Agenda

• • • • • • • • • • Organizational Overview Industry Snapshot Competitor Analysis Financial Analysis SWOT Overview Current Strategy Strategic Issues Recommended Solutions Implementation/Justification Recommendation Recap

Organizational Overview
• • • • • • Founded by Sebastian S. Kresge in 1962 Number 3 discount retailer in the U.S. Operates 1,479 stores in 49 states Maintains 3 retail concepts Filed bankruptcy in 2002 Merged with Sears, Roebuck & Co. in March 2005

Industry Analysis Key Success Factors
• Advanced technology that enables

Technology

merchandising efficiency

Distribution

• Efficient Supply Chain Management • High return on inventory investment/high inventory turnover • Good working relationship with suppliers • Low distribution costs • Low replenishment cycle times • Ability to predict consumer demand • Courteous customer service • Breadth of product line and brand selection • High sales per square footage (store productivity) • Effective merchandising strategies • Ability to meet local preferences and price sensitivities • Overall low costs and underpricing strategies • Convenient store locations

Marketing

Skills & Capability

Other types

Kmart’s Microenvironment
Economic Conditions

Rivals

Substitute Products

Technology

Legislation/ Regulations

Suppliers

Buyers

New Entrants

Society Values/ Lifestyles

Demographics

Disposable Personal Income
Retail Sales Approaching 41.5% in 2005

Consumer Confidence is beginning to rise

Competitive Analysis
High

Low
Variety

High

Low Price

Competitive Analysis
Expensive

Low
Variety

High

Inexpensive Price

Product Line Strategy
A time phased plan for introducing products, each product targeting a specific target market How Targets: African American Hispanic Asian American

Use unique strategic brand alliances Advantages and licensing agreements that are culturally specific to our target market

Favorable market share Increase Barriers to Entry Increased Image benefits

Examples “Dora The Explorer” Kenyon “K-Mart” Martin Special Food Seasoning

Financial Overview
300000

Historical Sales Actual Revenues

250000

Yr. 2000 2001

U.S. 35,925 37,028 36,151 30,762 23,253

200000

150000

2002 2003

100000

2004

50000

* In millions of dollars

0 2000 2001 2002 2003 2004 2005

Kmart Target Walmart

Financial Overview
8000 7000 6000 5000 4000 3000 2000 1000 0 2000 2001 2002 2003 2004

Kmart Gross Margin
Actual Margins Yr. 2000 2001 2002 2003 2004
Gross Margin

U.S. 7,764 7,296 6,298 4,504 5,407

* In millions of dollars Actual Net Income Yr. 2000 2001 2002 2003
Kmart Target Walmart

Kmart Net Income
12000 10000 8000 6000 4000 2000 0 -2000 2000 2001 2002 2003 2004 2005

U.S. (740) (530) (495) (636) 1,106

2004

Inventory Turnover April 2005
Walmart

7.7

Target

5

SHLD

4.5
Low Sales, High Inventory

SWOT Analysis
Strengths
• • • • • • Buying Power Brand Awareness Big K-Mart Sears Acquisition Restate Locations 7% increase Stock

Weaknesses
• • • • • • • • Supply Chain Management Poor Leadership Bankruptcy Poor store house keeping Strategy execution Lack of Customer service Excessive slow moving inventory Accounting practices

Opportunities
• • • • • • Buying Power Growth with Sears International Growth Big K-Mart Meaningful Acquisitions Technology

Threats
• • • • • • Poor Leadership Bankruptcy Poor store house Strategy execution Customer service NON Appealing to the youth

Kmart’s Downfall
• • • • • • • • • Weak customer image Poor merchandise buying Inability to maintain proper inventory levels Inability to keep up with buyer preferences Poor supplier relationships Unsuccessful diversification initiatives Mismanagement of capital investment funds Inexperienced management Dismal holiday sales

Facts About The Merger
• Merger announced November 2004; Completed March 2005 • Creates 3rd largest retailer in the U.S. • Valued at $12.3 billion • Headquartered in Hoffman Estates, IL • Expected to convert 400 Kmart stores into Sears stores • Objectives:
– Expand “off-mall” format presence – Be more competitive with Walmart, Target and Home Depot

• Goal:
– Achieve a 10% operating profit margin

Strategic Issues
What steps should Kmart take to achieve the following: • Establish an efficient supply chain management system • Efficiently manage its inventory • Build a strong brand image • Become a top competitor in the discount retailing industry

Competitive Strategy

Overall Low Cost Provider Best Cost Provider Focused Low Cost

Brand Differentiator

Focused Differentiator

Strategy Introduction
• In today’s retail and economic environment, retailers are searching for various ways to improve their financial performance without drastically adding new stores. With the increasing pressures of a competitive retail environment, retailers are having difficulty differentiating their business strategy, which results in declining margins The focus has shifted to implementing more effective merchandising strategies

Inventory is one of the most significant investments retailers make. Kmart has done a poor job in managing its inventory and executing its merchandising strategy

Recommended Strategy
• Strategy: Employ Merchandise Optimization Technology Merchandise Optimization Technology
– Emerging category of solutions that enable retailers to make more informed decisions on profitable buying, allocating, and pricing decisions based on consumer demand – Decisions include Pricing and Revenue Optimization, Demand Based Management, and Retail Revenue Management – Applies sophisticated data process techniques to existing inventory sales and data, which accurately model future patterns of supply and demands on the item and store level – Helps retailers make merchandising decisions with foreknowledge of their financial impact – New approach to managing the merchandising lifecycle

To Address Several Merchandising Issues: • Poor supply chain management • Frequent stock out • Excessive inventory of slow-selling items • Unsound pricing strategies

How Merchandise Optimization Technology will work in Kmart’s Business Environment…

Kmart’s Merchandise Lifecycle
Determine Buy Quantities
• Predict sales • Plan Promotions • Set size needs

Flow Inventory To Stores
• Create receipt flow • Configure prepacks

Manage Inventory Seasonality
• Determine Promotions • Replenish in-store • Manage price adjustments

Analyze Performance
• Identify missed opportunities • Understand consumer behaviors • Inform future decisions
Increase Gross Margin Dollars by 8%

Increase Gross Margin Dollars by 5%

Increase Gross Margin Dollars by 6-10%

Increase Gross Margin Dollars by 6-10%

• Informs every decision along the merchandising spectrum, from setting the merchandise strategy to executing the plan. • Provides insight into future consumer demand and recommended strategies to maximize profits. • Helps to put the right product in the right store, to right customer at the right time!

• Leading provider of Retail Profit Optimization solutions since 1983 • Designs solutions for retailers whose priority is get the highest return on their inventory investment • Delivered solutions for numerous leading retailers such as: American Eagle, Outfitters, Bloomingdale’s, Target Stores, and Toys R Us • Implementation is fast, flexible, and financially beneficial • Typically takes approximately 16 weeks to implement • Costs to implement vary based on the size of the business ($2M- $8M) • According to a study conducted by Accenture, it is estimated that the top-tier U.S. retailers $20 Billion in incremental gross margin dollars by employing Merchandise Optimization technology More than 60% of retail sales come from marked down merchandise. If prices are executed at the right time and enough to stimulate consumer demand Kmart will not be stuck with inventory shortages, dissatisfied customers, and lost gross margin dollars Implementing the MOT will increase Gross Margin Dollars by 33% Retailers see the impact the next season after implementation. According to a Harvard Business Review, retail users have reported that productivity rose 20%, improved customer service, with gains margins in the range of 5% to 15%

• • •

The Strategy and Creative Approach
Brand Image Strategy: reinforces or changes the target audience’s attitude toward the brand, primarily concentrating on psychological or emotional appeals.

Product Positioning Strategy: Carves out a niche for the brand in consumer’s mind’s relative to the competition as a means for differentiating the brand.

Competitive Strategy

Overall Low Cost Provider Best Cost Provider Focused Low Cost

Brand Differentiator

Focused Differentiator

Advertising strategy
• • • • • Target markets What is Target doing Historic ad campaigns What they should do Financial impacts

African American Segment: The Best Approach
• First understand them! - strong tie to historical experiences - pride togetherness and heritage - value family religion and church Use specialty media – 60% of AA feel that TV and print are designed for white people – Use agencies that specialize in reaching the African American market (i.e.Burrell Communications) – 55% of households watch BET – 25% (4 million) of women read Essence Network TV - Reaches viewers ages 12-17 and 50+

Most Promising Markets
African American Population Percentage of population Average Income
34,525,000

Hispanic
30,769,000

Asian American
10,504,000

12.7%

11.4%

3.9%

$12,351

10,773

18,226

Hispanic/Latino Segment: The Best Approach
• First understand them! - Hispanic refers to origin, not race - Value culture, traditions and language - Very conscious of brand names Spanish TV - 86% of population watch Spanish TV during week - focus ads in major cities (L.A., N.Y., S.F. Chicago) Focus on family - Literacy and funding programs - Sponsorship of athletic teams - Promotional events (i.e. festivals and fairs

Asian American Segment: The Best Approach
• First understand them! - Hispanic refers to origin, not race - Value harmony and family togetherness - High value on education Print Advertisements/Billboards - More Asians in the workforce than other groups, less time spent at home - Much larger percent eat out than Hispanics and African Americans - Responsive to ads that promote cooperation and traditional sex roles, and professionalism

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