Wal-Mart Wins, Kmarts Closing

Charlie’s Angels and swimsuit vixens couldn’t save Kmart Corp. from bankruptcy, so the company has turned to Mickey Mouse and Spike Lee for help.

In the meantime, a dime store in the Ozark hills has morphed into the largest company on Earth.

In February, Kmart announced a new line of children’s clothing co-branded with Disney. The beleaguered Kmart also said it has hired Lee to direct television commercials to try to convince Americans that it “really understands what matters in life.”

On Jan. 22, Kmart understood what it meant to file for bankruptcy.

After 40 years of retailing war, the company that Sam Walton started in 1962 has crushed its arch rival.

This is “the stuff of life.” That’s Kmart’s new slogan, and it couldn’t be more appropriate. In the retailing jungle, life is dangerous. The slow and ponderous animals are devoured by the adaptive and agile.

The Detroit Free Press reported that Kmart will close 291 of its 2,114 stores as part of the Chapter 11 restructuring. Three of the stores slated for closing are in Arkansas — in Pine Bluff, Jacksonville and El Dorado. Kmart said the list is “speculative” and the company will file an official list with the bankruptcy court by March 11. Closing the stores is supposed to save Kmart about $250 million a year.

Kmart has 12 stores in Arkansas, compared to 80 for Bentonville-based Wal-Mart. Every Arkansas city with a Kmart also has a Wal-Mart store.

Blue Light Special

Kmart, America’s third-largest retailer, filed for bankruptcy protection after a dismal holiday sales season and stiff competition from the industry leaders, Wal-Mart and No. 2 Target Corp.

In its bankruptcy filing, Kmart, based in Troy, Mich., listed total assets of $17 billion and total liabilities of $11.3 billion as of the fiscal quarter ended Oct. 31. Kmart has 240,000 employees, compared to 1.2 million for Wal-Mart worldwide.

In a press release announcing the bankruptcy, Kmart said it had secured $2 billion in debtor-in-possession financing arranged by J.P. Morgan Securities Inc. and Fleet Securities Inc.

Kmart’s stock plummeted from $5 per share in early January to 66 cents per share at one point after the bankruptcy filing. But the shares have recovered somewhat, selling at just over $1 since the restructuring began. Kmart’s stock peaked at $13.55 per share during the past year.

Within a month after Kmart filed for bankruptcy, Wal-Mart released its earnings figures for the past fiscal year. Wal-Mart had revenue of $217.8 billion, making it the largest company in the world, the first time a retailer has ever held that position.

For a couple of years now, most people knew this was coming.

As Bob Bobala wrote for The Motley Fool in September 2000, “go to a Kmart on Halloween and see if you’re not walking among the living dead.”

He was talking about “lollygagging employees” and a dearth of customers. That’s not what you would normally find at a Wal-Mart store.

Writing for the March issue of MIT’s Technology Review, Michael Schrage said Wal-Mart “is the 800-pound gorilla in a retail jungle of bonobos and howler monkeys … Today’s economic reality is that high-tech decisions made in Arkansas play a larger role in boosting America’s productivity than decisions made in Silicon Valley or Seattle.”

Kmart has been limping along for years now, mortally wounded by good old-fashioned hillbilly ingenuity and hard work, not to mention brilliant executives who were downright shrewd when it came to dealing with vendors.

Kmart may survive, but it will never be the same.

Battle of the ‘Marts

Most experts cite Wal-Mart Stores Inc. as the main reason for Kmart’s collapse.

Sam Walton grew up in Oklahoma, went to college in Missouri and decided to start his business career in Arkansas, the nation’s second-poorest state at the time. After serving in World War II, Walton opened a Ben Franklin store in Newport. In 1950, he lost his lease on that store.

Walton moved to Bentonville and began opening Ben Franklin stores in Northwest Arkansas. Eventually, he grew to become Ben Franklin’s biggest franchisee with 15 stores.

1962 was a pivotal year for the discounting giants. That year, Walton opened the first Wal-Mart in Rogers, Sebastian Spering Kresge opened the first Kmart store, Woolworth opened the first Woolco and Dayton Hudson founded Target Corp.

Kresge actually started his retailing empire in 1897 when he opened a dime store in downtown Detroit. So by ’62, he was on a roll. S.S. Kresge Co. had sales of $483 million that year, and Walton faced an uphill climb.

But Walton was just trying to carve out a niche in Arkansas, said Richard S. Tedlow, a professor of business administration at Harvard Business School and author of “Giants of Enterprise,” a study of Walton and six other corporate titans.

“Sam Walton didn’t set out to be the greatest retailer in the world,” Tedlow said. “He set out to be the biggest five-and-dime operator in Arkansas.”

During the 1960s, Walton converted some of his Ben Franklin stores to Wal-Mart stores. By 1969, Walton had 14 Ben Franklin stores and 18 Wal-Mart stores. A year later, Wal-Mart had 32 stores, $31 million in sales and went public, issuing 300,000 shares of stock that traded at $15 per share. By 1980, Wal-Mart had 276 stores and $1.2 billion in sales. That’s about 5 percent of what Kmart did in sales that year.

But Kmart wouldn’t change with the times, Don Soderquist said in a 2000 interview with the Northwest Arkansas Business Journal.

“[Kmart] had a successful product that worked,” said Soderquist, who retired in 2000 from his position as senior vice chairman at Wal-Mart. “Kmart’s formula worked. They were very profitable. They continued to use a cookie-cutter to cut it out. During that period of time, we continued to change.

“[Kmart] followed ‘if it ain’t broke, don’t fix it,’ but they didn’t change with society, the market and the economy. We would relocate stores if they weren’t serving the community successfully.”

At that time, Kmart wouldn’t locate stores in cities with a population of less than 50,000. Those small towns became a target for Wal-Mart’s nationwide expansion. Wal-Mart even built stores in towns with as few as 5,000 residents.

In 1991, everything changed. That year, Wal-Mart passed Kmart in sales with $32.6 billion, and Kmart was forced to re-evaluate itself.

Walton died a year later.

Smile and Sell

There were several reasons for Wal-Mart’s success, but Tedlow boiled it down to three: logistics, advertising and spirit.

Unable to compete with the logistical expertise of Wal-Mart, Kmart parked trailers behind about 1,600 stores last year to help get inventory onto the shelves.

With its efficient hub-and-spoke distribution system, Wal-Mart trucks were never more than a day’s drive away from a Wal-Mart store, and the company’s computerized data-management system automatically ordered items that are low in stock.

“Walton built a distribution system that was under everybody’s radar,” Tedlow said. “Sam Walton realized a light bulb in a warehouse doesn’t do anybody any good … Retailing is about getting the right product in the right place at the right time.”

“We have long had problems with our inventory flow,” admitted Stephen Pagnani, a spokesman for Kmart.

It may be no coincidence that Wal-Mart’s current CEO, Lee Scott, worked his way up through the company’s logistics division.

Tedlow said Walton came around slowly to the idea of using technology. But by 1983, Wal-Mart was using a satellite to track sales at its stores, Tedlow said.

For Technology Review, Schrage quoted Robert Solow, a Nobel Prize-winning economics professor emeritus from MIT, saying Wal-Mart was the primary factor behind the U.S. productivity growth from 1995 to 2000.

“That was not expected,” Solow was quoted as saying. “The technology that went into what Wal-Mart did was not brand new and not especially at the technological frontiers, but when it was combined with the firm’s managerial and organizational innovations, the impact was huge.”

On the advertising front, “Everyday low prices” says it all.

“It’s an unforgiving business,” Tedlow said of the discount retailers. “You’ve got to keep the prices low. That became, and I don’t think it’s an exaggeration to call it a religion at Wal-Mart.”

As far as spirit goes, Tedlow said that’s visible in everything from Wal-Mart’s corporate culture to its 10-foot rule, where employees are required to offer assistance to customers they encounter throughout the store.

Tedlow said it’s difficult to estimate the impact of smiling employees who offer to help customers.

Tedlow said Wal-Mart has gone against mainstream logic over and over again and made it work.

“Walton found opportunities where others didn’t see them,” Tedlow said. “Time and again, Wal-Mart has done things people said they couldn’t do. I’m not sure it’s a good idea to bet against them.”

The Scary Facts

In his pre-Halloween 2000 column about Kmart’s problems, Bob Bobala said Kmart has had an image problem since he was a child.

“Kmart’s precipitous fall from retailer heaven just goes to show that my kid sister and I were right,” Bobala wrote for The Motley Fool, an Internet business magazine. “Despite our mother’s pleas and our family’s fiscal realities, when growing up as peer-pressured, middle-class punks, we refused to step into a Kmart for fear of ruining our hip images. We saw the writing on the wall.”

Not even partnerships with Martha Stewart, “Charlie’s Angel” Jaclyn Smith or Sports Illustrated swimsuit model Kathy Ireland could help Kmart’s image, Bobala said.

“Contrast that to retail king Wal-Mart, which is lit up bright as Las Vegas at 11:00 p.m. — and as crowded as it is on a Saturday afternoon,” he wrote.

But the difference for investors boiled down to margins, Bobala said.

“Why would you buy a retailer with 1 percent profit margins that sells $32 billion worth of stuff, when you could buy another one that makes 3 percent on $165 billion in sales? That’s what Wal-Mart is doing,” Bobala wrote. “It is the beast come ’round to eat Kmart’s lunch, and it’s been doing it for a long time now … Wal-Mart is clearly the Godzilla stomping on Kmart’s chihuahua.”

Wal-Mart’s Big Year

Wal-Mart reported 2001 sales of $217.8 billion, a 13.8 percent increase from $191.3 billion for the previous year. That passes Exxon Mobile Corp., which reported annual revenue of $212.9 billion on Jan. 23.

“A lot has been made about us being the world’s largest company,” Scott said in a prerecorded fourth-quarter conference call. “Remember, it was never our goal to be the biggest, but to be the best as measured by our stakeholders, who are our customers, our suppliers, our associates and our shareholders.”

Wal-Mart reported a 9.2 percent increase in fiscal fourth-quarter net earnings, which rose to $2.189 billion, or 49 cents a diluted share, from $2.004 billion, or 45 cents a share, for the comparable quarter a year earlier. Wal-Mart’s fiscal year ended Jan. 31.

Analysts polled by Thomson Financial/First Call on average had expected Wal-Mart to report a profit of 49 cents a share. Their estimates ranged from 48 cents to 50 cents a share.

Sales in the fourth quarter rose to $64.21 billion, up 13.5 percent from $56.56 billion a year earlier.

Sales at stores open at least a year, also known as same-store sales, rose 6.9 percent. Same-store sales rose 5.9 percent at Wal-Mart stores and 5.7 at Sam’s Club stores, the company said.

Net income for the full fiscal year increased 6 percent to $6.671 billion, or $1.49 a share, from $6.295 billion, or $1.40 a share, in the previous fiscal year.

During the fiscal year, Wal-Mart opened 178 Supercenters, including 121 discount store replacements. The company opened 33 of its smaller discount stores, closed one and expanded or relocated four. Wal-Mart also opened 12 Neighborhood Markets, 25 Sam’s Clubs, 107 international units and seven distribution centers.

Click here to read about the history of Kmart.