THE SUPERCENTER JUGGERNAUT 1995-07-24 (8)

ELLIOT ZWIEBACH

TROY, Mich. -- Four years after entering the supercenter arena, Kmart here may be ready to step back and reappraise its approach to its Super Kmart Centers.

With 77 Super Kmarts already in operation, the company said it anticipates 20 to 25 new stores this year, including 10 that have already opened, and 20 to 25 more next year.

However, industry observers told SN they believe the company may slow expansion after that, particularly in the wake of recent top management changes. Floyd Hall, a former supermarket and discount store executive, was hired as Kmart's new chairman, president and chief executive officer in June. He joined a team of food executives that includes Ron Floto, a former supermarket official.

"All of Kmart Corp. is in a tender state of restructuring right now, and it doesn't have the money or the flexibility to begin an aggressive supercenter expansion strategy," said Ed Comeau, a securities analyst with Lehman Bros., New York.

"So it's likely to proceed slowly until it can restructure and stabilize its core business. What that means is, once the Super K's that are now in the pipeline are opened, Kmart will put supercenters on hold to reformat and remerchandise them so they'll be more productive and more competitive," Comeau said.

Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill., said he agreed.

"Super K's have been operating outside the corporate culture since their inception, but the company is now trying to develop greater standardization of execution," he said.

"Super K has a number of very positive features, but one of its problems seems to be the amount of variability between stores. In fact, there was a low point in Super K's past where the majority of stores were not operating up to the standards Kmart had hoped they would."

That was before Ron Floto left Kash n' Karry Food Stores, Tampa, Fla., in mid-1994 to become president of Kmart's supercenter operation, Bishop noted.

"Floto concluded -- even before Floyd Hall was hired as Kmart's new chairman, president and CEO -- that you can't let local people be totally in control of a store's merchandising and execution, and I think both men would be uncomfortable with that very decentralized model that led to inconsistent execution at the stores."

Bishop said he wouldn't be surprised if Kmart decides to slow the rate of supercenter development.

"Floto obviously has a plan in mind, and Hall will probably have a pretty good plan as well, and once they talk about it, implementing those plans could slow down new-store development somewhat."

When he was hired earlier this year, Hall said supercenters are "certainly a very, very viable prototype, and there's no reason they can't be a major part of our future business.

"We've made some mistakes in the past in some markets where we've put in a number of stores. But the management team here learned a lot, and we have those mistakes corrected."

Kmart officials said implementation of a new prototype is expected next March, when Kmart opens supercenters in Norfolk and Virginia Beach, Va. Company officials said they hope the changes will add $2 to $3 more to each consumer purchase.

The revamped prototype is designed to improve merchandising presentations in various departments, including fresh foods and private label -- two of the hottest sections in food retailing today.

Observers said Kmart had originally positioned produce near the back of the store to place it nearer to the receiving dock in an effort to achieve greater efficiencies.

But the realization that food drives store sales and perishables drive food sales made Kmart decide to move produce and other perishables to the front of the stores, they said.

The stores will also reduce dry grocery sections by about 1%, shrink the size of some service departments to make them more efficient and offer a more consistent private-label program put together by a newly hired private-label specialist.

Other new features will include better signs, more cross-merchandising to bring customers into the general merchandise sections and the shift of greeting cards to the food side of the stores.

Despite some initial problems and the massive rollout by Wal-Mart of supercenters, observers said the industry should not count Kmart out of the supercenter picture.

Volume on the food side of the stores is running from $250,000 to $300,000 a week at some units and up to $600,000 a week at others in stores ranging from 162,000 square feet to 185,000 square feet (the major difference being whether there are leased shops).

According to Bishop, "Some people have said Kmart is not able to do well in competitive situations, and the Super K's have done less well than the Wal-Mart supercenters.

"But Kmart is a huge company with a lot of strengths and a good management team in place -- it simply needs to learn how to sell groceries more effectively, either through supercenters or through discount stores.

"My guess is it will figure out how to do it at the supercenters."

Since Kmart opened its first Super Kmart Center in Medina, Ohio, in July 1991, supercenter expansion has generally been geographically diversified.

However, Kmart officials told SN the discounter plans to begin concentrating more Super K's in various parts of the country. Two such areas are Houston and Chicago, officials said.