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Kmart's Last Chance


Around Kmart Corp.'s (KM) headquarters in Troy, Mich., they were known as "the frat boys." Ebullient CEO Charles C. Conaway had recruited a handful of ambitious, energetic 40-ish executives like himself to tackle perhaps the toughest job in retailing: reviving the ailing discounter. To Kmart's board, their boy wonder appeared to have assembled a world-class team, drawn from the nation's top retail and consumer-goods companies.

But in retrospect, it looks as if Conaway and crew were swamped as much by their own inexperience as by Kmart's massive problems. While the outside world focused on Kmart's weakened finances and dwindling market share, management was in turmoil behind the scenes. Top execs came and went at a dizzying pace. A dubious price-cutting strategy was poorly implemented. All the while, Kmart, with $37 billion in sales in fiscal 2000, lurched toward the biggest bankruptcy filing in retailing history.

Many of Conaway's recruits are gone. But although the Kmart board has named director James B. Adamson, 53, as chairman and chief marketing strategist, Conaway remains CEO. That's not a confidence booster for some analysts. After all, Conaway already failed to deliver once. And now, he has a lot fewer senior execs around to help him. "Plan A--reducing prices--didn't work," says Prudential Securities Inc. analyst Wayne Hood. "Why do they think Plan B will be effective? And why should we believe them?"

The Kmart board hopes Adamson can impose discipline on Conaway and what remains of his dream team. Adamson, who recently helped breathe new life into Burger King Corp. and Advantica Restaurant Group Inc., parent of the Denny's chain, says he will supply the merchandising and marketing skills Conaway lacks. If he brings Kmart out of Chapter 11 before July 31, 2003, Adamson will get a fat pay package, subject to bankruptcy-court approval, of about $8 million.

Adamson says he values Conaway's operations expertise--for which Conaway will be richly rewarded. Subject to court approval, to Kmart's performance, and to other contract clauses, he could get $16 million over 18 months. Conaway declined to comment. "Chuck has done a wonderful job in a lot of areas of this business that needed attention," says Adamson. But, he admits: "We should have done a better job helping him on the side of the business he was not as experienced in, which is the whole merchandising and marketing side."

Saving Kmart won't be easy. But the board knew that back in June, 2000, when it took a big risk by hiring Conaway, president of drugstore chain CVS Corp. (CVS) and known as an operations whiz. At 39, he had never run anything as big and as complex as the 2,100-store Kmart and had no apparel experience. But his apparent grasp of the issues and his enthusiasm dazzled the board. He made such a strong impression that they stopped the search and hired him almost on the spot. Conaway, the board believed, could learn the "soft" side of the business from Kmart veterans. Adamson still believes the board made the right decision.

But Conaway chose to sweep out much of Kmart's top management and in months replaced them with his own recruits. In came 500 outsiders from the likes of Wal-Mart (WMT), Coca-Cola (KO), and Sears (S). Then he conceived of what proved to be a disastrous strategy: fighting Wal-Mart, the world's most efficient retailer, on price.

Conaway's biggest mistake, though, may have been handing too much authority to Mark Schwartz, an ex-Wal-Mart exec hired in September, 2000, as executive vice-president for store operations and promoted six months later to president and chief operating officer. Schwartz oversaw things day to day, and Conaway focused on the long term.

Schwartz was a curious choice for Kmart. His stint as second in command of Wal-Mart's fast-growing supercenters operations was valuable, but Schwartz had a number of stumbles on his resum?. While at Wal-Mart, he was also president of an unrelated real estate investment firm that filed for bankruptcy and later went belly-up. The firm's collapse became a distraction. In 1996 Wal-Mart stepped in to guarantee $1.1 million in loans to help Schwartz restructure the real estate firm's debt. Schwartz was soon reassigned to a Mexican joint venture, and he left Wal-Mart in 1998. He then tried to turn around two other retailers, Hechinger Co., a home-improvement chain, and Big V Supermarkets Inc. At Hechinger, as he later did at Kmart, Schwartz overbought on inventory and failed to conserve cash, says a Hechinger's board member. Both companies filed for bankruptcy within weeks of his departure. Schwartz was unavailable to comment.

Once at Kmart, sources close to the board say, Schwartz moved too quickly to challenge Wal-Mart with lower prices. Last summer, he accelerated Kmart's roll-out of everyday low prices from 10,000 items to more than 30,000. Convinced that the move would attract more shoppers, he laid in plenty of merchandise: Inventories ballooned by $400 million, to $8.3 billion, in the third quarter. But higher sales never materialized, leading to a disastrous holiday selling season. Schwartz left on Jan. 17, and Kmart filed for bankruptcy five days later.

Even before then, however, there was an exodus of other top execs. Chief Marketing Officer Brent Willis, 40, stayed only five months, leaving after a series of missteps, including ill-advised remarks to the press, say insiders. In an interview in the Apr. 9, 2001 issue of Advertising Age, for instance, he quipped that too many of Kmart's customers were just too old. "We've got geriatrics covered well," he said in discussing the chain's need to attract younger customers. Chief Financial Officer Jeffrey Boyer, 43, who didn't get along with Schwartz, left after six months. He was, say company insiders, a straitlaced accountant who failed to mesh with Schwartz's aggressive management style. And Chief Information Officer Randy Allen, 55, was later made chief diversity officer. Kmart says she will retire this spring for personal reasons. All three were unavailable for comment.

Kmart needs to find new talent to fill that management vacuum. It already hasanewstrategy.Using experience gained early in his career at Gap Inc. (GPS) and Target Corp. (TGT), Adamson is trying to carve out a niche for Kmart. Instead of challenging Target on trendiness or Wal-Mart on price, Adamson wants to position Kmart as a promotional discounter with strong private-label brands. Kmart is also slashing capital spending by half, renewing its focus on store operations, and developing a clearer marketing message with new Spike Lee commercials that emphasize families who want value.

Kmart has a huge task ahead of it. Nonetheless, Adamson is upbeat. "I could never deny there were some missteps last fall that were completely wrong, but we can correct them pretty quickly," he says. And he sees no reason to question Conaway's ability to lead that comeback. "If I had it to do over again, knowing what I know today, I would still have hired Chuck. I don't think it's fair to rest blame on any one individual. If you run a business properly, there's a collective group of people making decisions." Still, it's now up to Adamson and Conaway to prove that Kmart can make smarter decisions than it has so far. By Joann Muller in Detroit


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