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Kmart faces image issues
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January 23, 2002: 3:49 p.m. ET
Bankrupt discount chain needs to improve image to survive, experts say.
By Staff Writer John Chartier
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NEW YORK (CNN/Money) - Kmart has more to fix than its balance sheet as it attempts to reorganize under Chapter 11 bankruptcy protection, say those who follow the company.
The No. 2 U.S. discount retailer is scrambling to find a niche in a space it once dominated. Wal-Mart Stores Inc. (WMT: up $1.74 to $59.75, Research, Estimates) replaced it as the low-price leader years ago while Target Corp. (TGT: up $0.82 to $42.64, Research, Estimates) has captured a slightly more upscale market.
Troy Michigan,-based Kmart (KM: up $0.20 to $0.89, Research, Estimates) , with its aging stores, many of which are often unkempt and under-stocked has given its customer little reason to continue shopping there, analysts said.
That means re-emerging from bankruptcy is going to take a complete image overhaul that could include anything from in-store design changes to dousing the blue-light special forever.
"There is no quick fix for Kmart, and that's a problem given their financial situation," said Mark DiMassimo, CEO of DiMassimo Brand Advertising in New York. "They really have to go through the process to figure out who their customer is, or could be. They kind of just sat there and let everybody eat at their market from all sides. They have to find their new relevance. They may be dreaming of a mass market that doesn't exist for them anymore."
Kmart, which operates about 2,100 stores, has been struggling for years with fierce competition from Wal-Mart and Target. That competition heated up in the last year as the slumping economy drove more consumers to discount chains looking for bargains while being cautious with their money.
Chuck Conaway, who took the helm as CEO in 2000 from Floyd Hall, has taken several steps to cut costs, trying to clean up stores, improve checkout procedures and customer service. But many have criticized his strategy of going head to head with Wal-Mart, which does about $200 billion in annual sales compared with Kmart's $37 billion.
One aspect of that price competition was the revival of the bluelight special, hourly discounts on certain items, noted in the stores by a flashing blue light. The strategy is one that hails from Kmart's early days, but has been criticized for keeping a stale image alive.
"They basically focused on an icon for price, so your product has become either irrelevant or known as cheap," DiMassimo said. "Now you're doing a campaign on cheapness while you have competitors who have cornered the market on cheapness."
So if they can't compete on price, analysts say Kmart has to recast itself as a store that can provide customers with something unique. That's on top of closing hundreds of unprofitable stores and paying off their $1.6 billion in debt.
That's where Martha Stewart comes in. The home decorating maven said Tuesday she is sticking by her contract with Kmart for now, which brand and marketing experts agree is a key to helping get the company back on its feet.
Stewart's name on a line of moderately priced home goods from paint to potato peelers appeals directly to busy moms, an important niche customer, said Howard Nemiroff, a finance professor at Long Island University.
"They need to start thinking about a niche market, and Martha Stewart is playing ball," Nemiroff said. "If Kmart loses Martha Stewart, I think it would be very difficult to recover."
Nemiroff envisions a possible marketing campaign based around Stewart's brand that sends busy moms the message that her products are the way to go, and that Kmart is the place to get them.
Such a campaign might include advice and tips on decorating with Martha Stewart products, telling customers that Kmart may not have the absolute, rock-bottom prices, but the perceived value of the merchandise and services would be stronger, Nemiroff said.
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They need to start thinking about a niche market, and Martha Stewart is playing ball
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Howard Nemiroff
Finance Professor
Long Island University |
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The company can also capitalize on its Sesame Street apparel lines, and is also getting ready to offer Disney-branded clothing, said Eric Beder, a retail analyst at Ladenburg, Thalmann & Co.
But that's a difficult corner to turn since apparel, though it carries higher margins, has been in a funk for the last few years.
Beder said continuing store-design changes such as creating a grocery within a store, adding a one-hour photo service and new pharmacy departments would also help improve its image.
Giving old stores a facelift would also help improve customers' perceptions about the store.
"A lot of their problem has to do with the fact that the stores are old," Beder said. "A lot of Kmart stores have kind of gone to seed. They haven't been renovated, and Kmart never really had a program to do that."
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But it costs about $5 million to renovate a store - not cheap when you're paying off debt under bankruptcy protection.
As Kmart continues to work on its image, experts say the company needs to hype up that image with advertising. The company's advertising budget has remained roughly flat for the last three years at about $500 million, Beder said.
Much of its advertising has been through newspaper inserts while Target and Wal-Mart conduct aggressive, flashy television campaigns.
"I think if consumers like the new Kmart, if the company has any business sense, you can argue they should go out and be very big with it," Beder said. 
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