KMART CORP. BETTING ON NEW GROCERY CONCEPT

MARK TOSH

TROY, Mich. -- Kmart Corp. here, struggling to keep up with fast-growing Target and Wal-Mart, is unleashing a new weapon: a "high-frequency" format that includes groceries.

The merchandising strategy is built around a new store layout -- which Kmart says is easier to shop -- that offers deep discounts on a number of high-turning consumables, such as snack foods, beverages and paper goods. Kmart officially unveiled the prototype last week in Gaithersburg, Md.

About 25 stores in Miami have operated with the format over the past two weeks and posted "strong double-digit" sales gains across the store, said Robert Burton, Kmart's director of investor relations. He said gross margins also have risen at those stores, but not as much as sales because of a preponderance of lower-margin consumables in the sales mix.

"It's a concept with tremendous opportunity," Burton said, noting that Kmart expects to complete 150 remodels using this high-frequency layout this year, at a cost of about $400,000 a piece. And if the concept "lives up to its potential," he said, Kmart plans to convert the entire chain to the new format, beginning in 1997 through 1999, at a rate of some 450 stores a year.

Kmart is looking to make the format a cornerstone of its turnaround plan. The 2,143-unit chain desperately needs to boost sales and profits. Two weeks ago, it reported a profit of $34 million for the second quarter, ending a string of 13 quarters of either losses or lower year-over-year earnings. But same-store sales at the discount stores remained sluggish and well-below those for Target and Wal-Mart.

Specifically, the "high-frequency merchandising strategy" -- as Kmart calls it -- is built around three destination departments, said G. William Gryson Jr., who led a press tour of the Gaithersburg store last week. The departments are a 7,000-square-foot "pantry," with groceries, household chemicals and paper products; a slightly enlarged children's apparel department; and an overhauled home department, which now puts kitchen equipment adjacent the pantry department.

In creating the new pantry area, Kmart added about 2,500 new stockkeeping units in grocery and household products, including new items like cake mixes and sugar plus broader assortments of household chemicals and snacks. A 32-linear-foot cooler section also has been added for eggs, milk, orange juice, cheese, hot dogs and butter -- the first time Kmart has placed a cooler in a main aisle of a traditional discount store. Another feature of the high-frequency Kmarts is a single upright freezer, which is filled with Tombstone pizza.

The chain is testing ice cream in pantry departments at stores in Charlotte, N.C.

The concept is a refinement of the pantry idea Kmart first tried last year in Fort Wayne, Ind., and Charlotte, N.C. The pantry stores were set up to drive sales by giving better display and pricing to fast-turning consumables. Those stores "ran with a significant amount of management involvement" to determine optimal layouts and promotions, Burton said.

"We really experimented with it in those first 35 stores," Burton said. "Now we've settled on a format."