THE LACK OF MARKETING DROVE KMART TO BANKRUPTCY

David Merrefield

Kmart Corp. has been a dead man walking for quite some time now.

That may seem a bit harsh since despite its Chapter 11 filing of last week, there's little immediate prospect that Kmart will be obliged to liquidate, or suffer some similar fate. My meaning really goes to Kmart's moribund marketing efforts and its search for a strategic market position. A look at those factors may prove useful to the food-distribution industry. Let's begin our look at Kmart by briefly reciting the proximate sequence of events that triggered Kmart's bankruptcy: The discounter had a disastrous holiday selling season. That sparked an unusually tough report from a securities analyst. That loosed rumors that Kmart might not be able to pay its bills. That was followed by the reality of a missed payment to Fleming Cos., its primary grocery supplier. Fleming, and other suppliers, cut off shipments. Bankruptcy followed. (Fleming resumed shipments late last week.)

That's the basic story. But let's take a closer look to see if we can dig down to the roots of Kmart's woes.

Kmart's real problem is that it's a retailer in search of a reason for being. It's flanked on one side by Wal-Mart Stores, which possesses the unassailable position as the low-price-point provider of discount goods. It's flanked on the other side by the more fashion-forward Target Corp. That leaves Kmart without a viable position in the marketplace.

But that lack of position didn't happen entirely by default. There was once a strategy, and not long ago. Early last year, Yucaipa Cos. bought an equity position in both Kmart and Fleming. Then, it seems, Ron Burkle, Yucaipa's principal, brokered a deal that positioned Fleming to become the sole grocery supplier to Kmart. The Fleming-Kmart deal was little short of a virtual merger intended to generate such logistical efficiencies that Kmart could go head-to-head against Wal-Mart on price.

The problem was that Kmart was highly promotional; Wal-Mart an everyday-low-price merchant. But prior to the holidays, Kmart took the plunge, dropped its costly circular program and tried EDLP. No one bought it. Ron Burkle exited most of his position in Fleming.

What might Kmart have done? It might have gone in precisely the opposite direction, fleeing the commodity business. Indeed, it had the tools to do so in the form of licensing arrangements with Martha Stewart, Disney and Sesame Street. Except for Stewart, those assets were underleveraged to the point of being invisible. And the Stewart asset too was underutilized. Why couldn't Kmart have positioned itself as the "Home of Martha Stewart"? If not, why couldn't Kmart have tied Stewart product together at store level to increase its importance?

The lesson for other retailers is one that had been mentioned many times, but which evidently still bears repeating: Wal-Mart owns the price position. Let's all get used to it. The way to compete is to set out a marketing strategy that will shift customers' eyes from price to other forms of value, maybe even value of a higher order for which consumers will be pleased to pay. It's all in the marketing and Kmart may yet have a chance to do some.