US: Time for ailing K-Mart to step into modern world

Will a radical departure from its traditional strategy be enough to save the beleaguered US discounter K-Mart from bankruptcy?

The bankruptcy was largely blamed on poor Christmas sales. In fact, the demise of K-Mart was due to several years of bad management along with some critical marketing mistakes it made over the past year in a hyper-competitive and unforgiving market.

K-Mart is the oldest of the US discounters, having been part of the American retailing landscape since the Sixties. Yet today it stands at number three behind Wal-Mart, now the owner of Asda in the UK, and Target. Wal-Mart and Target play a tough game. They have larger, newer stores than K-Mart, which give the perception of better-quality merchandise. Both have been making bold moves and growing aggressively over the past few years. Sam Hill, author of a book on branding called, The Infinite Asset, describes Target as “quite possibly the best-run company in the world”.

In many ways, K-Mart’s heritage is what has landed it in the mess it’s in today. Its stores are in more urban locations, which are often impossible to expand and difficult to modernise. Then there are the infrastructure issues, such as the fact that many of its cash registers are so old that if one breaks down, it can bring the whole store to a halt as it crashes the entire system. Despite the $1bn (£700m) K-Mart has spent upgrading its processes over the past few years, it continues to fall far short of the state-of-the-art warehousing and distribution systems that Wal-Mart has put in place. This makes it even harder for K-Mart to compete on price – clearly a critical part of the mix for this market.

Just over a year ago, the K-Mart heritage also inspired a reported $25m (£17.3m) advertising campaign to relaunch a 40-year-old promotional offer called the “Blue Light Special”. This was a limited-time, in-store offer that was triggered by a blue light flashing at the end of an aisle and was the cue for shoppers to engage in a shopping rugby scrum to get their share of whatever the special offer happened to be.

Interestingly, the Blue Light was switched off by K-Mart’s management in 1991 in their attempt to modernise the chain’s image. A decade later, the promotion was hailed by the incumbent management as the marketing initiative that would save K-Mart, with chief executive Charles Conway describing the promotion as, “A retail phenomenon that provides consumers with… an opportunity to reconnect with K-Mart.” Last month, Conway resigned.

The Blue Light campaign was certainly well executed and featured some of the most innovative Internet advertising used up to that point. Yet with the benefit of hindsight, basing its comeback on a 40-year-old idea of random in-store discounts when Wal-Mart and Target were out there pitching low prices, broad inventories, trendy products and pleasant shopping experiences was more than a little risky.

To make matters worse, towards the end of the year, K-Mart decided to reduce its advertising. What it then learnt, to its cost, is that Americans who shop at discount retail outlets need constant reminders and reasons to shop there each week. Store traffic and sales dipped as soon as newspaper ads were cut. By the time they were re-instated, the momentum from the Blue Light campaign was all but lost and Wal-Mart and Target had pulled even further ahead.

What also seems strange is that K-Mart didn’t focus its advertising efforts on its true points of difference – a roster of trusted household-name brands that are only sold in K-Mart stores. The biggest of these by far is the American home-making and gardening guru, Martha Stewart, whose range of self-branded goods contributed $1.5bn (£1.03bn) to K-Mart’s sales last year. As well as Martha Stewart, K-Mart owns the rights to the Jacklyn Smith (ex-Charlie’s Angels) and Kathy Ireland brands of clothing and accessories, as well as Disney children’s’ clothing and Joe Boxer clothes and home furnishings.

The US bankruptcy court recently gave K-Mart authorisation to continue with its licensing deals and its new chief executive James Adamson said they would be a key part of K-Mart’s merchandising and marketing initiatives. Many critics believe that not making Martha Stewart the star of its ads and the main driver of traffic was another big marketing miscalculation.

After taking the painful step of cutting its workforce by nine per cent and closing 13 per cent of its stores, this month K-Mart unveiled its latest great marketing plan. It takes the form of a $25m (£17.3m) TV and radio advertising campaign that targets minority consumers, specifically blacks and Latinos.

These two groups make up 40 per cent of the 30 million consumers who shop at K-Mart each week. Furthermore, according Miami-based agency Market Segment Group, the purchasing power of minority consumers in the US is growing seven-times faster than that of white consumers. Blacks spent $469bn (£324bn) on consumer goods last year, while Latinos spent $384bn (£265.5bn). The ads feature pop singer Chaka Kahn, gospel-R&B star BeBe Winans, and, in Spanish-language ads, music legend Jose Feliciano. The retailer’s new strapline to accompany these ads is “K-Mart. The stuff of life”.

But if K-Mart truly wants to court minorities, it will need to go a lot further than just an advertising campaign. It’s hard to see how the middle-class, white Martha Stewart fits neatly with its multi-cultural targeting plan. Yet K-Mart regards this as a longer-term strategy and, according to Omar Wasow, executive director of Web portal, which has a claimed 5.1 million unique visitors each month, it’s making a smart move. “To look at marketing as race-neutral in today’s economy is naive,” he says. “This isn’t about being politically correct. It’s about being financially intelligent.”

Intelligent or not, with its Chapter 11 filing K-Mart has bought some much-needed time. What it has to prove now is that it can reposition itself as a financially viable, modern retail giant. It needs millions of Americans to agree with the slogan that K-Mart is indeed the best place for “The stuff of life”.

Polly Devaney is a former Unilever executive now working as a freelance business writer

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