Kmart Corporation

Company History

A new concept in merchandising, backed by thousands of dedicated men and women, changed the S.S. Kresge Company from a fledgling newcomer in the variety store field to a multi-billion-dollar chain of general merchandise and specialty retail stores.

In 1899, Sebastian Spering Kresge opened his first store in downtown Detroit. By 1912, Kresge had 85 stores with annual sales of more than $10 million. Kresge stores appealed to shoppers with the stores' low prices, open displays, and convenient locations. Inflation in the World War I era forced Kresge to raise prices to 25c, and in the mid-'20s, Kresge opened "green-front stores" to sell items at a dollar or less, often next to the red-front dime stores. Kresge went into the first suburban shopping center—Country Club Plaza in Kansas City, Missouri—in 1929. By 1930, variety-store chains had become commonplace because they provided a wide array of goods at low prices. Meanwhile, supermarket chains were introducing the public to self-service shopping. The Kresge Company launched its newspaper advertising program in the early 1930s. Radio promotions followed 20 years later, and television was added in 1968. Today, print ads still dominate Kmart's advertising program, with 72 million circulars weekly for insertion in 1,500 newspapers nationwide.

With the opening of America's first discount stores in 1953, a new era in retailing had dawned.

The Ann and Hope Mill Outlet in Rhode Island, which manufactured tinsel and corsage ribbons, sold discounted ribbons and greeting cards as well as women's house dresses for $2.19 each. Several other discount houses emerged in the 1950s, leading Kresge President Harry B. Cunningham to study a similar strategy for his organization. The result was the opening of the first Kmart discount department store, in Garden City, Michigan, in 1962. In Kmart's first year of operation, corporate sales topped $483 million. By 1966, Kresge registered its first billion-dollar year with 162 Kmart stores in operation. The name of the company was changed to Kmart Corporation in 1977 to reflect the fact that more than 95 percent of sales were generated by Kmart stores. By 1994, Kmart was the nation's second-largest general merchandise retailer with $34 billion in sales. Today, there are more than 2,400 Kmart stores in the United States, Puerto Rico, Canada, the Czech Republic, Slovakia, Mexico, Singapore, and Australia. Kmart employs some 300,000 individuals worldwide. Loyalty and long service are common; thousands of Kmart associates have worked for the company for 25 years or longer. Store management teams are responsible for the profitability of their own units and have the authority to make certain independent decisions about their operations.

In the early '70s, the company pursued an aggressive expansion plan that included opening 271 stores in 1976. In 1981, the company shifted toward refurbishing existing stores. For almost 80 percent of the American public, Kmart is the nearly complete one-stop shopping center. Still, the company is working to prompt customers to think of Kmart for even more of their shopping needs. In the 1980s, Kmart had the highest shopper traffic in the nation.

Today's Kmart differs greatly from its forerunner of the '60s. Kmart emphasizes top brands and a strong program of private-label products for the value-conscious customer. These merchandise lines include the Jaclyn Smith apparel line, Fuzzy Zoeller golf apparel, designer jeans for men and women, name-brand athletic shoes, Martha Stewart fashions for the home, prestige cosmetics and fragrances, and many respected names in home improvement and health and beauty care. The company adheres to a "satisfaction always" policy, which means that customers receive refunds and exchanges with ease. The Kmart Price Promise gives each store manager and associate the power to match competitor's prices. This policy ensures Kmart remains America's price leader. The company has made strides toward more efficient operations. Kmart Information Network (KIN) is an electronic system that connects all stores, distribution centers, and headquarters and streamlines various office procedures. Point-of-sale equipment is in all 2,400 stores. In 1986, Kmart and GTE established a satellite-based communications network. Thirteen distribution centers supply stores with a substantial amount of their basic stock; most stores are less than one day's drive from a distribution center.

Diversification and Modernization

The acquisition of the nation's largest retail bookstore chain, Walden Book Company, Inc., was completed on August 9, 1984. In addition to books, Waldenbooks stores also carry video and music selections and computer software. Average stores occupy 3,000 square feet and are located primarily in regional shopping malls and strip shopping centers. Kmart Corporation completed the acquisition of Builders Square, Inc. (formerly Home Centers of America) on September 27, 1984. A typical Builders Square store occupies approximately 80,000 square feet and features name-brand merchandise at discount prices. Assortments include lumber, building materials, hardware, paint, plumbing and electrical supplies, and garden and home improvement goods. In 1987, the company celebrated the 25th anniversary of Kmart stores and announced a partnership with Bruno's, Inc., of Birmingham, Alabama to develop American Fare, combination concept stores, in the United States. The company also moved to streamline operations, closing its Central Regional Office in Plymouth, Michigan and realigning its five remaining regional offices. The company also established a marketing department to strengthen communication to its customers about the Kmart store.

In 1988, Kmart announced two new retailing concepts to be developed by its Builders Square subsidiary—Sports Giant, a chain of sporting goods superstores, and Office Square, a warehouse-type office supply store. In February 1990, Kmart announced an accelerated five-year, $3.5 billion new store opening, enlargement, and modernization program. This aggressive program involved building approximately 280 new full-size Kmart stores, enlarging 700 existing stores, relocating 300 others, and refurbishing 670 to bring their fixturing and layout up to the new store standards. The early 1990 acquisition of The Sports Authority allowed the company to move forward in the sporting goods mega-store arena. The company's Sports Giant stores were converted to The Sports Authority stores. In September 1990, Kmart acquired 22 percent ownership interest in OfficeMax, an office supply superstore chain. OfficeMax agreed to acquire the Office Square business of Kmart's subsidiary Builders Square. Kmart acquired the remaining interest in OfficeMax in November 1991.

A new, bold Kmart logo was unveiled in September 1990, signaling change and innovation for the chain. The new symbol keeps Kmart in step with the times and reflects the dynamism and excitement of the company's commitment to renewal. In 1991, Kmart raised $1 billion in equity through a Preferred Equity Redemption Cumulative Stock offering (PERCS), ensuring the completion of its modernization program in 1996. At year end 1991, approximately 30 percent of the chain's Kmart stores sported the updated look.

Kmart's subsidiary operations, which in 1992 included Builders Square, OfficeMax, The Sports Authority, Waldenbooks, and Borders, were under the Specialty Retail Group. By year-end 1993, Kmart had completed more than half of its comprehensive store renewal program. Kmart also stepped up the roll-out of combination stores called

Super Kmart Centers. In 1993, Kmart sold its Pace Membership Warehouse subsidiary. Kmart also announced the sale of Payless Drugstore Northwest to Thrifty Drugs. By the end of 1994, there were 67 Super Kmart Centers nationwide. Borders-Walden, Inc. announced a corporate restructuring, renaming the entity Borders Group, Inc. Kmart sold its 21.5 percent interest in Coles Myer Ltd. and announced plans for Initial Public Offerings (IPOs) in Sports Authority, OfficeMax, and Borders Group, Inc.

Kmart initiated a productivity improvement process to reduce expenses by $600 to $800 million by the end of 1996. This process included the review of all aspects of the business to ensure growth in sales and earnings. A merchandise flow task force also was formed to focus on inventory flow, especially high-velocity consumable items. Financial information on the company is summarized in Exhibit 3.

International Expansion

Kmart made its initial entry into the European market when it purchased its first store in the Czech Republic in May 1992. Later that year, Kmart finalized the purchase of 12 additional stores in the Czech Republic and Slovakia. Kmart also announced plans to expand global operations, through joint ventures, in Mexico and Singapore. In 1994, Kmart opened its thirteenth distribution center in Brighton, Colorado, and stores in Mexico and Singapore.

Corporate Culture

The thirtieth anniversary of Kmart in 1992 marked the celebration of an institution deeply ingrained in the fabric of American life. Since its beginnings as Kresge, Kmart has successfully met the challenge of serving the changing needs of the American family.

Three savvy merchants, leaders of their generations, have played significant roles in the history of Kmart. The first was the founder, Sebastian Spering

(S.S.) Kresge, who built not only a successful retailing chain, but more important for its future, a flexible and responsive organization; the second, Harry Cunningham, emerged from the ranks to transform Kresge into Kmart; and until June 1995, Joe Antonini, the president and CEO who spearheaded Kmart's renewal for today's customer. Of all the great variety stores founded at the time of Kresge, only Kmart has maintained its leadership of American retailing.

Kmart was founded by a traveling salesman from Pennsylvania, Sebastian Spering Kresge. Kresge's variety stores spread throughout urbanizing America. Later, there were larger stores expanding the product lines and broadening the customer base. Through all this, S.S. Kresge was a man of vision deeply in tune with the dynamics of a growing America. Despite his personal frugality—and to the shock of his colleagues and associates—he borrowed heavily to invest in store expansion to go where his customers were.

Kresge believed that one should both entice and listen to the customer; he ran specials in his stores on a weekly basis so that each week there would be a new reason to shop at Kresge. He also left Kresge employees free to exercise their judgment and do their jobs—all who worked for him said that he never looked over their shoulders (in an age of heavy employee supervision)—an early example of the empowerment of employees.

Harry Cunningham, the next great Kresge/ Kmart leader, also was known for listening to his customers. As a young manager, he asked the sales clerks to record all customer requests on little blue cards. Cunningham read the blue cards daily, ordering the merchandise requested. Within a year, Cunningham increased his store sales by 100 percent. Before he took over as president in 1959, Cunningham toured the country. He looked at his and other people's stores, he listened to the people, and he thought about the emergence of the new suburban lifestyle. He saw a sea of young families needing to furnish their homes, but, like all young families strapped by cash, they desired high quality at a low price. This post-war generation, newly

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