KMART PLANS TO ACCELERATE EXPANSION OF SUPERCENTERS

DAVID GHITELMAN

TROY, Mich. -- Kmart Corp. here said it is accelerating its expansion plan -- with 400 stores, including 200 Super Kmart Centers, scheduled to come on line in the next five years.

The company's moves, according to analysts, are aimed at countering the massive expansion efforts of Kmart's arch-rival, Wal-Mart Stores, Bentonville, Ark.

"We have the capital, and we have the tactical information to select sites and consolidate in key market areas," Bob Burton, Kmart's divisional vice president for investor relations, told SN.

The push to open more stores -- and particularly more supercenters -- comes as Kmart is finishing its project of converting 1,840 Kmart stores to the chain's Big Kmart format. The $1.1 billion effort is scheduled to be completed by the end of this month.

Also helping the discount chain further its expansion into the supermarket business are the supply agreements with wholesalers Fleming Cos., Oklahoma City, and Supervalu, Minneapolis, that Kmart announced in July.

"We had the ability to flow goods to our stores before the agreement," said Burton, "but the scope of the new relationship [with Fleming and Supervalu] gives us additional flexibility."

Kmart also said it will convert 166 remaining Kmarts to a new small-store format. Burton explained that these stores, which tend to be older units in urban settings, have generally not been the recipient of much capital spending in recent years.

"We intend to go back and give them a facelift now," he said.

The facelift will not include much in the way of groceries, Burton added, beyond "an abbreviated pantry featuring dry groceries."

Burton said the company sees these stores, which had long been considered by some "a handicap, because they are older and smaller," as "a benefit, because they are in densely populated urban areas and have a loyal customer base."

One analyst, who requested anonymity, endorsed this urban strategy. "Urban areas are not currently well-stored with discount stores," he told SN. "Kmart's already the strongest player in these areas, and the company wants to capitalize on any advantage it has over Wal-Mart."

Ken Teague, retail consultant at Reach Marketing, Westport, Conn., told SN that Kmart's decision to increase its rollout of supercenters may have come too late.

"They're doing it now because they didn't do it before," he said, "but throughout Kmart country Wal-Mart is already well-entrenched."

The conversion of Kmarts to the Big Kmart format, he added, should help the chain. "This increases the ratio of supermarket items in their stores to 44%," he said. "What they've done is captured the best part of supermarket sales -- the center-store business -- without having to deal with fresh meat and produce, with those spoilage and labor costs."

Good as this is for the company, Teague noted, it may not be good enough. "Big Kmart sales per store are nowhere near those at Wal-Mart Supercenters or even at Super Kmarts," he said. "Supercenters are the fastest-growing retail concept at the moment."

No one, Teague added, is growing them faster than Wal-Mart. While Kmart remains "a larger presence in the Northeast and Ohio," Teague said, Wal-Mart is preparing to invade Kmart's turf, citing the recent opening of a Wal-Mart distribution center in Bedford, Pa., and another center scheduled to come on line in Johnstown, N.Y., in the spring.

"Each of these distribution centers can supply 100 Supercenters within a 300-mile radius," he said, "and right now Wal-Mart doesn't have enough Supercenters to support them."