Why can't Kmart be successful while Target and Walmart thrive?

If you have ever walked into a Kmart, you can understand why they are closing 68 stores this summer. I can’t remember the last time I set foot into one of their stores. Kmart was once a profitable discount retail store that was the leader of an industry that included Walmart and Target. Time has not been good to Kmart and they are now closing multiple locations. Kmart never created a niche market for itself. When anyone thinks of Walmart the perception of low prices comes to mind. When it comes to Target, a customer will pay a little extra for higher quality products. What do you get at Kmart? They offer such a wide variety of high and low quality products that it gives off the impression that even they don’t know their competitive advantage.

Kmart started off with success and had great economies of scale. They knew where to cut costs and spend money to stay in business. However, Kmart became complacent and didn’t continue to find ways to improve the economies of scale and use the economies of scope to their advantage. Eventually these cost cutting activities turned into diseconomies of scale. They started losing more money than they were making. Mismanagement is the main culprit of their failed success. They were not able to identify a competitive advantage and they didn’t know how to manage their economies of scope. There was no direction or reason to their actions and the business functioned like a chicken with its head cut off. There is plenty of demand for discount retail stores but Walmart and Target don’t even need to participate in predatory pricing to steel business from Kmart. Kmart just doesn’t have a loyal consumer base and can’t attract new customers. Kmart only has itself to blame. It was only a matter of time before they were on the verge of bankruptcy.

Sears and Kmart are closing 78 more stores


Dave Tufte said...

mholley: 100/100 I didn't take off for this, but what exactly is "failed success"? It reminds me of George Carlin's jokes about airline staff directing passengers to move their "seatback forward".

I don't think I've been in a Kmart since they closed the one in Cedar City in 2002. For what it's worth, before they opened the Wal-Mart at Providence Center, the Kmart was the place to go.

I am not sure how critical we all should be here. Kmart is an old brand. It was bought up in bankruptcy over a decade ago by another old brand, Sears. In their day, these were the places to go. I'm old enough to remember the first time I went to a Wal-Mart: it was 1991, and they weren't that common. I felt Sears was a tired brand then, although Kmart was still going strong.

Going back to the Kmart bankruptcy, one of their problems was that they were locked into properties that were no longer in outer suburbs, and therefore not as valuable. I'm not sure how you fix that: it's not likely that you can sell the lousy properties to generate enough cash to buy comparable properties in more expensive locations.

Chris said...

I was in Utah this past week, and I happen to drive by the location where "my" Kmart once stood. I was overwhelmed to see my hometown changing so rapidly, and a seemingly insignificant part of my childhood lay there demolished in a pile of rubble. I'm a product of the '80s, and Kmart was always the place my price sensitive parents took me as a child to pick out my birthday gifts and do back-to-school shopping. I remember when I was presented with the choice of going to Kmart or Walmart, I'd always choose Kmart. At the time, in our family at least, Walmart was considered the low quality discount store. Kmart was once the preferred choice for quality products at a great price. Now, 20 years later, I can't remember the last time I stepped foot into a Kmart. Kmart found itself without a place in the market over time, and they have been virtually overtaken by their competitors Walmart and Target. I agree that their fall is due to bad management at many levels. I found an article written in 2002, “Kmart’s 20-Year Identity Crisis," where the author pins their fall to their lack of marketing adoption, and complete loss of touch with their target consumer. As the average household became more price sensitive, Walmart quickly became the recognizable name for saving money on everyday purchases. The article also mentions Kmart's locations, as Dr. Tufte mentioned, they were built mostly in less appealing urban areas. This is an example of a first-mover disadvantage, where Walmart and Target were able to learn from Kmart's mistakes, and build in more appealing areas with easier consumer and merchandise delivery access.

So I guess my childhood memories of hearing the manager come over the PA system announcing that days Bluelight special will be laid to rest as Kmart continues to die a slow death into non-existence.


Vain Janglings said...

Chris, I am pretty sure we shared the same childhood Kmart (Woods Cross location). I just recently watched as the bulldozers heaped up the remains of said Kmart and carted them away.

I like this post because it shows the nature of business. The free market is so similar to nature. A business is born, it comes of age, and then dies and is replaced by a bigger and better business. Now, this isn't always the way business goes. You do have companies that have been around for years that don't seem to be going anywhere, i.e. GE, JP Morgan, Hershey’s, etc. But, for the most part, this is the way the business cycle runs.

Unfortunately, the government can get in the way of this natural cycle. Kmart should have been dead back in 2003, instead it opted for bankruptcy protection. This protection allowed for Kmart to restructure their debt, but not only that, just under a year after coming out of bankruptcy Kmart purchased the Sears Roebuck Company.

So my question is, "How can a company go through bankruptcy protection and in the same year buy another company?" So instead of dying with some semblance of dignity, Kmart is allowed to drag Sears down with them.

The moral of the story I suppose, is that government intervention is a bad thing 9 times out of 10. Letting the market be free allows for natural selection to take place, which opens up ground for new companies to develop and in turn is better for the market as a whole. I often wonder what the car industry would look like had the government not come in and bailed them out. Would it be better or worse? All my instincts point to better.

P.S. Does anyone else think Kmart had a distinct smell?

Dr. Tufte said...

Chris: 47/50 In the first sentence you wrote "happen" when you needed the past tense (-3)

Vain Janglings: 50/50 It's OK to write "this is the way the business cycle runs", but I wish there was a better phrase for it, since "business cycle" has a somewhat different connotation in macroeconomics. Perhaps "business life-cycle" would be better?

Oh, sometimes blogging with students makes me laugh. I used to go to that Kmart too, when we lived in those apartments out at the end of Redwood Road in 1991-2 (even then, if you lived in the nicer parts you did not call it Rose Park). And the first Walmart I ever went to was in Bountiful, I think.

Chris: I agree. I always chose Kmart until the Walmart Supercenter opened here 15 years ago.

Just a clarification: it isn't that Kmart's locations were less appealing at the time they built them, it's that metropolitan areas evolved away from them. That actually makes me think of a brand strategy they could have tried. I should think that Sears holdings owns some brand names from defunct department stores. Perhaps they could have rebranded the less desirable locations with old names, and put up new Kmarts in thriving areas. Having said that, though, I wonder if this is actually Sears strategy for the Kmart brand, and if this is something Kmart should have done in the 90's instead? It's weird though, because Kmart is the one that bought Sears (even though they all adopted the name Sears for the parent company), and I don't see just Sears' locations as satisfying that need.

On a related note, Kmart used a somewhat different strategy from Walmart (and maybe Target). This was that Kmart was an anchor store for shopping plazas. Kmart's interest in acquiring Sears about 10 years ago was partially that Sears saw itself as an anchor store for malls. Walmart's strategy has been to avoid plazas and malls. Clearly that has worked better, but I think that would have been hard to predict 25 years ago.

FWIW: If you need a time-waster, there's a site called DeadMalls that actually documents what the current status is of all those malls that were so popular a generation ago.

Vain Janglings: I do not know that I would characterize bankruptcy as "the government can get in the way". Business people around the world admire America's bankruptcy system because it is cleaner and more efficient at both allowing stakeholders to get out with something, and giving managers flexibility to recover some value through new initiatives.

I do agree with you that it seems a little odd for Kmart to have bought Sears right after exiting Chapter 11. But, having said that, no doubt this sort of plan was floating around during the court proceedings, and stakeholders were presumably on board with something along those lines.

This isn't required, but towards the end of writing this up I went to Google to do some fact checking, and came up with some law students' case study from the University of Tennessee about Kmart's reorganization. It's actually pretty interesting.

P.S. I do not think Kmart has a distinct smell.