NEW YORK — Debt restructuring, dramatic store closings and even a smooth transition out of Chapter 11 bankruptcy will not resolve Kmart Corp.'s biggest challenge: How will it stake out a successful niche in the face of stiff competition from Target Corp. and Wal-Mart Stores Inc.?
The nation's third-largest discounter has been bedeviled by eroding market share and an identity crisis for at least a decade. But analysts believe that given the increasingly cutthroat retail environment, the company, which is based in Troy, Mich., and has about 2,100 stores, must fight harder to find its reason for existence.
Wal-Mart Stores, the world's largest retailer, has successfully carved out a niche as the lowest-price operator, while Target has built a reputation as a chic purveyor of fashion and home furnishings. Kmart has tried to go after the mom, by joining in powerful licensed partnerships with Martha Stewart, Walt Disney and Sesame Street, but analysts believe the strategy still lacks clarity.
"I think it will be extremely difficult to pull out of this," said Kevin Murphy, a research director of retail operations at Gartner G2, a research firm. "Just cutting back on unprofitable stores isn't going to save the company. They continue to be pressed by the expansion of Target and Wal-Mart. In order to compete going forward, they need to find some point of focus."
This past holiday season, Kmart received a painful lesson that it couldn't beat Wal-Mart on price, when it reduced advertising circulars, and cut prices on 38,000 items, or about 40 percent of its merchandise. Last year, it also resurrected the BlueLight Special. The strategy backfired, with Kmart turning in a disappointing 1 percent drop in sales in December at stores open at least a year.
On the other hand, Wal-Mart generated an 8 percent gain in same-store sales, beating Wall Street expectations for a 5.6 percent gain.
Kmart's pricing campaign was the latest strategy from Charles Conaway, who came on board 18 months ago as chairman and chief executive. And although analysts attribute the company's weak holiday sales in part to a downturn in the economy, they lay most of the blame on Conaway, whom they believe didn't come up with the appropriate revival strategy.
Last Thursday, in an effort to shore up investor confidence, Kmart's board fired the company's president, Mark Schwartz, and hired James B. Adamson, a turnaround specialist, as chairman — replacing Conaway, who remains as chief executive.
Adamson is the former chairman, president and chief executive officer of Advantica, one of the nation's largest restaurant companies, which operates Denny's. He helped lead the company out of bankruptcy in 1998. He also played a significant role in getting back respect for Denny's, which was mired in a number of claims of racial discrimination.
In its Chapter 11 filing, Kmart offered few clues regarding its turnaround strategy, though it reaffirmed its commitment to catering to the mother, developing exclusive brands and to cutting costs. The company is expected to file a turnaround plan within the next 30 days, according to analysts.
"It is too early to tell, but clearly the strategy that Conaway offered had a lot of holes in it," said Shelly Hale, an analyst at Banc of America Securities. "It will be interesting to see what they embrace."
Hale expects the company to close as many as 700 stores, and believes that Kmart will re-emerge as a $25 billion company.
Last year, the retailer generated sales of $37 billion. Such drastic store reductions, she believes, should have been done by Conaway sooner.
Still, while acknowledging the need for drastic store closings, Bert Flickinger III, managing director of Reach Marketing, a consulting firm, fears that Kmart will run the risk of further losing its customers to competitors during its retrenchment period.
Target is expected to open at least 100 stores, while Wal-Mart plans to open at least 600 stores over the next two years, he said.
That number could be accelerated, he said.
"Its competitors will be closing in to try to capture as much Kmart business as possible," Flickinger said.
Flickinger believes that de-emphasizing food and consumable products, an area dominated by Wal-Mart, as well as focusing on pharmacy products should help Kmart better define its niche.
Other analysts pointed out that Kmart also needs to better focus on its African-American and Hispanic customers.
Of course, a big challenge for Kmart is keeping its exclusive partnerships with key brands, particularly Martha Stewart.
"Martha Stewart is the most valuable asset in this bankruptcy," said Flickinger. "Many of her customers would not otherwise be seen at Kmart."
The Martha Stewart Everyday brand, which includes products such as sheets, towels, paints and kitchenware, is Kmart's largest volume-producing label, generating about $1.5 billion in sales last year.
Martha Stewart Living Omnimedia has a provision in its contract that allows Stewart to leave Kmart in bankruptcy, but it would have to be approved by a bankruptcy judge.
"We remain optimistic that Kmart, our longtime domestic mass-market merchandising retail partner, will ultimately emerge from this situation as a stronger, more competitive company in keeping with its proud heritage," Stewart said in a statement. "Going forward, Kmart will continue to sell Martha Stewart Everyday brand products under the terms of our contract for the foreseeable future."
Stewart said Kmart had a number of outstanding payment obligations to her company at the time of Tuesday's filing.
Keeping Martha Stewart is also key to Kmart's attracting mothers as customers.
But, as Steve Skinner, a partner in the retail practice at Accenture, warns, "If you are going to own mom, you need a combination of service, environment and products."
He continued: "To the extent that Kmart becomes the authority for the mom, Conaway has a chance. If he only does it for a product perspective, the chain will die."