THERE'S SOMETHING ABOUT KMART: NEXUS OF BAD LUCK?

David Merrefield

It was a rainy and unseasonably chilly day in New York City last week when homemaking virtuoso Martha Stewart walked into the federal courthouse in Manhattan to learn she was facing a multi-count indictment setting out charges of securities fraud and obstruction of justice.

Charges were levied in connection with her sale in late 2001 of about 4,000 shares of ImClone, a biotechnology company run by a friend. The stock sale was suspiciously timed, since a day later its value plummeted. Stewart pleaded not guilty.

Stewart's folly brings to mind the importance of her Martha Stewart Everyday products to Kmart Corp. Kmart has done well with Martha Stewart-branded lines such as bed, bath, housewares and paint. The brand unifies the styles of those products and gives Kmart a hint of fashion to brighten its generally lackluster product offering. In recent time, the Stewart lines at Kmart were said to be producing some $1.5 billion of its $30 billion sales volume.

Kmart is in no position to absorb much more bad luck, even reflected bad luck. Despite the fact that Stewart's stock sale had nothing to do with Kmart, the sullying of the Stewart persona could change the public perception of the line, to the detriment of Kmart sales. So far, that doesn't seem to have happened even though publicity has for months illuminated the events that culminated last week.

Some observers maintain that the ugly news about Stewart is already so well known that any sales decline possible has already occurred. But it also may be that last week's publicity was noisy enough to capture the attention of a new group of consumers that, so far, hasn't paid much attention to the ruckus. And if that doesn't do it, the trial that's probably in the offing might do it. So it's also possible sales are poised to decline further.

That would not be a good thing for Kmart since it has few evident strategies left to move it forward in its post-bankruptcy incarnation. In a strange coincidence, Kmart filed for Chapter 11 bankruptcy in early 2002, just days after the Stewart stock trade occurred. It was the largest retail bankruptcy in history. Kmart rapidly emerged from bankruptcy 15 months later, in May.

This saga is of special interest to those in the food-distribution industry because about a year prior to the time it went bankrupt, Kmart forged an exclusive supply arrangement with wholesaler Fleming Cos. The deal was intended to position Kmart to become a major player in food retailing.

Kmart wasn't alone in that. It has become an unfortunate trend in retailing to seek prosperity through the sale of foodstuffs, regardless of what a retailer's core trade channel may be. But, for once, such a move produced no reward. After filing for bankruptcy, Kmart set out on a quest for rehabilitation by shuttering locations to reduce costs. Many of the newly dark stores were those that had been food-driven.

So Kmart abrogated its supply arrangement with Fleming. In turn, Fleming, deprived of a substantial proportion of its sales, filed for Chapter 11 in April.

It's probably no more than coincidence, but does an unusual amount of ill fortune dog Kmart and its business partners?