Posted: May 25th, 2022

K-Mart s Bankruptcy Case Study

K-Mart’s Bankruptcy — a Case Study

Why did the store synonymous with low prices for relatively high quality, the famed purveyor of blue-light specials, fall into dissolution and financial despondency and eventual bankruptcy in January of 2002? (CNN, 2002) The fall of Kmart the mega-store cannot be pinned simply to single internal or external phenomena, although the company was misguided and mismanaged on multiple levels, and the economy was enduring one of its rockiest retailing passages at the time. What left Kmart “singing the blue-light blues,” (LaMonica, 2002) can be subscribed to a variety of marketing, positioning, and branding phenomenon, as well as economic miscalculations and the company’s leadership.

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In 2002 analysts later said that Kmart management had made two big mistakes during the holiday shopping season when retailers consistently attempt to land themselves in the ‘black’ after ‘black Monday,’ the season between Thanksgiving and the New Year. Instead, Kmart had cut back on advertising during a season when consumers were particularly unwilling to part with recession-threatened cash and failed to brand itself in a homespun and patriotic fashion, as did Wal-Mart. Furthermore, it entered a price war with Wal-Mart it could not hope to win. (CNN, 2002)

But the undoing of the retail giant in the months after the recession began to grip the American heartland and do considerable damage to the infrastructure of blue chip stock as well as blue light specials shows that Kmart’s fall from grace cannot be blamed on the rise of Wal-Mart or Target alone, for it was one that had been long in coming, given internal corporate decisions as well as external economic phenomena such as the recession and the rise and rise of Wal-Mart in consumer’s hearts and pocketbooks.

Firstly, on a purely internal in-house basis, it was later revealed on January 25, 2002 that there were substantial accounting irregularities at Kmart, exaggerating profits for a long period of time. On December 9, 2002 Kmart admitted it had discovered additional mistakes in its books and that it had restate its financial results for the last three years as well as merely 2002. Kmart had also been overextending itself for a long period of time. On March 8, 2002 Kmart announced plans to close 283 stores and cut 22,000 jobs by June because it could not financially support this expansion anymore. Stores included 18 in Michigan, some of the least profitable enterprises.

Having to cut stores generated bad press for Kmart in an area of critical regional strength and consumer loyalty. Also, the giant spatial sprawl of Wal-Mart as a retail structure, not simply the dominance of the company was partly to blame — customers preferred that they could buy more things in the geographically spread-out Midwest at Walmarts, and did not have to travel to other stores to buy groceries, than they could at Kmarts. Thus, the closing of so many Midwestern stores also showed to Kmart stockholder everywhere that the flaws of the Kmart organization struck at the heartland, the heart of Kmart consumers. (“Timeline,” 2003)

Another problem with Kmart was that the Chief Executive Officer or CEO of Kmart of 2002 seemed more interested in improving his own status as a leader and his own financial profile, rather than creating a new direction for the company. Kmart Chairman and CEO Chuck Conaway ultimately had to resign after fewer than two years of service, walking away with at least $9 million in his pockets and leaving investors whom had lost more than $4.6 billion during his reign behind. (“Timeline,” 2003) Significantly in a statement on the Tuesday night, directly after the debacle of Conaway’s early resignation, Conaway’s successor Edward Lampert promised to take an active role in Kmart’s affairs. “Going forward, Kmart will be led by a board that has a substantial investment in the company,” he said. (Haber, “New Executive,” 2003)

In terms of its market strategy and positioning Kmart has since made attempts both to increase its revenue amongst its traditional Midwestern base, as well as to expand its outreach to new American communities, particularly the burgeoning Southwestern Hispanic demographic. Culturally and in terms of sheer dollar numbers, Latin Culture has begun to expand across the American nation in its influence and consumer domination. On December 10, 2002, “Latin sensation” singer known as Thalia and Kmart announced a partnership to sell a line of the entertainer’s clothing and accessories at Kmart stores, predominantly in Hispanic markets.

Timeline,” 2003) But Thalia is no J-Lo, and Hispanic consumers seem more attracted still by Wal-Mart’s lower prices than any specific identification with Hispanic culture in particular branding areas offered by the company.

Kmart’s current stated strategy includes “high-low pricing,” focusing on brand names and operating fewer stores. However, many analysts believe this shows the company is still thinking along the same economic lines as it did before. “High-low” pricing means offering deep discounts on selected items, which are advertised heavily. This pricing technique is a way of luring shoppers into the store, who will come for the specifically advertised discounts. The company hopes that after entering the store they will also buy other items at full price. High-low pricing a strategy used by many retailers, including supermarkets and drugstores, but it can be an expensive practice. It requires printing costly circulars and newspaper ads, which must be redone each week to offer different specials. (Haber, It’s a Lean Operation,” 2003)

Also, more customers are buying online, and can surf to sales, filtering out higher-priced items. Again, to make a point of comparison, Wal-Mart, Kmart’s chief competitor, no longer uses this strategy, and instead simply promises the lowest prices, all of the time. This illustrates how, still, and quite significantly, Wal-Mart has a greater understanding of modern consumer behavior and needs for cheapness and convenience at great speed rather than time-consuming price clipping and advertisement-scanning. This marketing reason is another one of the most frequently cited reasons for Kmart’s fall as a retailer in terms of strategy as well as in pricing, branding, store design, and span of items offered.

In fact, it is particular its focus on brand names, also in contrast to Wal-Mart, that has been problematic for Kmart in recent years, more than attempts to out-price the other retail giant. Firstly, some of Kmart’s highest-profiled exclusive brands like Martha Stewart house wares and linens have become tarnished. Even before her legal struggles, in 2002 Martha Stewart’s image had become an object of mockery rather than favor in the eyes of the American consumer. Other Kmart brands such Joe Boxer apparel and Disney and Sesame Street children’s clothes, might have been available only at Kmart in particular styles, but were still available at other outlets such as The Disney Store, Macy’s and toy stores, in some shape or form. Celebrities, such as Thalia that have been targeted by the company, often lack enough of a crossover appeal to other market segments or do not have enough consumer loyalty in one segment to generate sales revenues.

True, “shoppers like brand names, and they haven’t abandoned Stewart despite the domestic diva’s legal problems.” But “other than Stewart’s merchandise, Kmart’s brands may not have enough cache to attract shoppers. “They all have name recognition,” says Jordan Kaplan, professor of managerial science at Long Island University. “But Joe Boxer, in and of itself, is not going to bring bumble-gum-chewing Gen X’ers into Kmart.” (Haber “It’s a Lean Operation,” 2003)

Lastly, the strength of Kmart’s competitors, more than its weaknesses, may have more to do with its failures, which is something difficult for a company to address — it has simply been out positioned by cheaper, better, and leaner young companies.

Even attempts to ‘slim down’ may be counterproductive. True, running a leaner operation. Kmart closed about 600 stores during its bankruptcy, shrinking its store base to 1,513. But “while that saved millions and got the retailer out of leases for less-profitable locations, fewer stores mean many shoppers will have to drive farther to reach the nearest Kmart. How many will drive past Wal-Mart and Target to get to Kmart?” (Haber, “It’s a Lean Operation,” 2003)

Finally, problems existed and continue to exist as well regarding Kmart’s expenditures and its outlays to shareholders, past and future. “I see considerable challenges to Kmart attracting investor dollars,” said David Sowerby, a portfolio manager with Loomis, Sayles & Co. In Bloomfield Hills. Sowerby said there are so many other retail stocks available that investors have their pick without taking a chance on a company that is just emerging from bankruptcy. The stock market remains shaky, despite the recent economic recovery, and during the last round of reparations to investors, there was dissatisfaction with the company.

Some Kmart creditors, including landlords and vendors received only 10 cents a share in stock for each dollar the retailer owed them. The memory of this will not fade fast, and many other creditors, who would have preferred cash instead of stock, were dissatisfied with the bankruptcy settlement. Thus, K-mart remains tarnished in the minds of consumers, and also in the minds of those whom might give it the necessary dollars to reposition itself in the future.

Works Cited (January 22, 2002) “Kmart files for Bankruptcy.” Retrieved on September 12, 2004 at

Haber, Gary. (May 7, 2003) “Kmart hopes pricing, brand names work: It’s a lean operation leaving bankruptcy.” Detroit Free Press. Retrieved on September 12, 2004.

Haber, Gary. “Kmart names new chairman: Largest shareholder Lampert promises active role.” Detroit Free Press. Retrieved on September 12, 2004.

LaMonica, Paul. (January 18, 2002). “Singing the Blue Light Blues.” Retrieved on September 12, 2004

Time Line: Kmart’s bankruptcy in review (May 7, 2003) Detroit Free Press. Retrieved on September 12, 2004

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