I.

Overview
Sebastian S. Kresge opened the first Kmart store on March 1, 1962, in Detroit, Michigan.
A total of eighteen Kmart stores opened that year, ranking the largest discount retail store in
US at that time. The following are some important historical events of Kmart.
• In 1977, Kmart was formally renamed as Kmart Corporation.
• In 1984, Kmart merged four companies of various industries, heading for
Conglomeration operating mode. Meanwhile, it started its first Super Kmart Center,
selling various products.
• In 1994, because of its weak management and lack of competitiveness, it was criticized
as a retail store of low quality.
• In 1997, it sold some of divisions and focused on discount retail product line.
• In 1999, it founded a website which was named, “Blue Light. Com”, beginning to sell
merchandise via the Internet.
• In May 2000, Conaway was appointed as new CEO.
• In Dec. 2001, it was ranked as the third largest retail chain store after Wal-Mart and
Target.
• In Jan. 2001, it couldn’t afford to repay account payable to Fleming (the second largest
wholesaler in US), so the supply was cut out.
• In Jan. 2002, Kmart finally filed for bankruptcy.

I. Strategic Risk Analysis

1. Market, Customer and Product

1.1. General Situation
1.1.1. Macro economics
United States macro economics indicators from 1995 to 2001:

Gross
Disposable Customer Interest Rate Retail
Year Domestic
Income* Price Index** (% ) Sales***
Product*
1995 20,287 152.4 27,749 7.000 1,642
1996 21,091 156.9 28,982 6.875 1,734
1997 21,940 160.5 30,424 6.875 1,819
1998 23,161 163.0 31,674 6.875 1,897
1999 23,968 166.6 33,181 5.750 2,043
2000 25,472 172.2 34,759 5.875 2,191
2001 26,235 177.1 35,491 6.375 2,251
Source: www.census.gov

* Real value per capita

** 1982-1984 =100
*** In billion dollar, excluding motor vehicle and parts dealers

Figure 1. Macro Economic Indicators Table

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 Disposable Income per capita showed a tendency of increase with average
growth 4.6 % every year (1995-2000). Meanwhile Customer Price Index (CPI)
that shows inflation could only increase at 2.4 % every year (1995-2000). Even
when disposable income growth dropped to 2.9 % in 2001, it was still above
CPI growth (2.8%). This condition was supported by stable GDP which
increased at range 4.1 % – 4.9 % every year during 1995 to 2000 (but in 2001
plunged to 2.1 %). Government, apparently, tried to stimulate economic by
keeping the interest rate at low level. As a result, from 1995 to 2001, sales
retail had a robust increase with average growth 5.4 % every year.
Thus, generally there was no serious threat from macro economics condition to
business entity, although in 2001 it experienced slow down (retail sales only
grew 2.7 % from previous year) but still had positive trend.

1.1.2.US demographic trends (1990-2000)

• A growing number nontraditional household
Traditional household consists of parents (father and mother) and children,
and nontraditional household is a family which does not have characteristics
like the traditional family.
For example: single parent, unmarried partner
• The aging population
The population was getting older, which was shown by the increased median
age (from 32.8 years in 1990 to 34.8 years in 1996). One of critical issues
from this situation was Baby Boomers (as majority of population) changed
their attitudes as aging. They became less concerned with brand, less
emotional in buying, and more prices sensitive.
• More working women
There were more women going to work. In 1999, labor force participation
rate for women reached 60 % compares with 43.3 % in 1970 (for women age
16 or older).
• Generation X
This generation was born from 1965 to 1985, and by 2000 there were 44
millions. Considering they were in productive age and making first time and
big purchase, generation X had significant role. They have characteristics
like: getting married later than their parents, having broader definition of
“family”, buying products is not just to connote status or make a statement.
• Higher education attainment
In 2000, four out of five adults had completed senior high school, and
college completion rates increased to one adult of four attained bachelor
level. In the same way the population with less than high school diploma
decreased 3.6 million from 1990 to 2000. Total 80.4 % of population had
high school diploma or higher by 2000, and more than one-quarter of them
had bachelor degree or higher.
• Growth of ethnic markets
Hispanics that were the fastest growing ethnic of US’s population changed
demographic condition. In 1997 Hispanics were estimated about 28.4

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 millions and became 31.7 million in 1999 (11.7 % of the total population).
Even as July 2001, the Hispanic population surpassed the African American
population for the first time. Although their purchasing powers were still
lower than white customers, but increased seven times faster than them in
few recent years.
• Geographic location
People began to move out from cities to suburban or tertiary (the less
important areas than suburban). Usually, middle and high income population
are as the fore runner of moving.

1.1.1.US retail industry trends

• Greater time constraints
People became valuing time more, and shopping was considered as more “a
chore” rather than “a fun”. They would prefer general merchandise stores
which provide more various products and could eliminate their trip’s
frequency.
• Expanded usage of technology
As technology development was getting more sophisticated by the end of
20th century, retailers used it to foster their growth. Applying technology in
their systems will enhance sales, cut costs, and obtain more information
about their shoppers.
• The increase of store less shopping
This means that people can pick and buy a product without coming
physically. This kind of shopping is as a substitute for traditional retail store.
For example: internet sales, catalogs, home-shopping networks.
• Convenience requirement
Customers demand more convenience while shopping. It can be store
appearance (cleanliness, organized stacks) or sales-clerk service.
• Demand for specialty items
• Retailer-supplier alliances
Retailer and supplier have more intense and close relationship.
• Micro-merchandising
The central headquarter grants local store more power to determine which
products should be stored and at what level. This is based on idea that every
area has different demand depends on local need (store-on-store basis).
• Micro-marketing
Retailers establish one-to-one relationship with customers as a way to
communicate with and create loyalty among customers.
• Declining labor supply

1.1. Kmart’s strategy

1. Customer
Kmart typical customer is a blue-collar high school graduate in the $ 15,000 to $
25,000 income (low income customer). From 1990’s to 2000’s, Kmart target
customer changed to middle income families (from modest income customer in

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 1960s and 1970s). Then it also tried to specify its target market to young mother
with children.
– “Families who earned between $ 15,000 and $ 60,000 a year” (CEO Bernard
Fauber).
– “Kmart will become the store of choice for low and middle income families
with children by satisfying…” (CEO Floyd Hall, 1995-2000).
– “Our goal is to rebuild Kmart brad as the authority for moms, homes and kids”
(CEO Chuck Conaway, 2000 – 2002).
Unfortunately, some polls showed contradictory opinions:
– Gallup poll: shoppers that prefer Kmart to Wal-Mart or Target are less
educated urban and rural dwellers and with less than $ 20,000 in annual
income.
– New York Times: Kmart customer had the lowest median income ($ 35,000
versus $ 37,000 and $ 45,000 for Wal-Mart and Target, respectively), the
fewest college graduates (30 % versus 31 % for Wal-Mart and 40 % for
Target), the lowest percentage households with children under age 18 (38 %
versus 39 % for Wal-Mart and 44 % for Target).
1. Ethnic Market
Because of Kmart’s urban location which is convenient for many Hispanics (most
of them live and work near major cities), 40 % of Kmart’s sales were derived from
ethnic minority shoppers. But only after 2002, Kmart seriously paid much
attention to this untapped market.
2. Location
Kmart location strategy was city/urban focused and primarily operated in leased
facilities with 25-year contract and 50-year renewal option. Only 133 of stores
were owned.
Kmart also had no relocation policy due to the cost and inconvenience. It chose to
stay at existing locations, while for other retailers picking up and moving is a
regular practice in order to stay close with their shoppers.
3. Time Constraint
Kmart opened Super Kmart (1991) and Big Kmart (1997), and gradually reduced
its traditional store to be replaced with Big Kmart. Both were hoped that could
provide more various products. Super Kmart has 140,000 to 190,000 square feet
width, and Big Kmart has smaller width (84,000 to 120,000 square feet), but was
better designed, better lighted, and less cluttered stores.
4. Technology
Started in the late 1970s, Kmart tried to catch up with other retailers’ technology
by investing more and more in new technology adoption to its supply chain
system ($3 billion in 1980, $ 1 in 1987, $ 2.5 million in 1992, $ 1 billion in 2000).
These investments was paid off, when Kmart’s Seasonal Merchandise
Management System could generate an incremental $ 28,9 million in profit in
1992 and by 1999, its database could track 2 billion transactions a year from more
than 85 million households.
5. Store less shopping

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 In 1998, Kmart launched www.kmart.com as site for internet sales and one year
later replaced with www.bluelight.com which was joint venture with Soft Bank,
Yahoo and Martha Stewart. Although this website sold limited products, in first
six months attracted more than 3 million subscribers and sales grew 1,060 % in
2000. Other factor that pushed sales was free internet service for customers who
made a minimum amount of purchases via web site.
6. Shopping convenience
Since 1981 Kmart (CEO Bernard Fauber) had planned and tried to remodel and
upgrade its stores. Even by 1986, restoration budget increased to $ 2.2 billion,
but the program never been finished until Chuck Conaway era, last CEO before
Kmart went bankrupt.

1.1. Risk
1. Dissonant market (between management’s target, real implementations, and
population trends).
Kmart did not focused on particular customers (neighborhoods, income levels,
educational, backgrounds, gender, and etc) and grabbed all people who lived
around its stores as its customers. For example:
• Circulated millions of newspaper advertising circulars each week to
household nationwide without any constraint.
• Launched Pantry area which sold lower margin food and drug items located
at front of the store. Meanwhile at back of the store, it had brand area which
sold branded apparel and toy.
Kmart was looked like not consistent with defined target market, or perhaps
because of weak execution.
Similarly, Kmart had targeted women as customers, had to face the fact that
women got declining time spent on shopping caused by work, family, or
community responsible. The less time they spend in store, the less they would
buy.
1. Untapped Market.
Opportunity cost was caused by lack of attention to the ethnic shoppers which
were Kmart’s significant and potential market.
2. Lousy location.
Kmart’s stores located in the area which had traffic in the past, and when (middle
and high income) people began to move out from cities, Kmart stores located in
lower-income neighborhoods and made much more difficult to grab middle
income customer as Kmart stated. City area also brings consequences higher rent
and smaller parking lots. Conversely, Wal-Mart and Target preferred suburb areas
which have opposite natures.

3. Outdated technology.
Although Kmart had invested billions in technology, but there was a possibility
that it did not keep pace with technology development. Thus, to evaluate needs a
benchmark and Wal-Mart which has many similarities would be an ideal
comparison.
Figure 2. Kmart and Wal-Mart Technology Development

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 Year Kmart Wal-Mart

1960s Decided to invest in process automation

Leased an IBM 370/135 computer system to
maintain inventory control, distribution and
Early F/S statement
1970s Equipped each store with back end
computer, electronic cash registers and
UPC scanners
End Built a computer network and deployed
Equipped its stores with computer
1970s system for ordering merchandise

Began to use bar codes for scanning POS

Started to adopt scanners, credit card
data, and adopted Texlon technology to
Early processor linked by satellite and the
provide a description of the merchandise,
1980s ability to monitor inventory and sales
quantity, shelf label and other data when
data in nearly 500 stores
reordering
Completed to set own satellite
communications system which enables
headquaters to communicate directly with
each store with out paying long-distance
1 $ billion investment in technology
1987 phone charges
adoption
Deployed Retailink (EDI) that made
suppliers could access sales data ,
inventory level, projections and propose
new sales strategies
Used data warehouse prototype to store
1990
historical sales data
Owned EDI network and win
1992
Smithsonian award
Made Retail Link available via the Internet
1996
and used it as an application form
Used email to send promotional
Early materials and renewed inventory Used the internet for data exchange with
2000s system, scanners and faster cash thousands of its global suppliers
registers

4. Internet sales as a new business model.

Internet sales which do not required customer to come physically have different
characteristic from retailers’ store. And Kmart was a new player in this model.
5. Internet sales could not reach target market.
From 3 million subscribers in the first six months www.bluelight.com launching,
40 % of them were new to the internet, and the fact that 57 % million of Kmart’s
customers did not yet have Internet access.
6. Less convenience due to store appearance and lack of employee.
Most of Kmart’s stores were built during the expansion push (1960s and 1970s),
and just 10% was built during 1980s. This made Kmart’s stores look like older
than other retailer’s stores. Even some negative images about Kmart’ stores were
in shoppers’ mind, like: dirty floor, disheveled displays, and crowded aisles.
Another aspect that influences customers’ convenience is sales clerk service. The
number of sales clerk and the mean of sales clerk interact determine this factor. As
a comparison, Kmart had the lower employees with the same or more stores

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 relative to Wal-Mart and Target (by 1999, Kmart had 275,000 employees and
2,171 stores, meanwhile Wal-Mart employed 910,000 employees in 2,389 stores
and Target employed 281,000 in 912 stores).

1. Competitors
2.1. Competition and Competitors
Business which sells standardized product, such as general merchandise, faces harder
competition due to customers have low switching cost (they can move from one
supplier to others in cheap or free cost).
Basically, Kmart just had two main competitors, Wal-Mart and Target. They had
stable growth and squeezed Kmart’s market from above and below. Wal-Mart with
lower price strategy (and technology aided) which had had the mid-to-down target
market across the family life stages grabbed Kmart’s original market for general
merchandise product, and from other side, Target with brand discount strategy which
had had the mid-to-upscale target market grabbed Kmart’s branded product market.
Wal-Mart, mainly, has a phenomenal growth, from a single small discount store to the
largest retailer in the US in three decades. In 1994, Wal-Mart sales exceeded the
combined sales volume of Kmart and Sears, and by 1996, it
exceeded the combined sales volume of Sears, Kmart, and Target.
On the other hand, new entrants would be difficult to compete in the market. Since
retail market was dominated by few players that the top ten stores accounted for 95 %
of sales of discount store and three-quarter of them were captured by Wal-Mart,
Target and Kmart.

2.2. Kmart’s Strategy

Some strategies (for example: price cuts on 10,000 products and exclusive agreement
with many branded product vendors) had launched to compete with Wal-Mart and
Target, but apparently they were not enough (see figure.1.1). Kmart looked like
inferior whether in price, image, strategy implementation, or even corporate culture.

Branded Product General Merchandise

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 Figure 3 Kmart’s Branded and General Products Position

2.3. Risk
Hard challenge (competition) from Wal-Mart and Target

1. Suppliers (and Resources)

Kmart’s suppliers could be divided based on its product:
– Special (branded) good
For example: Martha Stewart, Jaclyn Smith, Kathy Ireland’s, Sesame Street, Route 66,
Bench Top and Disney
– General good (merchandise)
For example: Fleming Co. (food), Scotts (gardening products)
Basically, Kmart as the largest retailer in early 1990’s and the third largest retailer in late
1990’s had good bargaining power over its suppliers. But as Kmart’s tendency in
developing more exclusive brands, Kmart’s position was less strong over special good
supplier, especially when it had had established brand, than general good supplier.
Since outsourcing became alternative business model in procurement, Kmart also
outsourced some its processes. Such as, Kmart’s food department was subcontracted to
Fleming. Co, or its information system and distribution fleet were subcontracted to third
party (i2 Technologies and Advanced Logistics). In short term, outsourcing will lower
cost, but as a consequence Kmart would be likely of losing of control of its own process.

1. Internal Processes
In Floyd Hall era (1995-2000), Kmart had a mission: “Kmart will become the discount
store of choice for middle-income families with children by satisfying their routine and
seasonal shopping needs as well as or better than the competition”. Afterward, in 2001,
Kmart, although not clearly stated as “mission”, restated its mission to: “Transforming
Kmart into the authority of moms, home, and kids”. The focuses (strategies) to achieve
these missions also had changed from competitive pricing, , great promotions with “never
beaten” advertised prices, better store formats to fixing supply chain, effective marketing,
reducing SG & A expense.
Some strategies during 1990 to 2000 showed Kmart experienced transformations from
core business as discount retailing, like as:
– Launching brand name products such as Martha Stewart, JOE BOXER, Sesame Street as if
moving toward upscale consumer.
– Expanding to food sales (as Wal-Mart and Target did) whether in Pantry format (low-
priced) or other formats.
– Grabbing noncore income as charging manufactures which advertised on Kmart’s
circular.
– Acquiring specialty retailers and warehouses, such as: Office Max (office supplies, Marko
Inc, Borders (books), Builder Square (improvement product)s

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– Acquiring automotive and sporting goods specialty stores whereas claimed to stay focus to
“mom and kid” segment.
– Re-launching Blue Light which lowered price on about 45 % of more than 30,000
products.
Even though changes are needed for every company in order to grow and sustain, but it
also brings a possibility of loss of focus.

1. External Agents
Some external agents which have influence to Kmart, for example:
– Government, whose policies affect Kmart, such as tax, antitrust, national holiday, labor.
– Retailer organization which can be industry representative in negotiating with government,
such as: National Retailer Federation.
– Financial analyst which they could work for banks, insurance companies, mutual funds,
and securities firms.
– Labor union which has significant role in amid of declining labor supply and the need of
sufficient number of employees, such as: Retail Wholesale and Department Store Union.

1. Strategic Partners
Strategic partners here were partners whom their existences were vital to Kmart and so
otherwise. For example: single Kmart’s food distributor, Fleming Company Inc; or Martha
Stewart which helps Kmart get its “mom market” and Kmart provides distribution channel
for Martha Stewart.

II. Business Processes and Internal Risk Analysis

1. Retail Industry Business Process

The primary process of retail industry incorporates inbound logistic, operation and out
bond logistic, or its supply chain. Because these processes continuously recur, they are
also called retail process life cycle (see figure 3.1).

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 Source: www.wipro.com
Figure 4. General Retail Process Cycle

The first phase is planning, and it determines location and capacity, sort of product, how
much and when to order, how much to store (safety stock), and mode of transport. Then,
order is sent to supplier. Supplier responses it by delivering goods to warehouses to be
temporarily stored. Next, warehouses distribute these goods to each store to be sold to
customers. At the same time, the information system records the inventory data from the
beginning to the end which become feedbacks for planning phase at the end of the year
(such as, which products are most popular, which merchandises should be promoted and
so on). Again, the processes start, and replenish inventory.
In more sophisticated process, retailer exploits the advance of technology which could
reduce lead time, minimize the amount product stored, sale as what and when downstream
needs, and finally reduce cost. There is a direct and accurate linkage between retailer’s
customers and retailer’s suppliers. Every time product passes through point-of-sale (e.g.
cash register), the sales are record and sent to network database which supplier can access
to determine product replenishment. Meanwhile, warehouse functions more in preventing
bullwhip effect (demand variability) and anticipating seasonal product.

2. Kmart’s Strategies
• Information system.
As the store’s number growing and to support sales strategies, Kmart had tried to
improve its upstream (supplier) and downstream (customer) information system many
times. For example:
– In 1997, Kmart bought software from EXE Technologies to build its warehouse
management system, but it was scrapped in 2001 (as part of software and
hardware write-offs), and adopted new software from i2 Technologies.
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 – In 1998, Collaborative Planning, Forecasting, and Replenishment (CPFR)
program that enabled collaboration on sales forecasts, promotional planning
and replenishment with suppliers gave Kmart 14 % sales increase and stock
rates raise from 86 % to 94 % (from cooperation with supplier Kimberly-
Clark). This program expanded to other suppliers (P&G, Colgate-Palmolive,
etc) but suddenly was stopped in early 2000 due to subscription fees required
by its provider.
Wal-Mart had begun the similar program in 1995 with supplier Warner-Lambert and
boosted stock rates to 98 % from 87 % and increased sales by $8.5 million.
– In 2001, Dan Hammond, divisional vice president, developed a project that
enabled to capture sales information from cash register every time soft-line
product sold, automatically update the on-hand inventory, use a high-speed
connection to report to a central computer that suppliers could access. This
project would involve 29 vendors. But in 2000, Hammond’s project was
downgraded and replaced with new outsourced hardware and software.
At the same time, Wal-Mart had successfully held a real-time data at more than
2.500 stores for more than 10.000 suppliers.
Compared with Wal-Mart, Kmart’s information system is obviously outdated. As a
result Wal-Mart’s supply chain outperformed Kmart’s and other retailers’ supply
chains. This reason also can explain why Wal-Mart’s warehouses could replenish
almost 85 % of their inventory, meanwhile other retailers could only replenish about 50
to 65%; or Wal-Mart could make daily deliveries to its stores, Target made deliveries
every three to four days, while Kmart could only deliver every five days to its stores.
• Product allocation was determined centrally.
Kmart did not practice fully micro-merchandising even when Conaway decided to
reduce percentage of merchandise being allocated by central planners from 60 to 40 %
in 2001.
• Warehouses had responsible to receive, store and redeliver goods to its chain.
Before merchandise was distributed to stores, warehouses received and stored it. That
was why warehouse needed large stockrooms. Kmart shunned further supplier
involvement. Otherwise, Wal-Mart shifted this responsible to vendors. Suppliers with
the help of inventory system took responsibility for ensuring that product was available
in stores when it was needed. As a result, Wal-Mart’s warehouses had little need for
large stockrooms and Wal-Mart’s stores had smaller lead time in ordering a product.
• Distribution Center
Kmart’s stores, mainly Super Kmart, were not located around its distribution centers.
They tended to be scattered, made distribution center difficult to distribute efficiently.
While Wal-Mart seemed developing grocery distribution system by locating stores
(Supercenter) around its distribution centers.
• Outsourcing its entire trucking operation (distribution).
Although outsourcing distribution system was a common practice in that period (like
Kmart and Target) as company wanted to be cost effective, Wal-Mart had its own fleet
(by 1992, there were more than 2,000 tractors and 11,000 trailers)
• Having two information systems.

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 Until mid 1990s, Kmart’s apparel sales were handled by Kmart subsidiary, and it was
not tied into the hard-line system which managed general merchandise. These two
systems could not share information each other.

1. Risks
• Unreliable information (timeliness, relevance and completeness)
Kmart’s information system had not been able to provide accurate and real time
information that made the company did not know which products were hot sellers or
which stores needed and when. It could trigger other consequences (risks), like as, out
of stock or overstock and theft (theft and bad information system could raise shrinkage
rates, Kmart’s shrinkage rate was 3 %, when industry average shrinkage rate was below
1.5 %, and Wal-Mart’s was 0.0075 to 0.0100 %). This condition also could explain
when in 2000, Conaway got rid of nearly 15,000 truck trailers full of inventory that had
been sitting behind stores because there was no space inside.
• Longer cycle time and obsolescence
Central allocation and warehouse-through-distribution makes time needed from
ordering to receiving a product longer and having possibility of obsolescence, besides
the possibility that product determined by central is not what local needs. That Kmart
distribution center was not around its stores deteriorates this risk.
• Resource wastage
Two separated systems would create double similar processes and works. It would
produce an inefficiency, not to mention a work to combine two reports (from different
systems). So is system change. Kmart changed information system many time, it made
resources that had been used in previous project futile. Another condition that could
create resource wastage risk is warehouse-through-distribution, otherwise supplier-
direct-distribution can increase efficiency, but it requires supplier-retailer intense
collaboration.
• Loss of power to improvement
By outsourcing, Kmart losses its control on distribution system and when delivery
mistiming happens, Kmart is more difficult to fix delivery schedule or inventory
management system as a whole.

I.Risks Assessment

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Risk Low Medium High
Strategic Risks
Dissonant Market √
Untapped Market √
Lousy Location √
Outdated Technology √
Internet Sales √
Less Customer Convenience √
Hard Competition √
Loss of Control √
Loss of Focus √
Internal Risks
Unreliable Information √
Longer Cycle Time and Obsolence √
Resource Wastage √

Figure 5. Risk Assessment Table

Assessment, evaluated qualitatively, is based on the impact of the risk to the performance of
Kmart and the possibility of that risk happens. And as a result, six risks are categorized high,
five risks are medium, and one risk is valued as low.
Among those risks, the most critical one is loss of focus, because this reflects the
management strategic step. It determines where company wants to go or to be (vision), long-
term targets, short-terms targets, and strategies to achieve them. So, it is like an underlying
strategy for other strategies and risk from this strategy would trigger other risks. Kmart
seemed did not know that it should be a discount store, specialty store or specialty discount
store. Those were why Kmart’s information technology was often changed (billions
investment was spent in vain), got no progress and remained behind Wal-Mart’s. Then, it
would threat the reliability of information produced. Finally, Kmart’s supply chain would be
difficult being effective and efficient without eligible information. What would happen next
be longer cycle time, obsolete product, out-of-stock, and over-stock. Other effects caused by
losing of focus were not able defining its customer (moreover paralyzing customer target
with demographic or retail industry trend) and not able finishing its store restoration program,
and providing convenient shopping experience to its customers.
Some risks had been mitigated by some conditions or strategies. Therefore they are
categorized as medium or low. Lousy location, for example, the impact would be weakened
by the increase of Hispanics which Kmart’s location convenient for them (without realizing
demographic trend and Kmart did not exploit yet), even Wal-Mart tried to move to urban
area. Cooperation with Yahoo also would reduce Kmart’s less experience in internet sales,
and it could hit branded product customer target as Kmart moving to upscale segment. In
competition, basically Kmart only got Wal-Mart and Target as competitor, and as ex-market
leader Kmart still had many resources and potentials to compete. Instead, after Kmart got

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declining, Kmart was still the third largest retailer. It would make Kmart had enough
bargaining power with suppliers and required better product standard from them.

II. Financial Analysis*

Analyses use three types of ratio, there are:

– Solvency (to measure Kmart’s ability to fulfill its both short and long term
liabilities).
– Operating (to measure how efficient Kmart operates and utilizes its asset),
and
– Profitability (to measure how effective Kmart operates and utilizes its
asset).
And to evaluate those ratios, Wal-Mart’s financial performances are compared as benchmark.

*We analyze Kmart financial performances from 1997 to 2000 to understand trends what Kmart was
undergoing. We do not use data 2001, because it was ended in January 2002 (Kmart’s fiscal year is ended in
January) the same period when Kmart announced its bankruptcy (Kmart filled under chapter 11 in January
2002).

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 KMART WALMART
RATIO
2000 1999 1998 1997 2000 1999 1998 1997
Solvency
Current ratio 2.1 2.3 2.1 2.9 0.9 1.3 1.3 1.6
Cash ratio 0.11 0.08 0.19 0.15 0.07 0.11 0.1 0.08
Debt to asset ratio 0.58 0.58 0.58 0.60 0.63 0.58 0.59 0.57
Operating cash flow ratio 0.27 0.25 0.34 0.26 0.32 0.45 0.49 0.54
Interest coverage* -0.16 4.64 3.72 2.15 9.89 10.19 8.29 6.77
Interest coverage** 4.31 5.97 6.18 3.78 12.17 13.95 12.78 10.14
Operating
Gross Profit/Sales (%) 19.90% 21.75% 21.84% 21.85% 21.42% 21.00% 20.79% 20.36%
SG&A/Sales (%) 20.03% 18.13% 18.55% 19.07% 16.39% 16.25% 16.41% 16.16%
Interest Expenses/Sales (%) 0.78% 0.78% 0.87% 1.13% 0.62% 0.58% 0.66% 0.81%
Inventory Turnover 4.39 4.12 4.08 7.03 6.48 5.77
Avg Acc Pay Period*** 27.64 27.6 27.53 32.88 32.54 32.72
Profitability
Profit Before Taxes/Sales (%) -0.90% 2.84% 2.37% 5.50% 5.32% 4.85%
x Sales/Average Assets 2.49 2.45 2.43 2.74 2.89 2.78
x Avg Assets/ Avg Equity 2.40 2.38 2.43 2.56 2.41 2.38
x (1- Average Tax Rate) 59.60% 67.00% 71.20% 63.25% 62.59% 63.03%
=Return on Equity (%) -3.19% 11.13% 9.96% 24.47% 23.14% 20.22%
* Earning Basis
** Cash flow basis
*** Days

Figure 6. Kmart’s and Wal-Mart’s Financial Performances Table

From figure, there are some points:

• Kmart outperforming Wal-Mart in solvency is spurious.
In short term, Kmart’s and Wal-Mart looked like similar liquid (current and cash ratio),
even Kmart was a little bit better than Wal-Mart. In the same way, debt to asset ratio
shows that they had no difference ability to cover their obligations. But if it is scrutinized
further, Wal-Mart had stable average account payable periods longer than Kmart. It
means that Wal-Mart had a strong relationship or more powerful bargaining power with
or to supplier that it can defer the payment of its liabilities longer. That was the cause that
made Wal-Mart current liabilities larger, and then its solvency ratios seemed worse than
Kmart.
Interest coverage ratios make clear Kmart’s real condition. Kmart had a tendency of
declining, otherwise Wal-Mart tended to increase. Negative earnings had enervated
Kmart’s ability to satisfy its interest in future.
• Kmart’s profitability deteriorated.

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 It is quite clear that Kmart’s ROE dropped sharply, even being negative in 2000. It is an
alert that there were problems. Compared with Wal-Mart, it showed opposite result, a
robust stable increase.
• Operating ratios answer why Kmart was getting less profitable.
At least, from operating ratios, there are two reasons why Kmart’s profit kept declining.
One is the increase of cost of sales (see figure 7) which causes percentage of gross profit
to sales plunged down in 2000 and second is the sales, general and administrative expense
was climbing up.
Kmart

Wal-Mart

Figure 7. Kmart’s and Wal-Mart’s Gross Profit-COGS Composition

Based on Kmart 2000 annual report, it is explained that those increase was due to some
strategic action taken, such as:
– Store closings that required Kmart to pay lease obligation and maintenance
expense $ 191 million and elicited $ 75 million of inventory write off.
– Inventory reduction amounted $ 290 (Kmart had a high shrink rate).
– Information technology write off amounted $ 60 million (in 2000, Conaway
had software and hardware write off program).
Besides that, Kmart also suffered $ 64 million loss from investment in bluelight.com
subsidiary.
Those reasons are quite enough to show that Kmart committed poor strategic strategy and
inefficient supply chain caused by outdated technology.

I.Conclusion

Risk analysis, whether strategic risk analysis, internal risk analysis, or financial analysis,
obviously find that Kmart’s performance would be declining and other retailers (Wal-Mart,
especially) would outperform Kmart. But it is still quite unpredicted that Kmart would
experience illiquidity problem and go bankrupt, although perhaps negative earnings is a
warning that Kmart could not provide enough cash in the future.

References

Bradley, Robin.H. 2001. Automated Replenishment Rings Up Sales. Supply Chain e-

Business June.
Chopra, Sunil and Meindl, Peter. 2004. Supply Chain Management 2 ed. Upper Saddle River:
Pearson Prentice Hall.

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Graff, Thomas.O. 1998. The Locations of Wal-Mart and Kmart Supercenters: Contrasting
Corporate Strategies. The Professional Geographer 50 (46-57).
Greg, Jacobson. 2002. A Study in Contrast (Wal-Mart Stores Inc. and Kmart Corp). Racher
Press, Inc.
_______.2002. Kmart: SCM Gone Wrong. Baseline Magazine January.
_______.1998. Kmart Annual Report.
_______.1999. Kmart Annual Report.
_______.2000. Kmart Annual Report.
_______.2001. How Kmart Fell Behind. Baseline Magazine December.
Markham, Jerry.W. 2006. A Financial History of Modern U.S Corporate Scandals: From
Enron to Reform. M.E. Sharpe 234-235.
Shields, Martin and Kures, Matt. 2007. Black Out of The Blue Light: An Analysis of Kmart
Store Closing Decision. Journal of Retailing and Consumer Services.
Turner, Marcia.L. 2003. Kmart’s Ten Deadly Sins: How Incompetence Tainted An American
Icon. John Wiley and Sons, Inc.
Wilson, Lisa H. January 2001. Retail Industry Study. Business and Research Services.

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