There's a really interesting article in dbusiness (a Detroit business magazine) that attempts to explain how Kmart blew the huge lead they had on the discount channel and collapsed into bankruptcy. The article is based on opinions from former managers and executives whose non-disclosure agreements have expired. As such, it needs to be read with caution - anybody in such a position will naturally look back and say, "None of that would have happened if they had just listened to me." But nonetheless, the article makes for fascinating reading to anyone involved in channel issues - which I think describes just about everybody reading this newsletter - I recommend it highly.

It's much too long to summarize in any detail, so I'll just bullet-point some of the main problems the Kmart veterans present:

• The company was insular and inbred. From the earliest days into the eighties, no outsider was hired into the executive ranks.

• They underestimated the competition (perhaps a result of the previous point). "I remember an executive meeting where they said, 'Wal-Mart is a regional discounter, leave them alone.'" 

•  Their logistics were inferior. One of the executives compared them unfavorably to Walmart: "Walmart developed systems for ordering on-time merchandising (in the mid-1970s), and spent a lot of money on that. And their transportation systems were just unbelievable. They figured out how to get product to the stores a lot quicker."

• Merchants had compensation structures based on perverse incentives. Once such was 'theoretical gross' - calculations of the profitability of a SKU were based on its full mark-up, rather than on its actual selling price. Thus, over-priced items which had to be severely marked down at the store level continued to be carried because they were contributing mightily to the buyer's theoretical gross.

• Because they used gross margin percentages instead of sales per square foot as their primary measure, Kmart often stocked high-margin SKUs in many categories and gave less space to high-volume items. An executive cites deodorants, where he says Kmart carried 80-100 SKUs, with the data showing that they were often out of stock on the top brands. He says that "he could guarantee that the top-five-selling deodorants would be out of stock by 8 p.m. on Sunday because there wasn't enough shelf space allocated to cover the volume of their sales over the weekend."

• They ignored data. When one of the early scanner reports showed that much of the candy in the stores was selling below cost, the report was tossed aside. "The divisional manager said to me, 'You cannot issue that report.' She said it was obviously flawed." It took two more years of data before change came to the candy aisle.

There's much more. It's a fun and instructive read, and you may have had experiences with Kmart that support its points, or counter them. Our exit question, therefore is What do you think went wrong at Kmart? Vote and add your comments.

Source: TPMA