From Blue Light to bankrupt: Kmart’s decline ‘one of the saddest retail stories’

March 13, 2019 in News by Slad

 

Source: Detroit News | 

Warren — It was one of the most innovative retail chains of the last century, but Michigan-born Kmart’s future is anything but certain as its parent emerges from Chapter 11 bankruptcy.

Kmart has staved off demise again — for now. Retail experts say it would take nothing short of a miracle to keep its stores and sister company Sears alive more than a few years. The retailer’s devoted shoppers, however, hope that is not true.

“Up until surprisingly recent history, they were one of the most innovative companies,” said Ken Nisch, chairman of Southfield-based brand strategy and retail design firm JGA. “It’s a whole series of coulda, woulda, shoulda. They had more stores than Walmart, better systems, better merchants. They were a better company.”

Last month, a federal bankruptcy judge approved the $5.2 billion sale of Sears Holdings Corp. to chairman Eddie Lampert’s hedge fund, Florida-based ESL Investments Inc. The acquisition includes the remaining 202 Kmart stores and 223 Sears stores. Thirteen Kmarts, eight Sears stores and six Sears automotive centers remain in Michigan.

The retail-giant brands are a shell of their former selves. There were 3,500 U.S. Kmart and Sears stores and more than 300,000 employees when Kmart acquired Sears in 2005.

A business plan filed with the court ahead of the judge’s approval of the sale suggested ESL would close and sell about 36 of the remaining 202 Kmart stores. The plan estimated the selloff would generate $200 million a year through 2021. The hedge fund has said it would retain about 45,000 employees.

A statement sent to The Detroit News on Kmart’s future did not mention closures: “Kmart is proud of our Michigan roots,” a Kmart spokesperson said in an email, “and we look forward to continuing to provide our members and customers in the state with trusted brands, services and convenience.”

Dalante Tyler, who lives around the corner from the Kmart in Warren, finds the store convenient.

“They have really good customer service,” the 19-year-old factory worker said after picking up a backpack and a bottle of pop on a recent snowy day. “The cashiers are kind, and they have better prices than other stores.”

For others, Kmart carries a hit of nostalgia.

“I remember coming here as a little girl,” said Tanya Johnson of Detroit, who works in education and is “under 40.” “It brings back a lot of memories. Now, I like their kids’ clothing selection. That’s what brings me here today.”

‘Saddest’ of retail stories

Before growing into the big-box discount store chain that Kmart came to be, the company began as two S.S. Kresge five-and-dimes — one in Memphis in 1897 and one in Detroit in 1898. Founder Sebastian Spering Kresge took sole ownership of the Detroit location and soon after incorporated the S.S. Kresge Co., which went public in 1918.

There were several hundred Kresge stores by the time executive Harry Cunningham opened the first “K mart”-branded store in 1962 in Garden City. The Kresge store brand was retired in 1966, but the name lives on in the philanthropy of the Troy-based Kresge Foundation. Cunningham’s company was renamed Kmart Corp. in 1977.

“It was a bold move at the time,” said Erik Gordon, clinical assistant professor at the University of Michigan’s Ross Business School. “It was expensive. It showed a real pivot, and they were a leader at the time by opening one of the first big-box discount stores. Tired old Kresge put on dancing shoes and turned into Kmart, one of the great retail transformation stories.”

The retailer grew to become the second-largest in the United States after Sears. It experimented with surprise Blue Light Special discounts beginning in 1965. It designed a robust retail-employee training program. The company was among the first to use celebrity-branded products with names such as Martha Stewart, former “Charlie’s Angel” Jaclyn Smith, Rosie O’Donnell and Adam Levine. Other customer-friendly adoptions were layaway and store credit cards, Nisch said.

“They were a company that lived really close to its customer,”  he said. “They found a way to bring aspirational products to the mass market.”

But by 1990, Walmart had surpassed Kmart as the second-largest retailer in the United States behind Sears. In the decade prior, Kmart had shifted its focus to purchasing other chains such as Builders Square, Borders books and Sports Authority — all of which have gone defunct. The investments left Kmart stores “flailing.”

“Kmart fell behind in technology and logistics,” Nisch said. “They lost their pricing edge against Walmart. They were at a point where they could never catch up again.”

Kmart’s profitability and sales peaked in 1992 and its store count hit 2,323 in 1994, but competition was growing with Walmart, Target and soon internet shopping. The company filed for Chapter 11 bankruptcy in 2002, emerging a year later with ESL as the majority owner. In 2004, the company announced it was purchasing Sears for $11 billion; it moved its headquarters from Troy to Hoffman Estates, Illinois, in 2006.

While the company made some efforts to reinvigorate stores, revive Blue Light Specials and encourage Sears’ Shop Your Way loyalty program, stores continued to shutter. Profitable quarters were rare and it sold off assets such as Craftsman tools. The original Garden City Kmart store closed in 2017. The company filed for Chapter 11 bankruptcy in October with Lampert’s ESL as the only bidder looking to buy the company.

“Eddie did not destroy Kmart and Sears,” UM’s Gordon said. “He took two weak retailers and made them even worse. Kmart is one of the saddest retail stories.”

Post-bankruptcy

The remaining Metro Detroit Kmart stores are in Belleville, Lake Orion, Warren and Waterford. Sears has stores in Livonia and Westland Shopping Center. The Sears location in Novi’s Twelve Oaks Mall is closing, joining numerous other big-box vacancies across the country.

Twelve Oaks owner Taubman Centers Inc. does not own the Sears storefront, but has been looking to acquire it, said Maria Mainville, Taubman strategic communications director. Its departure opens up opportunities for attractions, restaurants and other concepts to take over that space, she said. The company, however, does not anticipate filling the vacancy this year.

“The closing of Sears will have very little impact,” Mainville said. “Sears does not pay rent and is not driving traffic, so a new tenant or number of tenants will only strengthen the center. When a tenant leaves, particularly one that hasn’t been resonating with consumers like Sears, it’s an opportunity to bring something more exciting for shoppers and to improve the return for the shopping center.”

Meanwhile, Kmart’s 906,000-square-foot former headquarters in Troy remains empty after more than 12 years. Kresge had moved to the building at 31000 W. Big Beaver in 1972. Southfield-based Forbes Co., the owner of the adjacent Somerset Collection shopping mall, purchased the 40-acre site for $17.5 million in 2009, a fraction of the $41.5 million investors paid for it in 2005.

The recession squashed plans to demolish the building in a $320 million Pavilions of Troy mixed-use development announced in 2008. Forbes Co. did not respond to request for comment.

“It’s probably the No. 1 site in Michigan that is looking for a bright idea,” Nisch said.

As to what might save Kmart and Sears, he added: “They are going to have to think bigger than their reality.”

Gordon believes that without new management, Kmart could disappear in the next two years. He thinks Sears could survive as a scaled-down hardware and appliance retailer. Sears Hometown and Outlet Stores Inc., which spun off from Sears Holdings in 2012, franchises similar stores. It has 19 Hometown stores, six appliance outlets and two hardware stores in Michigan.

“The bankruptcy doesn’t turn a retailer that shoppers are shunning into a retailer that shoppers will buy from,” Gordon said. He predicted if Sears goes bankrupt again, it likely would not make it out. “I think Lampert has time to turn it into something viable. I don’t know if Eddie can execute it. But I think time is up at Kmart.”

Nisch, however, thinks Kmart has a longer shelf life than Sears since it owns most of its properties.

“Kmart has more leverage and less real-estate appeal,” he said. “There’s less pressure to liquidate. It can just coast along.”

Kmart’s shelves may be more bare than what he remembers as a child, but Zach Lloyd wants the retailer to survive.

“I’ve had friends who worked here,” the 27-year-old Wayne machinist said. “It was the neighborhood store you’d go to growing up. I hope it sticks around.”

bnoble@detroitnews.com