KMART SEEN FACING SUPER CHALLENGE IN LIFTING SHARE

SN REPORT

K -- Is a 30% market-share solution in the cards for Super Kmart Centers, or is it an impossible dream?

As reported last week, Dennis Carter, vice president of food at Super Kmart, Troy, Mich., told an industry group that supercenter market saturation is likely to occur nationwide by 2003, so the game will belong to the swift.

He said Kmart's goal is to "expand aggressively in order to achieve significant market share of the industry. For us, that means gaining and maintaining a 30% market share by the year 2000." That would imply at least doubling the current crop of 87 Super Kmart Centers in four years. Kmart has said it may open 20 to

30 supercenters next year. Market observers said last week that the specified market-share goal makes perfect strategic sense, but is one that will prove to be exceedingly difficult to chase down:

Kmart's management team is new and it's distracted by systemic financial difficulties that have driven results downward for 10 consecutive quarters. Falling numbers are expected to continue through the third quarter ending Nov. 16 and the fourth quarter. Many analysts are anticipating a turnaround no sooner than next spring. Some question whether the credit market will give Kmart that much time.

Competitors won't stand still. Wal-Mart Stores, Target Stores and others have ambitious rollout plans that, when realized, will amplify the number of stores Kmart would have to open to gain market share. Looking at Wal-Mart alone, that discounter plans to have 500 supercenters, up from the current count of 208, by the close of 1997. Wal-Mart plans to have seven food distribution centers by that time, observers said.

Kmart's market-share catch-up game may be hobbled by a slow start for some current stores. As many as 17 Super Kmart Centers now operating are underperformers "because they are the wrong size for their market or for other reasons are not generating the right margins," said Don Spindel, a securities analyst with A.G. Edwards & Sons, St. Louis.

Last week's reaction to the market-share prediction came as Floyd Hall, chairman and chief executive officer of Kmart Corp. since June, was here conducting a series of meetings with financial analysts and investors, outlining his plans for turning around the company's sagging financial performance.

Hall specified that supercenters and an increasing dependence on sales of consumables were high on his list of priorities. Hall said that strategy includes the following goals:

To increase shopper frequency by testing discount store formats with a stronger emphasis on consumable merchandise -- an effort already under way with a test in Fort Wayne, Ind., and follow-up tests in other markets scheduled to begin this month. (For more on Kmart's new Pantry format, see Page 63.)

To strengthen its traditional discount store business and win back core customers by improving its merchandise assortments, becoming more competitive on price points, controlling gross margins, improving its in-stock position, all with the goal to raise sales per square foot to more than $200.

To continue opening new stores -- including both discount stores and supercenters on parallel tracks -- with about 30 discount stores and 20 to 30 supercenters scheduled for next year. In his remarks to analysts, Hall said Kmart may close 70 discount stores in 1996 "as a result of relocations, expired leases or unproductive locations." He denied industry speculation that Kmart intends to close 500 underperforming units. Kmart has already closed 207 stores this year and it shut 121 in 1994. It operates 2,163 Kmarts, including the 87 Super Kmart Centers, and 171 Builders Square home improvement stores. Hall said the company's efforts to reduce expenses could include selling the Builders Square operation and its 127-unit Kmart Canada operation. "There's definitely a sense of urgency there and Hall recognizes that Kmart must start showing really good results, whatever that means, in the next two to four quarters," Spindel said. "The whole issue is the tough operating environment. If the environment were better, I would have more optimism about Kmart's recovery. But even Wal-Mart, the best company in the industry, is struggling, and other companies are going out of business, which complicates Kmart's ultimate recovery. "When you're trying to turn a company around, as Kmart is, while others are running going-out-of-business sales and doing other irrational things, it disrupts your operation." Spindel said Kmart will show a third-quarter loss, "but we need to see some decent profit improvements within the next year, and the sooner the better." Wayne Hood, an analyst with Prudential Securities, Atlanta, said the success of Kmart's plan will probably hinge on the willingness of the credit market to give the company time to implement the proposed changes. "Kmart will need a fairly decent holiday season to impress the credit market, although it's going to be a difficult fourth quarter for the entire industry," Hood said. "The earliest we're likely to see any impact of the new strategies is the first quarter of 1996, and clearly by the second quarter we should see improved results -- if the credit market gives Kmart that much time." Spindel said the success or failure of efforts to win back customers for its core discount stores is unlikely to have any direct impact on Kmart's plans to expand supercenters. "Kmart took a step back this year to shore up its basics -- better in-stock conditions, cleaner stores, more efficient operations, better management systems -- because it had to walk before it could start to run. And in 1996 it plans to continue to grow its supercenter base while addressing other new formats," said. Bill Bishop, principal at Willard Bishop Consulting, Barrington, Ill., told SN last week that, apart from questions of financial capability, it makes sense for Kmart to aim for a 30% market share and that certain advantages are newly present in the Kmart system that bode well. They are:

Unlike the past, Kmart now has a management team in place that understands how to run a food store and the principles of chain-store retailing. Notable in that regard is Ron Floto, Kmart's president of supercenters. Before assuming his current position, he was chairman, president and chief executive officer of Kash n' Karry Food Stores, Tampa, Fla., and Carter was himself an executive at Kash n' Karry before joining Kmart. Hall, among his prior positions, was the top executive at Grand Union Co., Wayne, N.J.

In the short term, Kmart will enjoy some advantages from pulling food products from mainline wholesalers instead of endeavoring to build its own distribution infrastructure. Kmart is supplied in the main by Fleming Cos., Oklahoma City, and Supervalu, Minneapolis.

The supercenter "fits keenly" into Kmart's core business, since the food side pumps up store traffic, benefiting both food and nonfood operations.

A Kmart Compendium

U.S. discount Stores: 2,077 Kmart stores (including Puerto Rico, Guam and Virgin Islands).

U.S. Supercenters: 87 Super Kmart Centers (by the end of the current fiscal year).

International Discount Stores: 16 overseas Kmart discount stores (3 in Singapore, 13 in the Czech Republic and Slovakia). 127 Kmart Canada stores, based in Brampton, Ontario. International Supercenters: 4 in Mexico.

Home Improvement: 171 Builders Square home improvement stores, based in San Antonio.

Previous Year's Financial Performance: Sales for the year ended Jan. 28, 1995, of $34.02 billion, down 7.3% from $36.7 billion in 1994. $296 million in earnings for the year ended Jan. 28, 1995, compared with loss of $974 million in the prior year.

First-Half Financial Performance: Sales of $8.4 billion for the first half of 1995 ended July 26, up 6.3% from $7.9 billion in the prior year's first half. The company posted a first-half loss of $82 million, reflecting discontinued operations (sales of 87% interest in Borders Group and OfficeMax), compared with a loss of $112 million in the prior year's first half. Third-quarter results are due Nov. 16.

Discounter Supercenter Projections

The following chart shows supercenter projections for the big-three discounters that have entered the supercenter fray: Wal-Mart, Kmart and Target Stores.

Wal-Mart supercenters: Currently: 209 Through end of fiscal year in January 1996: 237-247 Through 1996: 347-357 Through 1997: 431-456.

Kmart supercenters: Currently: 86 Through end of 1995: 87 Through 1996: 107-117 Through 1997: data not available.

Target supercenters: Currently: two Through end of 1995: two Through 1996: 8-10 Through 1997: 18-22.