How Kmart made cheap cheerful again

By Frank Chung

In 2008, Kmart was nearly bankrupt. Photo / John Borren
In 2008, Kmart was nearly bankrupt. Photo / John Borren

Kmart has made cheap cheerful again.

Bright, clean stores, wide aisles, colourful displays, big numbers and low prices.

It may not seem like rocket science to the customer walking in today, but the turnaround journey from a tired, failing retailer on the verge of collapse to the most successful discount department store in the country today has been a long one.

A few years ago, the business was turning over around A$4 billion but making zero profit.

Last financial year, Kmart's earnings grew 8.8 per cent to A$470 million, while total sales were up 14 per cent to A$5.2b.

Guy Russo, the former McDonald's Australia boss who took over in 2008, slashed product lines, revamped musty old stores, exited underperforming categories, cut supply chain costs by going direct to factories, and moved away from promotional discounts to an "every day" low pricing strategy.

Speaking to News Corp in 2010, Russo explained how when he first arrived, the "customer was not being looked after".

"Pricing was terrible - it was either too high or too low - and the stores were poorly invested in so they looked terrible," he said at the time. "I was told the carpets had not been changed in 30 years. The change rooms were worn out."

One of his first decisions was to slash product lines from 100,000 to 40,000, shifting focus to basic private label items sourced directly from factories. "Our customers spend an average of 20 minutes in the store shopping," he said.

"But when I was watching them they were spending most of their time trying to sort out the difference between the many products in the same range.

"We were trying to be The Reject Shop as well as Harrods. We had toasters priced up to $400. We had barbecues priced up to $1500 and clothes priced over $100. The only time we would sell them was when they were on sale at half price and then we made no money on them."

Speaking to SmartCompanylast year, Russo explained how Kmart had "no reason" to be selling expensive branded items normally found at mid-level retailers. "It would be like McDonald's all of a sudden starting to sell T-bone steaks with knives and forks," he said.

According to Geoff Dart, retail analyst with DGC Advisory, despite having no retail experience when he arrived, Russo's success came from applying the "cheap and cheerful" ethos he learned during 33 years at McDonald's.

"Cheap and cheerful is in Guy's DNA," he said. "Good, reliable quality and price. They get the ambience of the store right, they get colour schemes, the visual merchandising is good. The stores are easy to walk around and everything's got a big price on it."

Dart says the most important thing was getting rid of brands and entire categories. "If you went through the electrical appliances, they would have had a dozen small appliances," he said. "At one point they had Braun, Tefal, all the brands you'd expect to buy at Myer or David Jones. Guy said, where are we going to win and where aren't we?"

Like Aldi, Kmart appeals to all income demographics. Kmarts do well in areas of high income areas as well as low. "Mums love it," Dart said. "Kids normally grow out of a T-shirt before it wears out.

"They've defined the segment they want to play in - discount department stores - and who they want to target, which is pretty well everyone who wants a bargain, and positioned the brand around that in marketing terms."

Dart says customers have certain expectations about the quality of product they get for the price they're willing to pay - the value line. "Target moved prices above their value line. That's why they failed," he said.

"Big W's failing because it doesn't have a position, it has no reason for being. It doesn't have a positioning, it hasn't identified who its customer is. You go through its stores and look at the ranging - it doesn't make sense."

Last financial year, Kmart's earnings grew 8.8 per cent to A$470 million, while total sales were up 14 per cent to A$5.2 billion. Photo / NZME
Last financial year, Kmart's earnings grew 8.8 per cent to A$470 million, while total sales were up 14 per cent to A$5.2 billion. Photo / NZME

Gary Mortimer, marketing professor at QUT, said five or six years ago, Kmart's positioning was about every day low prices, but "when customers entered the Kmart store, they didn't actually find that proposition at all".

"What they found was branded products, at prices that were not necessarily low every day," he said. "They've strategically gotten rid of ranges that as a discounter they don't do well in.

"Things like TVs, DVD players, consumer electronics that evolve and become obsolete quickly if you're not turning them over. They didn't have the sales expertise to be selling $2000 flatscreen TVs.

"They had Kmart garden centres for a while, again highly perishable, very costly to manage, in a sector that had been dominated by Bunnings, so they got out of that as well and focused on areas that were growing substantially."

The big success areas for Kmart have been apparel, which account for 60 per cent of sales, and home fashion items like furnishings and manchester.

"They've captured that market by generating volume," Professor Mortimer said. "They started with $15 ladies jeans, created volume and brought that down to $11, created more volume and brought it down to $7.

"They've gone to market with a promise that they are a very good retailer on general merchandise and apparel basics, and it doesn't pretend to be anything it's not."

But with Russo now tasked with turning around the failing Target business as head of the combined Department Stores division, Professor Mortimer says there is danger in simply trying to replicate the success of Kmart.

"You can certainly see his strategy starting to float through into Target," he said. "You see it in their advertising, promotions, price pointing, stacks of T-shirts, clear aisles - Target is starting to look a lot like Kmart.

"That's a bad thing. It's risky, because people don't see the difference and you're potentially diluting your shopper. If you've got two businesses but only 100,000 shoppers, they're going to shop equally at both.

"What you want is two businesses with two different propositions, and different shoppers."

- news.com.au

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