of children's clothing. The CEO also said investors should look for a more expanded Martha Stewart presence.
Some think Kmart will be able to leverage its strengths and survive Chapter 11.
``They have location and they have a brand name, but they have to end the problem of people asking themselves why they want to go there (Kmart stores),'' said Jeff Netter, finance professor at the University of Georgia.
``Kmart needs to decide what it is. If they concentrate on private label and come up with an idea to generate some excitement, they will be OK,'' he said.
Kmart shares gained 19 cents to 88 cents, a rise of 27.54 percent, in heavy volume on the New York Stock Exchange on Wednesday.