TROY, Mich. -- Kmart Corp. here said last week it plans to close 60 of its 117 Super Kmart Centers -- a possible prelude to shuttering the remaining 57 locations, industry sources told SN.
"There's just a basic lack of interest in the food piece of the business," one executive told SN.
"Julian Day [Kmart president and chief operating officer] tried to do all he could to make the supercenters successful, but James Adamson [Kmart chairman and chief executive officer] wanted them closed, no matter what," the executive explained.
"Adamson has made comments over the past six or seven months that he didn't think supercenters were viable, so no one should be surprised if Kmart closes the rest of the Super K's in the next go-round," he added.
Besides eliminating the 60 supercenters, Kmart said it also plans to close 266 Kmart and Big Kmart stores in 44 states and Puerto Rico -- probably by the end of April -- and a single distribution center in Corsicana, Texas, at the end of March. The company said it would eliminate up to 37,000 jobs.
According to Day, "These closings reflect an emphasis on protecting and strengthening our competitive position in key strategic markets. To this end, we are planning an aggressive marketing campaign to remind our current and prospective customers about the outstanding products, service and value that will continue to be available at more than 1,500 Kmart stores across the U.S., the Caribbean and Guam."
Although observers expect Kmart ultimately to phase out the supercenter operations, they said they expect the discounter to retain a food assortment at the Pantry sections of its remaining Big K stores -- operating 12-foot gondola sections (down from 20 to 24 feet a year ago) for basic dry groceries, such as soup, tuna, mayonnaise, syrup and canned vegetables, in addition to multi-gondola runs for such higher-volume consumables as coffee, cookies, candy, water, soap, paper towels, chips and beverages.
The 60 supercenters set to close are in 21 states, encompassing nine in Texas; seven in Michigan; five in California; four each in Alaska and Ohio; three each in Arizona, Illinois, Indiana, Louisiana and North Carolina; two each in Alabama, Colorado, Connecticut, Georgia and New York; and single locations in Arkansas, Mississippi, Nebraska, Nevada, South Carolina and Virginia.
One supermarket analyst told SN he was surprised by the closings "because I thought the Super K's -- both before the Chapter 11 filing and since -- were one of the fastest-growing parts of the business and that the company was very happy with that operation.
"So the closings surprised me -- unless those stores have deteriorated significantly since the filing, with sales declining to a point that the model was no longer working as well."
The prospects for expansion of the Super Kmart format appeared bright less than two years ago when Kmart elevated Mark Schwartz to the position of president and COO, given Schwartz's background as former president and CEO of Big V Supermarkets, Florida, N.Y., and 16 previous years with Wal-Mart. At the same time, Charles Conaway, Kmart chairman and CEO, said the company was considering converting up to 1,000 existing discount stores to the supercenter format over a 10-year period.
Schwartz resigned last January, less than a week before the Chapter 11 filing, and Conaway left the company in March, with prospects for the supercenter operation dimming as the company faced serious marketplace challenges from Wal-Mart and Target.
Industry sources said Kmart's problems in developing its supercenter base include a lack of geographic concentration and a lack of food background by supervisory personnel. "The supervisory staffs of the Super K's lacked food store backgrounds, and they were particularly limited in the area of perishables," one observer explained.
He said he believes Kmart will shut down its supercenter operation completely based on the fact the company is closing some of its best Super K locations, including all four Alaska supercenters, all five California locations and nearly half the combined number of stores in Colorado, Illinois and Indiana. "The problem in Alaska was the cost of supplying the stores there," he explained, "but California had some of the better Super K's, and so did Colorado, Illinois and most of the Midwest.
"That's why I believe they'd like to get totally out of the Super K business," said the observer.
Gary Giblen, senior vice president and director of research for C L King Associates, New York, expressed a similar opinion. "To do food, you need to be a low-cost operator and really understand how to deal in commodities, and while Kmart does some things well, it's lacking in terms of supply-side costs and efficiencies, which makes it hard to do food successfully."
With the prospect of closing more than half its supercenter base, it's inevitable Kmart will eventually close the rest, Giblen said. "Getting out of half the supercenters makes the logistics and economies of scale for servicing the food side even worse than it is now," he explained.
The 117 Super Kmart Centers account for sales estimated at $3.8 billion, or approximately $32.5 million per unit. By that estimate, the 60 stores scheduled for closing account for a volume of approximately $1.95 billion.
Industry observers estimate the 117 Super K's have accounted for approximately 12% of Kmart's 2002 sales, which are estimated to be about $31.5 billion -- down 6% from 2001 sales of $33.5 billion.
Earlier this year, Kmart began testing new approaches to food at the Pantry sections of its Big K stores -- moves that were described as a possible prelude to revamping its Super Kmart Centers. The new approaches included efforts to improve item selection, in-stock positions, shrink reduction, advertising programs and promotional activities.
The announcement of the store closings was made last Tuesday, eight days short of the one-year anniversary of Kmart's bankruptcy filing last Jan. 22. In March, Kmart announced the closing of 271 discount stores and 12 supercenters in 40 states and Puerto Rico, and the elimination of 22,000 jobs.
All stores scheduled for closing will remain open pending approval of the store closing plan by the bankruptcy court; once that approval is obtained, Kmart said it plans to begin immediate inventory-clearance sales.
In other developments last week:
Kmart said it expects to finalize and file its plan of reorganization and a disclosure statement with the bankruptcy court by the end of this week, with a hearing set for Jan. 28.
It said it hopes to gain approval for the disclosure statement and related voting solicitation procedures at a court hearing Feb. 25, which would permit it to solicit acceptances for the reorganization plan beginning in March and seek confirmation by mid-April, with its emergence from Chapter 11 on or about April 30.
Kmart said it has received a commitment of up to $2 billion in exit financing from a bank consortium, which will be secured by inventory, to replace its current $2 billion debtor-in-possession facility -- effective the date the reorganization plan is approved by the court.
