Agenda • Organizational Overview • Industry Snapshot • Competitor Analysis • Financial Analysis • SWOT Overview • Current Strategy • Strategic Issues • Recommended Solutions • Implementation/Justification • Recommendation Recap
Agenda
• Organizational Overview• Industry Snapshot• Competitor Analysis• Financial Analysis• SWOT Overview• Current Strategy• Strategic Issues• Recommended Solutions• Implementation/Justification• Recommendation Recap
Organizational Overview
• Founded by Sebastian S. Kresge in 1962• Number 3 discount retailer in the U.S.• Operates 1,479 stores in 49 states• Maintains 3 retail concepts• Filed bankruptcy in 2002• Merged with Sears, Roebuck & Co. in March
2005
Industry AnalysisKey Success Factors
Technology
• Advanced technology that enables
merchandising efficiency
Distribution
• Efficient Supply Chain Management• High return on inventory investment/high
inventory turnover• Good working relationship with suppliers• Low distribution costs• Low replenishment cycle times• Ability to predict consumer demand
Marketing• Courteous customer service• Breadth of product line and brand selection
Skills & Capability
• High sales per square footage (store productivity)• Effective merchandising strategies• Ability to meet local preferences and price
sensitivities
Other types• Overall low costs and underpricing strategies• Convenient store locations
Economic Conditions
DemographicsSociety Values/
Lifestyles
Legislation/RegulationsTechnology
Suppliers
New Entrants
Buyers
Substitute Products
Rivals
Kmart’s Microenvironment
Disposable Personal IncomeRetail Sales Approaching
41.5% in 2005
Consumer Confidence is beginning
to rise
Competitive Analysis
Variety
Price
High
Low
HighLow
Product Line Strategy
How
A time phased plan for introducingproducts, each product targeting a specific target market
Use unique strategic brand alliancesand licensing agreements that areculturally specific to our target market
“Dora The Explorer”Kenyon “K-Mart” MartinSpecial Food Seasoning
Examples
Targets:African AmericanHispanicAsian American
Favorable market shareIncrease Barriers to EntryIncreased Image benefits
Advantages
0
50000
100000
150000
200000
250000
300000
2000 2001 2002 2003 2004 2005
Kmart
Target
Walmart
Financial Overview
Actual Revenues
Yr. U.S.
2000 35,925
2001 37,028
2002 36,151
2003 30,762
2004 23,253
* In millions of dollars
Historical Sales
0
1000
2000
3000
4000
5000
6000
7000
8000
2000 2001 2002 2003 2004 Gross Margin
Actual Margins
Yr. U.S.
2000 7,764
2001 7,296
2002 6,298
2003 4,504
2004 5,407
* In millions of dollars
Kmart Gross Margin
-2000
0
2000
4000
6000
8000
10000
12000
2000 2001 2002 2003 2004 2005
Kmart
Target
Walmart
Actual Net Income
Yr. U.S.
2000 (740)
2001 (530)
2002 (495)
2003 (636)
2004 1,106
* In millions of dollars
Kmart Net Income
Financial Overview
Inventory TurnoverApril 2005
Walmart 7.7 Target 5
Low Sales, High Inventory
SHLD 4.5
SWOT Analysis
Strengths• Buying Power
• Brand Awareness
• Big K-Mart
• Sears Acquisition
• Restate Locations
• 7% increase Stock
Weaknesses • Supply Chain Management• Poor Leadership• Bankruptcy • Poor store house keeping • Strategy execution• Lack of Customer service • Excessive slow moving inventory• Accounting practices
Opportunities• Buying Power
• Growth with Sears
• International Growth
• Big K-Mart
• Meaningful Acquisitions
• Technology
Threats• Poor Leadership
• Bankruptcy
• Poor store house
• Strategy execution
• Customer service
• NON Appealing to the youth
Kmart’s Downfall
• Weak customer image• Poor merchandise buying• Inability to maintain proper inventory levels• Inability to keep up with buyer preferences • Poor supplier relationships• Unsuccessful diversification initiatives• Mismanagement of capital investment funds• Inexperienced management• Dismal holiday sales
Facts About The Merger
• Merger announced November 2004; Completed March 2005
• Creates 3rd largest retailer in the U.S.• Valued at $12.3 billion• Headquartered in Hoffman Estates, IL• Expected to convert 400 Kmart stores
into Sears stores• Objectives:
– Expand “off-mall” format presence– Be more competitive with Walmart, Target
and Home Depot
• Goal:– Achieve a 10% operating profit margin
Strategic Issues
What steps should Kmart take to achieve the following:• Establish an efficient supply chain management system • Efficiently manage its inventory • Build a strong brand image• Become a top competitor in the discount retailing
industry
Competitive Strategy
Overall Low Cost Provider
Focused Low Cost
Brand Differentiator
Focused Differentiator
Best Cost Provider
Strategy Introduction
• In today’s retail and economic environment, retailers are searching for various ways to improve their financial performance without drastically adding new stores.
• With the increasing pressures of a competitive retail environment, retailers are having difficulty differentiating their business strategy, which results in declining margins
• The focus has shifted to implementing more effective merchandising strategies
Inventory is one of the most significant investments retailers make. Kmart has done a poor job in
managing its inventory and executing its merchandising strategy
• Strategy: Employ Merchandise Optimization Technology
Merchandise Optimization Technology– Emerging category of solutions that enable retailers to make more informed
decisions on profitable buying, allocating, and pricing decisions based on consumer demand
– Decisions include Pricing and Revenue Optimization, Demand Based Management, and Retail Revenue Management
– Applies sophisticated data process techniques to existing inventory sales and data, which accurately model future patterns of supply and demands on the item and store level
– Helps retailers make merchandising decisions with foreknowledge of their financial impact
– New approach to managing the merchandising lifecycle
To Address Several Merchandising Issues:• Poor supply chain management• Frequent stock out• Excessive inventory of slow-selling items• Unsound pricing strategies
Recommended Strategy
How Merchandise Optimization Technology will work in Kmart’s Business Environment…
Determine Buy Quantities
Manage Inventory
Seasonality
Analyze Performance
• Predict sales• Plan Promotions• Set size needs
• Create receipt flow• Configure prepacks
• Determine Promotions• Replenish in-store• Manage price adjustments
• Identify missed opportunities• Understand consumer behaviors• Inform future decisions
Flow Inventory To Stores
Kmart’s Merchandise Lifecycle
• Informs every decision along the merchandising spectrum, from setting the merchandise strategy to executing the plan.• Provides insight into future consumer demand and recommended strategies to maximize profits.• Helps to put the right product in the right store, to right customer at the right time!
Increase GrossMargin
Dollars by 5%
Increase GrossMargin
Dollars by 6-10%
Increase GrossMargin
Dollars by 6-10%
Increase GrossMargin
Dollars by 8%
• According to a study conducted by Accenture, it is estimated that the top-tier U.S. retailers $20 Billion in incremental gross margin dollars by employing Merchandise Optimization technology
• More than 60% of retail sales come from marked down merchandise. If prices are executed at the right time and enough to stimulate consumer demand Kmart will not be stuck with inventory shortages, dissatisfied customers, and lost gross margin dollars
• Implementing the MOT will increase Gross Margin Dollars by 33%• Retailers see the impact the next season after implementation.• According to a Harvard Business Review, retail users have reported that productivity rose
20%, improved customer service, with gains margins in the range of 5% to 15%
• Leading provider of Retail Profit Optimization solutions since 1983• Designs solutions for retailers whose priority is get the highest return on their inventory investment• Delivered solutions for numerous leading retailers such as: American Eagle, Outfitters, Bloomingdale’s, Target Stores, and Toys R Us• Implementation is fast, flexible, and financially beneficial• Typically takes approximately 16 weeks to implement• Costs to implement vary based on the size of the business ($2M- $8M)
The Strategy and Creative Approach
Brand Image Strategy:reinforces or changes the target audience’s attitude towardthe brand, primarily concentrating on psychological or emotional appeals.
Product Positioning Strategy:Carves out a niche for the brand in consumer’s mind’s relative to the competition as a means for differentiating the brand.
Competitive Strategy
Overall Low Cost Provider
Focused Low Cost
Brand Differentiator
Focused Differentiator
Best Cost Provider
Advertising strategy
• Target markets
• What is Target doing
• Historic ad campaigns
• What they should do
• Financial impacts
African American Segment:The Best Approach
• First understand them!- strong tie to historical experiences- pride togetherness and heritage- value family religion and church
• Use specialty media– 60% of AA feel that TV and print are
designed for white people– Use agencies that specialize in
reaching the African American market (i.e.Burrell Communications)
– 55% of households watch BET– 25% (4 million) of women read Essence
• Network TV - Reaches viewers ages 12-17 and 50+
Most Promising Markets
African American
Hispanic Asian American
Population 34,525,000 30,769,000 10,504,000
Percentage of population
12.7% 11.4% 3.9%
Average Income
$12,351 10,773 18,226
Hispanic/Latino Segment:The Best Approach
• First understand them! - Hispanic refers to origin, not race- Value culture, traditions and language- Very conscious of brand names
• Spanish TV- 86% of population watch Spanish TV during week- focus ads in major cities (L.A., N.Y., S.F. Chicago)
• Focus on family- Literacy and funding programs- Sponsorship of athletic teams- Promotional events (i.e. festivals and fairs
Asian American Segment:The Best Approach
• First understand them!- Hispanic refers to origin, not race- Value harmony and family togetherness- High value on education
• Print Advertisements/Billboards- More Asians in the workforce than other groups,
less time spent at home- Much larger percent eat out than Hispanics and African
Americans - Responsive to ads that promote cooperation and traditional
sex roles, and professionalism
Sit-Commercials