NEW KMART LEADER SEEN AS UNLIKELY TO SAVE GROCERY 2004-10-25 (1)

JON SPRINGER

TROY, Mich. -- The future of Kmart here was a subject of speculation once again last week after the discounter named a new chief executive officer to replace former Sears and Safeway executive Julian Day.

The appointment of former restaurant executive Aylwin Lewis to president and CEO at Kmart seemed to indicate the company would be making a new effort to compete as a merchant after a period of post-bankruptcy reorganization when it behaved more like a real-estate company than a retailer. Yet observers expressed doubt that the move signals a resurrection for Super K, Kmart's grocery supercenter concept, and they were puzzled as to how Kmart would spend the funds it recently collected selling stores on the less-productive asset base left behind.

"I don't believe Kmart will be willing to spend their newfound fortune on the stores they have left -- these are stores most competitors would consider closing," David Livingston, president of DJL Research, Pewaukee, Wis., told SN. "They've already sold off their highest-volume and most profitable stores, and the money they've been spending on renovations on existing stores isn't much more than a coat of paint."

Lewis most recently served as president and chief multi-branding and operating officer at Yum Brands, the $8 billion restaurant company that includes Pizza Hut, KFC, Taco Bell, A&W All-American Food and Long John Silver's. In an interview with the New York Times last week, Lewis said he intends to make Kmart "a super retailing brand," by "winning the marketplace and operating great stores to serve unmet consumer needs."

Gary Giblen, director of research at C L King & Associates, New York, told SN that Lewis is "the best possible hire to rebuild the organization," and that renewed strength in Kmart could affect supermarkets competing for business in categories like consumables and household goods. Giblen said Lewis will do "the retail-detail stuff" that Kmart's previous leadership didn't, but that he would likely lead the retailer to evolve divisions other than grocery.

"If I had to guess, I don't think [Lewis] would want to compete with Wal-Mart in the supercenter business," he added. "That's fighting Wal-Mart on its own battlefield and what got Kmart into trouble in the first place."

Kmart still operates 59 grocery and general merchandise Super K stores, a Kmart spokesman said. Three Super K stores were among 68 locations sold in separate deals to Sears and Home Depot earlier this year. Sears bought a Medina, Ohio, Super K, and Home Depot bought locations in Hanover, Pa., and Champaign, Ill.

Kmart's remaining grocery locations, with the exception of certain Midwest stores, appear to be struggling, Burt P. Flickinger III, managing director, Strategic Resource Group, New York, told SN. Flickinger said Kmart pricing strategies valuing higher-profit sales on a smaller customer base were "fatally flawed" at Super K, noting that on a recent visit to stores in the Southeast, a gallon of milk at Super K was priced at $4.99, while area Wal-Mart and Food Lion stores were offering the same item at $2.67.

Flickinger speculated that Kmart would wind down its grocery business. That would impact Minneapolis-based Nash Finch, which supplies groceries to Kmart.