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KMART'S CAMPAIGN TO REMAKE ITSELF Retailer polishes image to compete with Wal-Mart


For Kmart Corp., the last decade has been a Blue Light blowout. Now it's fighting back.

One of the great retail success stories of the 1960s and 1970s, the Troy, Mich.-based discount store chain plodded through the 1980s as an upstart from Arkansas grabbed the attention of Kmart shoppers and the admiration of the business world.

Sam Walton's Wal-Mart Stores, which rang up a mere $2.4 billion in sales in the 1982 fiscal year, swept out of the South and breezed past Kmart in 1990, to seize the title of No. 1 U.S. retailer, with $43.9 billion in sales. Kmart, with $34.6 billion in annual sales, held onto the No. 2 position only because of the stumbling of once-dominant Sears.

But now, as its arch-rival, Wal-Mart, begins its push into the Baltimore area, Kmart is spending about $3 billion to give its aging discount stores a new look comparable to Wal-Mart's. It is backing that program with aggressive marketing to revamp its "polyester palace" image.

The renewal program is part of a 4-year-old effort by Kmart's chairman, Joseph E. Antonini, to revitalize the giant retailer, whose "blue light specials" and "attention, Kmart shoppers" announcements have provided fodder for a legion of stand-up comics.

In effect, the company is remaking itself, much as S. S. Kresge did in 1962, when it opened its first Kmart store in Garden City, Mich., and started a process that would lead to its rebirth as Kmart Corp.

Mr. Antonini's determination to transform the company is spelled out on the cover of its 1991 annual report.

"Kmart has changed," it proclaims in large letters. "We've changed the way we look, feel, think and act."

Analysts are skeptical about how much Mr. Antonini has been able to change the way Kmart feels, thinks and acts. But there is little doubt that his renewal program is radically transforming the way Kmart looks.

A walk through the Pasadena store, where the interior has been renovated, demonstrates that the new format is a dramatic departure from the cluttered, down-on-its-luck appearance of its older stores.

Aisles are wider, merchandise is better displayed and lighting is brighter. Bold red-and-white signs add color and make it easier to find your way around the stores. Added checkout lines make it easier to get on the road.

Brand names are prominently displayed throughout the store to pound home the message that buying at Kmart doesn't mean buying flimsy merchandise.

Gone is the old snack bar, replaced by a Little Caesars pizza franchise. At the front door is a "greeter" -- a classic Wal-Mart touch. Wheelchairs are available for customers who need them.

The nationwide program is well on its way in the Baltimore area, said A. N. Petraglia, Kmart's district manager for the east-central region. He oversees 14 stores covering a territory stretching from Annapolis to Frederick.

Already, Kmart's new look is in place at its stores in Fullerton, Crofton and on Wabash Avenue in Baltimore. At Pasadena, where the interior is finished, the facade will be upgraded this autumn. Work is in progress at Ellicott City and Sykesville.

Kmart is about halfway through its conversion program, which it launched in 1990. The undertaking, which the company expects to complete in 1995, will transform 2,400 stores and add an additional 100 to the chain, said Lisa Shields, a corporate spokeswoman. Smaller stores that cannot be expanded to fit the format will be closed and replaced.

For Kmart, the renovation program in Baltimore comes just in time. Wal-Mart opened its first area store in Glen Burnie this month, and it won't be long before the Bentonville, Ark.-based chain rings the city with stores in Westminster, Harford County and other suburban locations.

Let 'em come, said Mr. Petraglia, who works out of a small office in the rear of Kmart's Dobbin Center store in Columbia. "We are not intimidated by Wal-Mart at all."

According to Mr. Petraglia, Wal-Mart's reputation for providing good value is a matter more of perception than of reality. Kmart, he said, offers better merchandise.

"Our quality in fashions and clothing is really superior," he said. "We offer a broader assortment. We're more on-trend."

Mr. Petraglia acknowledges that Kmart fell behind the times during the last decade.

He acknowledged that checkout lines were too long, that displays were unattractive and that the chain's reputation suffered.

"The image problem that has plagued us is we were basically too cheap," he said.

In recent years, Mr. Petraglia said, Kmart has increased the percentage of name-brand merchandise it sells and cut back on private labels. Indeed, the stores are filled with such familiar brand-name items as Sharp stereos, Black & Decker power tools and Jordache clothing.

"The quality has always been there," he said. "Our new look shows it off a lot better."

Along with the store-renovation program have come an upgraded computer system and new distribution centers that will vastly improve Kmart's ability to control its inventory and prevent out-of-stock problems.

Wayne Hood and Dina Pliotis, analysts at Prudential Securities, reported this month that the upgraded distribution system is already improving Kmart's ability to keep merchandise in stock. Largely as a result, they are projecting increased comparable-store sales in the second half of this year.

Mr. Petraglia said the system is 100 percent up and running in the Baltimore area.

So far, the returns on Kmart's $3 billion investment are mostly projections. In July, the company posted a 7.5 percent increase in comparable-store sales, healthy for Kmart but anemic by comparison with Wal-Mart.

Over the last year, Kmart's comparable-store sales figures have been spotty, and the core discount-store business has lagged behind the company's specialty retail subsidiaries, including PACE Membership Warehouse, Waldenbooks, The Sports Authority and Pay Less Drug Stores.

The company has been consistently profitable, but its best annual return on equity for the past 10 years, 18.9 percent in 1983, lags far behind Wal-Mart's worst, 32.6 percent in 1991.

Analysts who follow Kmart are generally positive about the renewal program, but they turn skeptical when Kmart claims to be the equal of Wal-Mart.

Richard Nelson, an analyst with Duff & Phelps in Chicago, said Kmart has shifted away from its 1980s strategy of selling low-quality goods for rock-bottom prices. Quality has improved noticeably, he said.

Mr. Nelson said Kmart's merchandising skills might actually be superior to Wal-Mart's in the apparel sector.

But he noted that measures of store productivity "still show that the customer prefers Wal-Mart." He put Wal-Mart's sales per square foot at $266 and Kmart's at $184.

He does, however, believe that Kmart is on the right track. "I think they're making very good strides in improving their image in the marketplace," he added. "There's a lot of people doing a worse job than Kmart."

But Otto Grote, a veteran analyst of discount retailers with Derby Securities in New York, takes a more jaundiced view. He said Kmart could have invested its $3 billion more productively than it has in spending it on renovation.

"They've got problems more serious than the age of the paint in the stores or the color of their fixtures," Mr. Grote said. "The problem is more in the personal service."

Mr. Grote said that Mr. Antonini has proved to be a very good manager, but that he faces a fearsome task in transforming Kmart. "It's hard to take a $35 billion company and change the way it does business," the analyst said.

An illustration of the problems facing Kmart could be observed last week during a visit to its newly renovated Pasadena store. The interior was vastly improved, but when a customer brought a sale item to the checkout counter, the cashier couldn't find the price.

After failing to get the attention of a manager, who was talking with another employee, the cashier found somebody to run back to the department to check on the price while the customer waited. Finally, after the employee failed to return, the customer said he could no longer wait.

The cashier's response was a nonchalant "OK," and the customer walked out without making a purchase. A similar outcome would be all but unthinkable at Wal-Mart, which is widely praised for its emphasis on customer service.

A clearly dismayed Mr. Petraglia acknowledged that that type of incident still occurs, but he said "it's far less than it ever used to be." He said the lapse was especially galling because Kmart has implemented a program called "Power to Please" that encourages employees to do anything within reason to keep customers happy.

"They don't have to call a manager for every little thing," he said.

Nevertheless, he said, service has improved at Kmart, and the number of complimentary calls he has received this year exceeds the number of complaints, by 440 to 34.

Mr. Petraglia said that although Kmart's nationwide and regional sales have been unsatisfactory so far this year, he has been delighted with

the sales comparisons at the renovated stores. "We're talking double-digit increases every week," he said.

The district manager said he's confident that Kmart can sustain that trend as the renewal program continues. "We have been to the bottom of our cycle, and we're on the way up," he said.

Defying the expectations of retailing experts, Mr. Petraglia made a bold prediction: "We're three years away from being No. 1 -- maximum."

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