Agenda

• Organizational Overview
• Industry Snapshot
• Competitor Analysis
• Financial Analysis
• SWOT Overview
• Current Strategy
• Strategic Issues
• Recommended Solutions
• Implementation/Justification
• Recommendation Recap
 Organizational Overview

• Founded by Sebastian S. Kresge in 1962

• Number 3 discount retailer in the U.S.
• Operates 1,479 stores in 49 states
• Maintains 3 retail concepts
• Filed bankruptcy in 2002
• Merged with Sears, Roebuck & Co. in March
2005
 Industry Analysis
Key Success Factors
• Advanced technology that enables
merchandising efficiency
Technology

• Efficient Supply Chain Management

• High return on inventory investment/high
inventory turnover
Distribution • Good working relationship with suppliers
• Low distribution costs
• Low replenishment cycle times
• Ability to predict consumer demand
• Courteous customer service
Marketing
• Breadth of product line and brand selection
• High sales per square footage (store productivity)
• Effective merchandising strategies
Skills & Capability
• Ability to meet local preferences and price
sensitivities
• Overall low costs and underpricing strategies
Other types
• Convenient store locations
 Kmart’s Microenvironment

Economic Conditions

Substitute
Rivals
Products
Legislation/
Technology Regulations

Suppliers Buyers

New Entrants

Society Values/
Demographics
Lifestyles
Disposable Personal Income
Retail Sales
Approaching
41.5% in 2005

Consumer
Confidence
is beginning
to rise
 Competitive Analysis
High

Low High

Variety

Low

Price
 Competitive Analysis
Expensive

Low High

Variety

Inexpensive

Price
 Product Line Strategy
Targets:
A time phased plan for introducing
African American
products, each product targeting a
Hispanic
specific target market
Asian American

How

Use unique strategic brand alliances Favorable market share

and licensing agreements that are Advantages Increase Barriers to Entry
culturally specific to our target market Increased Image benefits

Examples

“Dora The Explorer”

Kenyon “K-Mart” Martin
Special Food Seasoning
 Financial Overview
Historical Sales
300000
Actual Revenues
250000 Yr. U.S.

200000 2000 35,925

2001 37,028
150000 2002 36,151
2003 30,762
100000
2004 23,253
* In millions of dollars
50000 Kmart
Target
0 Walmart
2000 2001 2002 2003 2004 2005
 Financial Overview
Kmart Gross Margin
8000
Actual Margins
7000

Yr. U.S.
6000

5000
2000 7,764
4000
2001 7,296
3000
2002 6,298
2000
2003 4,504
1000
2004 5,407
0
2000 2001 2002 2003 2004
Gross Margin * In millions of dollars
Kmart Net Income
12000
Actual Net Income
10000
Yr. U.S.
8000

6000 2000 (740)

4000 2001 (530)
2000
2002 (495)
0
2003 (636)
Kmart
-2000
2000 2001 2002 2003 2004 2005 Target 2004 1,106
Walmart
 Inventory Turnover
April 2005

Walmart 7.7 Target 5

SHLD 4.5
Low Sales, High Inventory
 SWOT Analysis

Strengths
• Buying Power
• Brand Awareness
• Big K-Mart
• Sears Acquisition
• Restate Locations
• 7% increase Stock
Weaknesses
• Supply Chain Management
• Poor Leadership
• Bankruptcy
• Poor store house keeping
• Strategy execution
• Lack of Customer service
• Excessive slow moving inventory
• Accounting practices

Opportunities Threats
• Buying Power • Poor Leadership
• Growth with Sears • Bankruptcy
• International Growth • Poor store house
• Big K-Mart • Strategy execution
• Meaningful Acquisitions • Customer service
• Technology • NON Appealing to the youth
 Kmart’s Downfall
• Weak customer image
• Poor merchandise buying
• Inability to maintain proper inventory levels
• Inability to keep up with buyer preferences
• Poor supplier relationships
• Unsuccessful diversification initiatives
• Mismanagement of capital investment funds
• Inexperienced management
• Dismal holiday sales
 Facts About The Merger
• Merger announced November 2004;
Completed March 2005
• Creates 3rd largest retailer in the U.S.
• Valued at $12.3 billion
• Headquartered in Hoffman Estates, IL
• Expected to convert 400 Kmart stores
into Sears stores
• Objectives:
– Expand “off-mall” format presence
– Be more competitive with Walmart, Target
and Home Depot
• Goal:
– Achieve a 10% operating profit margin
 Strategic Issues

What steps should Kmart take to achieve the following:

• Establish an efficient supply chain management system
• Efficiently manage its inventory
• Build a strong brand image
• Become a top competitor in the discount retailing
industry
Competitive Strategy

Overall Low Cost

Brand Differentiator
Provider
Best Cost
Provider

Focused
Focused Low Cost
Differentiator
 Strategy Introduction

• In today’s retail and economic environment, retailers are searching for

various ways to improve their financial performance without drastically
adding new stores.
• With the increasing pressures of a competitive retail environment, retailers
are having difficulty differentiating their business strategy, which results in
declining margins
• The focus has shifted to implementing more effective merchandising
strategies

Inventory is one of the most significant investments

retailers make. Kmart has done a poor job in
managing its inventory and executing its
merchandising strategy
 Recommended Strategy
• Strategy: Employ Merchandise Optimization Technology
Merchandise Optimization Technology
– Emerging category of solutions that enable retailers to make more informed
decisions on profitable buying, allocating, and pricing decisions based on
consumer demand
– Decisions include Pricing and Revenue Optimization, Demand Based
Management, and Retail Revenue Management
– Applies sophisticated data process techniques to existing inventory sales and data,
which accurately model future patterns of supply and demands on the item and
store level
– Helps retailers make merchandising decisions with foreknowledge of their
financial impact
– New approach to managing the merchandising lifecycle

To Address Several Merchandising Issues:

• Poor supply chain management
• Frequent stock out
• Excessive inventory of slow-selling items
• Unsound pricing strategies
 How Merchandise Optimization Technology will work in
Kmart’s Business Environment…

Kmart’s Merchandise Lifecycle

Flow Inventory Manage Analyze

Determine Buy Inventory
Quantities To Stores Performance
Seasonality

• Predict sales • Create receipt • Determine • Identify missed

• Plan flow Promotions opportunities
Promotions • Configure • Replenish • Understand
• Set size needs prepacks in-store consumer
• Manage price behaviors
adjustments • Inform future
decisions

Increase Gross Increase Gross Increase Gross Increase Gross

Margin Margin Margin Margin
Dollars by 5% Dollars by 6-10% Dollars by 6-10% Dollars by 8%

• Informs every decision along the merchandising spectrum, from setting the merchandise strategy to
executing the plan.
• Provides insight into future consumer demand and recommended strategies to maximize profits.
• Helps to put the right product in the right store, to right customer at the right time!
• Leading provider of Retail Profit Optimization solutions since 1983
• Designs solutions for retailers whose priority is get the highest return on their inventory
investment
• Delivered solutions for numerous leading retailers such as: American Eagle,
Outfitters, Bloomingdale’s, Target Stores, and Toys R Us
• Implementation is fast, flexible, and financially beneficial
• Typically takes approximately 16 weeks to implement
• Costs to implement vary based on the size of the business ($2M- $8M)

• According to a study conducted by Accenture, it is estimated that the top-tier U.S. retailers
$20 Billion in incremental gross margin dollars by employing Merchandise Optimization
technology
• More than 60% of retail sales come from marked down merchandise. If prices are
executed at the right time and enough to stimulate consumer demand Kmart will not
be stuck with inventory shortages, dissatisfied customers, and lost gross margin dollars
• Implementing the MOT will increase Gross Margin Dollars by 33%
• Retailers see the impact the next season after implementation.
• According to a Harvard Business Review, retail users have reported that productivity rose
20%, improved customer service, with gains margins in the range of 5% to 15%
 The Strategy and Creative
Approach
Brand Image Strategy:
reinforces or changes the target audience’s attitude toward
the brand, primarily concentrating on psychological or
emotional appeals.

Product Positioning Strategy:

Carves out a niche for the brand in consumer’s mind’s
relative to the competition as a means for differentiating the
brand.
 Competitive Strategy

Overall Low Cost Brand

Provider Differentiator

Best Cost
Provider

Focused
Focused Low Cost
Differentiator
 Advertising strategy
• Target markets
• What is Target doing
• Historic ad campaigns
• What they should do
• Financial impacts
 African American Segment:
The Best Approach
• First understand them!
- strong tie to historical experiences
- pride togetherness and heritage
- value family religion and church

• Use specialty media

– 60% of AA feel that TV and print are
designed for white people
– Use agencies that specialize in
reaching the African American market
(i.e.Burrell Communications)
– 55% of households watch BET
– 25% (4 million) of women read Essence

• Network TV
- Reaches viewers ages 12-17 and 50+
 Most Promising Markets
African Hispanic Asian
American American
Population 34,525,000 30,769,000 10,504,000

Percentage of 12.7% 11.4% 3.9%

population
Average $12,351 10,773 18,226
Income
 Hispanic/Latino Segment:
The Best Approach
• First understand them!
- Hispanic refers to origin, not race
- Value culture, traditions and language
- Very conscious of brand names

• Spanish TV
- 86% of population watch Spanish TV during week
- focus ads in major cities (L.A., N.Y., S.F. Chicago)

• Focus on family
- Literacy and funding programs
- Sponsorship of athletic teams
- Promotional events (i.e. festivals and fairs
 Asian American Segment:
The Best Approach
• First understand them!
- Hispanic refers to origin, not race
- Value harmony and family togetherness
- High value on education

• Print Advertisements/Billboards
- More Asians in the workforce than other groups,
less time spent at home
- Much larger percent eat out than Hispanics and African
Americans
- Responsive to ads that promote cooperation and traditional
sex roles, and professionalism
Sit-Commercials