Kmart in crisis

Kmart in crisis
Discount chain is learning what downtown retailers already know

Jan. 24, 2001

Kmart Corp. on Tuesday filed for Chapter 11 bankruptcy protection. The move came just a day after a major food supplier halted most of its Kmart shipments when a $78 million payment did not materialize, and less than a month after the end of a disappointing holiday season.

Corporate officials have said that Kmart will keep all its 2,114 stores open, but analysts have hinted that’s not likely. Examination of a few basic figures suggests they’re right.

Kmart was counting on strong Christmas sales to maintain the fiscal revival achieved by closing unproductive stores and revamping merchandising techniques (changes it had been far too slow in making). It had ordered heavily, and the combination of the recession and a change in buying patterns prompted by the Sept. 11 terrorist attacks left it unable to service its debt.

No one could have predicted what happened Sept. 11, nor could retailers have reacted quickly enough to the complexities of the aftermath. But the recession was well under way by the time Christmas orders were computed, and Kmart had the benefit of sophisticated market analysis. The chain’s buyers didn’t go that far wrong: Christmas sales were down only 1 percent below last year’s figures on a same-store basis. During a recession, and recovering from what we all hope is a one-time economic trauma, a 1-percent drop isn’t all that bad. The fact that it was too much shows that the margin between success and bankruptcy was razor thin for Kmart.

Beyond the national economic ramifications of potentially losing one of the three major discount stores (Wal-Mart and Target are the other two) are the local costs. Kmart left the Cortez market two years ago, just as Wal-Mart was opening its new superstore there. That means that Cortez residents have only one source for many basic items: Wal-Mart. Kmart anchors one end of the Durango Mall, and its withdrawal would leave a gaping hole.

Some Kmart stores surely will close, and there’s no great mystery about which ones that’s likely to be: stores with low or declining revenues, stores in closely contested markets, and stores far from suppliers and warehouses. Moreover, the decision will be made by region, and the sparsely populated rural West is a textbook example. The Revco drug chain, whose stores were once ubiquitous across the Southwest, emerged from bankruptcy by retreating east of the Mississippi.

Whether consumers would be bothered all that much is a central issue in the discount-retail market. The general perception is that Target is more upscale than Wal-Mart, which in turn is slightly nicer than Kmart, but that alone doesn’t constitute a preference. Price isn’t necessarily the driving factor either, because pricing is inconsistent. A person living in a community like Farmington might save considerable money by shopping all three stores for the lowest price for each item on his or her list, but most shoppers pick one store and buy everything there — at least for that week. Loyalty isn’t what it used to be, and if Kmart has a better sale circular in next week’s paper, Wal-Mart and Target shoppers might stampede to the blue light.

Discount chains have wrought huge and painful changes on small American towns, but the retreat or even demise of one won’t reverse that trend. Kmart is now learning what downtown retailers already know: Shoppers vote with their feet, and they follow their noses, right on out the door to the next new trend.