KMART COMEBACK WON'T HINGE ON FOOD SALES

David Ghitelman / Additional reporting: Mark Hamstra

TROY, Mich. -- Food sales are unlikely to figure prominently in the comeback strategy of Kmart Corp. here, according to retail consultants and other industry observers interviewed last week by SN.

In contrast, the company -- which is scheduled to emerge today from the largest retail bankruptcy reorganization in U.S. history -- said food remains an important part of its offering.

A Kmart spokesman told SN, "I don't think much has changed except that we reduced our supercenter portfolio by half. And we're doing self-distribution now. But we still continue to have the Pantry department in all our stores."

However, most observers said the 60 remaining Super Kmarts and the Pantry departments will probably play a decreasingly significant role at the company.

James McTevia, chairman, McTevia Associates, a turnaround firm based in Eastpointe, Mich., said the new executive team at Kmart will have its hands full trying to turn the company around without devoting the resources necessary to being a profitable food retailer.

"I believe the focus of the owners of Kmart is not going to be on grocery," he said. He added that he believes the company emerged from bankruptcy too quickly, and that additional sites might need to be closed.

He said that in locations where Kmart doesn't face strong competition from supercenters operated by Wal-Mart Stores, Bentonville, Ark., or from supermarkets, the company might present a strong food offering, "but wherever Kmart has competition in the grocery industry, it is not going to be successful," he said.

Tony Camilletti, senior vice president, JDA Inc, Southfield, Mich., a retail design and brand consulting firm, offered a similar assessment.

"I don't think they have an image in the marketplace as being a valued grocery resource for people," he said, adding that a new prototype Kmart store he had visited "had no food in it at all."

Kurt Barnard, president and chief economist, Barnard's Retail Consulting, Upper Montclair, N.J., said he doubted that Julian Day, Kmart's president and chief executive officer, was giving much thought to food. "It is really not something that is uppermost in Julian Day's mind, and rightly so," he said. "He is far more concerned in stabilizing Kmart and creating a favorable image in the minds of his target customers.

"What Julian Day has to do and what he is going to pursue in earnest is to revive the faith and confidence customers used to have in Kmart."

Although Kmart last year generated an estimated $1.4 billion in food sales from 117 Super Kmart stores, the company has since closed nearly half those locations and has switched from a single wholesaler to a network of smaller suppliers, an arrangement observers said would be much less scalable.

All the consultants said they saw Kmart's supercenters as an endangered species. Camilletti called them "almost an anomaly in their chain."

David Rogers, president, DSR Marketing Systems, a Deerfield, Ill.-based retail consultancy, said, "I think it's just of matter of time before they close the rest of them. They've lost their critical mass."

Rogers, however, was one of the few consultants who said he did not see Kmart completely abandoning food. "I think they will have to continue to include food in terms of traffic generation," he observed. "It will enable them to compete better with dollar stores."

Willard Bishop, president, Bishop Consulting, Barrington, Ill., put the case for food in even stronger terms.

"I think it's vitally important that Kmart have a clear and well-executed food strategy," he said. Bishop recommended the company focus on a limited assortment format rather than a supercenter format.

"Twenty years ago, they tried this [limited assortment] and failed because of poor execution," he noted. "But today, there are a growing number of consumers who are looking to buy food from mass merchandisers."

Noting that the price difference between limited assortment stores like Aldi and supermarkets is significant, Bishop said such a format could make the company competitive against both supercenters and supermarkets.

Arun Jain, professor of marketing at the State University of New York in Buffalo, said Kmart might be able to carve out a niche as a low-priced urban player, but it would be well-advised to keep food sales to a minimum.

"They should give up any pretension of trying to be like Wal-Mart," he said. "They should be like Woolworth was. Nobody is there now. Many of their locations are perfect for that."

Most consultants said whatever strategy Kmart chooses, or however well it executes it, the chances of a successful turnaround are slim.

Rogers said Kmart's efforts to carve out a niche for itself away from Wal-Mart and supermarkets will expose it to other rivals. "We've heard all about how Kmart's strategy now is to serve the inner city and the ethnic population," he said. "Dollar stores will provide stiff competition for the strategy Kmart appears to have identified."

McTevia said he believed the company has yet to identify a workable strategy. "I don't think Kmart has the time to fish around and try to figure out what it's going to do to survive," he said. "Kmart lost money before going into Chapter 11, it lost money while it was in Chapter 11, and it's losing money coming out of Chapter 11.

"Somebody has got to very quickly get that company operating profitably."