I was reading in this morning’s paper that Kmart is about ready to be released from Chapter 11 Reorganization. [note: written in late 2003] Whether it’s in time or ahead of time was the subject of the article, but it appeared fairly irrelevant to me.
I was trying to figure out, if I had been in charge of the Kmart reorganization, whether I could, in good conscience, determine that Kmart has any life at all after bankruptcy.
Kmart no doubt had a place in the evolution of retail distribution. It was a good solid discount retailer producing fair pricing for competent and adequate merchandise. Who doesn’t remember the Kmart Blue Light specials?
On the other hand, life passed Kmart by in lots of significant ways. One is called Target. The other is called WalMart. And if anybody has any doubt that those two own the category, stroll through any of their Super Centers.
I remember being in Denver, Colorado some twelve to fourteen years ago when I went into a Target for the very first time. I was absolutely shocked. I remember, as a matter of fact, writing an article about it at the time. It was a retailer’s dream to see how wonderfully Target had created the type of retail ambiance which produces a buying environment for its customers.
Since I had already abandoned Kmart by that point, as what appeared to me to be a pretty tacky low level discounter, I was so very surprised not only to recognize that Target offered a similar value proposition but in a much more attractive environment, but I was also surprised to note that Kmart was not rushing, in the face of having seen a brand new Target store, to assemble the best store designers in the country for an appropriate countermeasure.
My observations about WalMart were even earlier on.
Back in law school in New York City, I had a friend who was the Vice President of Merchandise for Federated Department Stores. There was a management shakeup which resulted not only in my friend getting booted out of his corporate office, but he was accompanied by all the rest of the executives.
After looking around for a job for about six months, Jerry gave me a phone call. He had apparently landed a job in the early 1970’s with a relatively smallish operation out of Bentonville, Arkansas and his job, as Vice President of Merchandising for then not known WalMart, was to travel with Sam Walton himself all over the globe to look for merchandise to sell in WalMarts.
To a fashion design retailer like Jerry, the concept that Sam kept hammering home – intrinsic value – was a foreign term.
What was intrinsic value to a fashion retailer like Jerry who took brand names like Calvin Klein, Gucci, and so forth, and simply keystoned the price on the racks: $100 cost became a $200 price?
Intrinsic value? What in the world was that?
Jerry didn’t last that long at WalMart. The cultural divide between the keystone concept of retailing brand names and the intrinsic value notion Sam Walton brought to the table – look at a garment, or a piece of merchandise, establish what its fair price is, and then negotiate the vendor down to a price which allowed WalMart to sell it profitably – was a completely foreign notion. Start with customer value and then establish a cost structure: not a bad notion, but totally foreign to Jerry.
And yet, when you think about it some 30 years later, the concept of intrinsic value which has continued to drive WalMart is the very same concept which makes it extremely difficult for anybody to even attempt to compete now that WalMart is literally not only the largest distributor of merchandise in all history, but also the largest corporation in the world.
Add to that the Super Centers which both Target and WalMart have built, and I have an extremely difficult time trying to understand why Kmart hasn’t figured out that its gig is up and it’s time to simply fold the tent.
Natural selection, as a process, has a habit of not permitting companies, organizations, or even organisms, to survive unless they adapt quickly in the face of competitive species which are equalizing the natural resources of supply and demand around them.
Was there a shot for Kmart at some prior time? Absolutely! When Target was new and vulnerable, Kmart could have eaten their lunch by just simply morphing into what Target turned out to be.
Did Kmart have a chance to take on and ultimately beat WalMart? Probably not. But what it clearly could have done is morph into a concept of intrinsic value which focused on maintaining profit margins by driving vendor prices lower against what should otherwise have been a reasonable selling price to the consumer.
Instead, Kmart just simply stuck to their knitting, irrespective of what went on around them, to the point that it will now emerge out of Chapter 11 DOA. The customers know it. The vendors know it. The capital community knows it. America knows it. Apparently, the only ones who don’t are the Kmart executives themselves.
If we take a look at the competitive landscape – what I call the ambient environment -within which Kmart will now function, it becomes very clear to me there is no room left. WalMart and Target are taking on the world. The rural communities which do not boast the simple population to support either have their own local providers. Kmart is left with dingy stores, locations which are no longer optimal, no heart or soul to its culture, and an inadequately staffed or trained workforce.
Any of us would be hard pressed to suggest that our economy has lost something by the demise of Woolworth, Montgomery Ward’s, McCrory’s, Grant’s, and the like. They had wonderful and venerable names at one point in time. But life simply passed them by and they were unable to adapt – at least not adapt rapidly enough. Why should Kmart not be added to that list?
It appears to me that Kmart’s ultimate solution is to liquidate its merchandise, sell off whatever assets it has, redirect its strong locations to the Targets and WalMarts of the world, and redirect its poor locations to non-retail users since the locations would not, in the final analysis, be able to support a retail application anyway.
And the workforce? That workforce would be so much better utilized by redeploying it for a productive enterprise that has a culture in the present and aspirations for the future.
Since I’m not on the Board at Kmart and nobody over there has been ringing my phone asking for my opinion anyway, my thoughts become relatively irrelevant as far as Kmart goes. On the other hand, my observations may be helpful here to you.
1. No business should permit itself to be rendered irrelevant by an organization which literally develops right in front of it. The very companies which have the capability of destroying the business are the very same ones that can provide a landscape portrait of a better or different enterprise.
2. A business must not only be aware of what its unique selling proposition is, but must always be about the process of maximizing the value in that selling proposition. In its absence, you’re left with a carcass of a business without value to offer anyone.
3. An enterprise which is not incessantly and consciously morphing is an enterprise which will not, sooner or later, be breathing.
Bye-bye, Kmart. Fare thee well!