How Kmart Fell Behind

The first Kmart store opened in 1962, in Garden City, Mich. Sam Walton opened his first Wal-mart Discount City, in Rogers, Ark., the same year.

For more than a quarter-century, Kmart had the upper hand, in large part because it had been spun out of an established retail company, S.S. Kresge Co., a dime store and downtown department store chain that got its start in 1899. Kresge executives recognized a significant new form of retailing emerging in the 1960s: large stores in suburban strip shopping centers that sold a wide variety of goods for discount prices. Seventeen more Kmart stores followed that first one by the end of 1962. By the end of 1963, Kmart had 53 stores, while Walton was just planning his second Wal-Mart.

Yet, when the new century dawned, Wal-Mart long ago had roared past Kmart. Wal-Mart’s revenue for the trailing twelve months was $205 billion, while Kmart reported $37.1 billion for the same period; what’s more, Wal-Mart’s profit margins were more than ten times Kmart’s margins. Wal-Mart has about 1,750 discount stores, plus some 900 Supercenters, almost 500 SAM’S Clubs, and about 20 Neighborhood Markets, and has used its heft to become a true multinational, with hundreds of stores in Mexico and Canada and scores more around the world. Kmart operates its 2,105 in the US and its territories.

What let Wal-mart blow by Kmart in the past 15 years?

One of the biggest factors: The ways Sam Walton, he of the down-home, pickup truck-driving image, used information technology to keep track of what sold in his stores, replenish the products that were selling the fastest, and keep inventory costs down. Even more important in the long run: Wal-mart’s systems have been used to support a coherent and consistent strategy of everyday low prices and customer service, while Kmart has lurched all over the map.

As far back as 1992, the Harvard Business Review pointed to Wal-mart’s well-honed business processes as the key to its success, with technology as an important enabler. In response, Kmart pointed to the chain’s own technology prowess—”Kmart has aggressively moved from an outmoded technological base to a leadership, twenty-first century position in our industry,” wrote a Kmart executive—but the ensuing years proved that such proficiency as Kmart had was not enough to remain competitive. In 1992, Kmart said it wanted to have revenue of $100 billion by 2000. It reached $37 billion.

As early as 1966, Walton was focused enough on IT to spend time at an IBM training center looking for the talent to automate his company. Wal-Mart was a retail-industry pioneer in areas like just-in-time inventory and highly choreographed logistics, all in the service of making Wal-Mart the low-cost competitor. “Everyone has emulated their capabilities, but they are probably five or six years ahead of everyone else,” says Dan O’Connor, chief executive of analyst firm Management Ventures, Inc. In the decades since “Mr. Sam” first went to IBM school, Wal-Mart continued to lure top IT talent to Bentonville, Ark., where company headquarters is located. “It’s like a global community of developers down there,” says O’Connor.

Although Walton was notoriously cheap, he could be convinced to spend money on things that would save the company money in the long run and allow it to grow. On the same issues, Kmart had the tendency to be penny-wise and pound-foolish.

As chronicled in “In Sam We Trust” by former Wall Street Journal reporter Bob Ortega, Kmart let its lead slip away.

In the 1970s and early ’80s, Kmart lagged Wal-Mart on adoption of several waves of retail technology, including back-end computers for individual stores, electronic cash registers and scanners that could read UPC bar codes. By 1973, the growing Wal-Mart chain had computers in 22 of 64 stores. Kmart didn’t get serious about putting them in every store until 1978. By 1982, it had computers throughout its stores, but the lack of scanning cash registers meant that sales data wasn’t kept as current.

As a result, Wal-Mart got a head start on many elements of what is now called “supply chain management.” The scanning cash registers fed updates to store computers, which adjusted sales and inventory records. Store managers could watch the inventory of a fast-moving item drop and electronically file replenishment orders with Wal-Mart’s distribution centers.

Wal-Mart’s next logical step was into the world of Electronic Data Interchange, using virtual documents to place orders and receive shipping notices. In the late 1980s, it began supplementing those EDI connections with a system called RetailLink that allowed suppliers to access sales data and projections, and help Wal-Mart plot ways to drive up sales. Today, this electronic networking with business partners would be called an “extranet.” RetailLink started as a proprietary dial-up service, but smoothly evolved into a browser-based system.

In contrast, according to one former Kmart IT executive from the mid-1990s, Kmart’s first experiments in collaboration with supply chain partners came about at the prompting of suppliers who had been involved in similar projects with Wal-Mart, and not because anyone at Kmart took the initiative.And Kmart did achieve success in its attempts to match up with Wal-Mart. By 1992, the 2,000th vendor had joined Kmart’s own EDI network. And the Troy, Mich., retailer won a Smithsonian Award from Computerworld magazine for the second generation of its Kmart Information Network, for merchandise, planning, tracking and replenishment.

Internally, Wal-Mart focused on keeping its distribution systems lean and mean. The combination of better tracking of demand and inventory, plus electronic links with its suppliers, it was able to maximize the flow of hot products through the system and avoid accumulating duds.

Kmart wound up with a split distribution network. Because its apparel sales were originally handled by independent companies, and later an organizationally separate subsidiary, the “softlines” group for apparel and related products had a separate distribution network. Softlines also had different computer systems than those used by the “hardlines” group that handled products like appliances. As of the mid-1990s, business analysts still couldn’t generate one report that would give a complete picture of supply and demand—they had to run multiple reports, then bring the results together in a spreadsheet. Flash forward to 1997, and the same problem is a priority for then CIO-Donald Norman, who was billed in the press as a turnaround artist.

Former Kmart CIO David Carlson claims that Kmart caught up technologically during his tenure, and even started to get ahead in areas such as the use of data warehousing. He was hired in 1985 to untangle a point of sale technology project that had flopped. Once it got its scanning cash registers working, Kmart began feeding this new wealth of sales data into an NCR Teradata data warehouse.

When Joseph Antonini became CEO in 1987, he announced a $1 billion investment in faster technology adoption. But Kmart never used the technology it had to its full potential, Carlson says. The data warehouse could have been used more aggressively to forecast demand, but Kmart’s merchandizing executives preferred to trust their own judgment. At the very least, historical data should have been used to determine which products ought to be dropped because they weren’t selling. But the merchants tended to keep broadening the variety of products rather than narrowing in on the ones that sold best, Carlson says.Greg Buzek, who studies retail technology as president of IHL Consulting, says the problem Carlson lamented continued long after he was gone. The data warehouse, which Kmart and NCR recently announced plans to expand to 92 terabytes capacity, “will churn out all the information you need about what’s selling and what’s not,” he says. But unless management pays attention, the data is worthless. “Because they didn’t believe the system, they had trucks, and trucks, and trucks of inventory just sitting there.”

Under Chuck Conaway, those truckloads of inventory no longer sit behind Kmart stores. Their absence is a clear sign that the company has made visible progress toward its goals. Whether this is truly the beginning of a new chapter in Kmart’s use of technology to meet or beat its competition remains to be seen.