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Kmart Execs: Details and Best Practices Will Determine Company's Future

NEW YORK - In gearing up for its late April bankruptcy emergence, Kmart's top brass say a detailed approach to marketing and operations and a well-defined best practices strategy are key to solvency and eventual profitability.

At a press briefing held in New York on Tuesday, Julian Day, who was named CEO on January 19 and who is also president, said it is paramount that Kmart make efficient and consistent use of all available data and technology as a major means of controlling costs and maximizing profits on the store and corporate levels. On the integrity side, executives say Kmart has installed a strict system of checks and balances so that each area of business can monitor and communicate with others.

The company is currently under government investigation for alleged misuse of funds and other suspected corrupt practices that took place under previous administrations.

"Our strategy is being very exceptionally laid by applying disciplined leadership, honesty and integrity," said Day to the gathered press. "It is not a strategy that involves a new 'Star Wars' concept of retail. Rather, we will require a lengthy rebuilding process to produce adequate returns on sales."

One area of focus is promotions. If Kmart is to be successful as a high/low retailer, Day believes promotions must be properly planned and must center on the right products and the consumer's market basket as a whole rather than just on one sale item. "You must figure out what, besides the promoted item, is in the market basket. In the past, the company would go for the best same-store sales and offer the hottest price on one item. It was thought you'd get people in to buy up and they would buy other items. But you can't leave this business to chance if you want to end up with a certain margin, and there are plenty of complex algorithms that can figure this out."

While much data has been available to executives regarding promotions and other areas of business, many have failed to use it adequately. Often, a "seat of the pants" mentality prevailed here and in other segments. "When I came here, I was surprised by the quality of systems in the company," said Day. "But they weren't being used--nobody was looking at the reports." For the first time, Day says the company also plans to break out the performance of promotional products separately from the overall sales mix.

Kmart also wants to cut about 10 percent of its SKU base by narrowing selections in items that may be overassorted with choices. By eliminating a choice, Kmart can provide more facings--and thus better in-stock positioning--to remaining items. Adding too many choices in an item, he says, creates a short performance blip but can hurt long-term performance and in-stock positioning.

Other "detail" areas related to costs include store manager empowerment, a move that allows managers to adjust and order inventory levels on 500 high margin, high volume SKUs and set up appropriate displays. The company is also better allocating employee work hours to diminish use of overtime pay.

On the Best Practices front, executives would not comment on the actual steps they have taken to cooperate with investigative government agencies. But they did say Kmart has set up a system of checks and balances where executives must read over new initiates carefully. Initiatives are then signed off by several different groups of people. In addition to avoiding potential corruption, this practice makes sure that each arm of business understands and accepts where funds are being spent.

Jack Butler, chief bankruptcy counsel, said that Kmart will be appointing a new board of directors comprised of Day and Kmart's creditors. Under a plan to be filed on March 28, the company will allocate up to 10 percent of shares to management when it resumes public trading. "We want to have a set of best practices and make the stewardship investigation historical and not a go-forward issue for the company," he added.

Kmart executives also discussed the changing nature of their food business. After cutting the SuperKmart business in half--there are now about 60 SuperKmarts--and following termination of the Fleming distribution agreement, Kmart is using regional wholesalers to supply perishables and "ensure a continued supply," Day said. Other products, which include packaged and consumable items offered in all 1,500 Kmart stores, are being self-distributed. The SuperKmarts that were closed included locations that were not profitable as well as stores whose lease costs were deemed too high. "Now, I'm comfortable about where we are in food and consumables," he said.
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