40 years after Kmart, Target and Wal-Mart first burst upon the scene - forever changing the definition of retail - the retail industry is dominated by these three mega-chains and a handful of regional players. The leading players continue to adopt very different strategies, however.
Elsevier Food International, Vol. 5, Number 2, May 2002
Len Lewis

"Two roads diverged in a wood and I- I took the one less by, and that has made all the difference."
From The Road Not Taken by Robert Frost

The three major discounters Wal-Mart, Target and Kmart now account for nearly $200 billion in annual sales, or approximately two-thirds of the revenues rung up by the top 20 discount retailers in the US. Coincidentally, all of the top three opened their doors in 1962. But, as the poem goes, their roads diverged and with them, corporate strategies. These have taken Wal-Mart and Target on two distinct paths to success and seen Kmart still deciding which road to travel. When Kmart filed for bankruptcy in mid-January, becoming the collapse in retail history, long-time industry observers were not surprised. The chain has failed to come up with an identity or any value proposition for consumers. Its standing has been tarnished further by abysmal customer service, shabby stores, empty shelves and expensive, unproductive advertising circulars.
Its debtor-in-possession status gives Kmart some breathing room in the chain's effort to get off life support by eliminating strangling interest payments, giving it the liquidity to pay employees and critical vendors and to get out from under unprofitable leases. And, with an infusion of new capital and management, the Michigan-based chain has an opportunity to come up with a strategic plan that will help differentiate itself from Wal-Mart and Target, or at least to find its niche.

Thinking differently
Wal-Mart and Target, on the other hand, have done everything to differentiate their strategies not only from the rest of the retailing universe, but also from each other. Wal-Mart's principal tactic has been to offer low prices on everything, every day, focusing on customer service to create a pleasant shopping environment. But underpinning its store network is a decades-old commitment to computerisation, and the development of state of the art supply chain initiatives.
Meanwhile, Target too, has focused on the supply chain. But its real success lies in its upscale image. This has been carefully nurtured through exclusive relationships with designers such as architect Michael Graves, who also designed for European housewares producer Alessi. This new upscale discounting, combined with creative advertising and co-marketing programmes with CPG companies, has enabled Target to become the ultimate in 'cheap chic'.
A recent consumer survey conducted by USA Today, CNN and the Gallup Organisation found that 52 per cent of people preferred shopping at Wal-Mart, while 29 per cent cited Target. Kmart came in a distant third with 13 per cent. Most criticisms centred on the chain's dimly lit stores with boxes of merchandise clogging the aisles waiting to be shelved.
However, Kmarts woes may be endemic of an issue facing the entire retail industry: namely, there's no such thing as traditional discounting. "Behaviour has changed. No one is exclusively a discount store shopper. Over the past few decades, it's reached a point where we all shop everywhere," says Barbara Bund, professor of marketing at MIT's Sloan School of Management, Cambridge, Mass.

Wal-Mart
Wal-Mart is clearly the one that sets the pace in terms of price for both general merchandise and food, the latter a major part of its supercenter strategy and a solid competitor to bottom line growth. Industry observers generally agree that going head-to-head with Wal-Mart on price is tantamount to suicide. Kmart found that out the hard way during an ill-fated price campaign last year. The problem was that Kmart only cut prices on selected promotional goods instead of cutting prices on all items.
For Wal-Mart, price is only one part of the strategic equation. There is the unwavering commitment to information technology that began in 1969 when Wal-Mart started using computers to track inventory. "They are the benchmark by which everyone else is measured," says John Hauptman, vice president of Willard Bishop Consulting, Illinois. "They are extremely efficient in procurement and distribution and work more closely with vendors on moving products through the supply chain than any retailer I know."
"Wal-Mart is an expert at taking costs out of the system for themselves and suppliers," says Hauptman. "Suppliers don't complain about Wal-Mart when it comes to things like invoice deductions. They don't arbitrarily take deductions like other retailers. It's a cost vendors don't have to incur. You always know where you stand with them and there's a quantifiable value to not being surprised." The bottom line is that the company is often procuring, distributing and selling product almost as quickly as it has to pay for it. "They are close to having neutral cash flow on products and, in some cases, a positive cash flow."
Meanwhile, Wal-Mart has become such an all-pervasive force in retailing, it no longer sees the benefit of sharing information for AC Nielsen's synchronised retail data network. Says Hauptmann: "They already give vendors data they need to supply stores. And they're so big that anyone with access to syndicated data for the mass merchandiser channel could figure out Wal-Marts sales by category or even by SKUs. They simply did not enjoy the same confidentiality as other retailers."
Of course any discussion of Wal-Mart would be incomplete without looking at the chain's store opening strategy. At present, it operates, 2,700 stores in the US and plans to have its biggest expansion ever in the next fiscal year - 45 million square feet. Supercenters, opening at the rate of three per week, have emerged as the single biggest competitive threat to traditional supermarkets. But some observers estimate that at the current rate of expansion, Wal-Mart could saturate the US supercenter market within several years' time. However, the chain is also moving ahead with other formats -Neighborhood Markets and Sam's Clubs. At present, only nine Neighborhood Markets are operating and 12-15 new units will open their doors this year. However, industry sources are convinced that Wal-Mart views the 43,000-square-foot format as a vehicle for national expansion, probably placing them in close proximity to supercenters, thereby giving consumers a choice of shopping experiences. Meanwhile, the company continues to tweak the format's merchandise mix before rolling it out. "Given the development of so many good growth models, and the infrastructure to support them, I don't see them slowing down in the next five years," Hauptman says.

Top 10 Discount/Value Chains (Sales in US$ '000)

  *Costco’s position is due to the fact that NRF has included warehouse clubs in its calculations.
(Sources: National Retail Federation, Wahington, D.C)

Target takes top honours
Although Minneapolis-based Target takes top honours as the nation's upscale discounter, it too has focused nearly as much as Wal-Mart on supply chain initiatives and distribution.
But the chain's relationship with vendors is different. "They rely less on suppliers in the areas of supply chain and inventory management, but have an incredibly close relationship with marketing," says Hauptman. On the technology front, the chain has been trying to perfect case flow-through. Target was responsible for driving Levi Strauss to store-specific packages on replenishment. "In the past, an apparel chain would write an order that would come into the warehouse. The case would be opened, tagged and broken down into assortments for individual stores by style, size and colour," says Frank Dell, president of Dellmart, a Stamford, Connecticut based consultancy. "Now, the order goes to Levi with instructions for styles, sizes and colours for individual stores. And, when cases come in to Target's warehouse, they are simply put onto a conveyor and shipped to the stores. Warehouses don't touch the merchandise."
Target is also one of the major proponents of pre-tagging - another major labour saving for the distribution centres and, because of it huge jewellery business, the chain is also one of the leaders in article surveillance technology.
While industry pundits laud Target for strengthening the supply chain and investing in technology, merchandising and the chain's ability to build a unique retail brand have made it a destination for consumers and a favourite on Wall Street, which views the format as one which can be aggressively expanded.
Target's earnings per share could grow at a 15 per cent annual rate for the next five or ten years, according to Lehman Bros. retail analyst Jeffery Feiner. The major reason is the potential for SuperTarget, a superstore format that could be expanded to 300 or 400 units by 2010. This would produce incremental sales of $15-20 billion, he said in recent industry report. Long term, Target's management is only committing to average annual square footage growth of eight to ten per cent. However, this does not take into account potential acquisitions such as sites from the now defunct Montgomery Ward and Bradlees discount chains. As a result, Target could increase its store base, long term, to 2,800 units, according to Feiner. In addition to store expansion, Target is rolling out a Target Visa debit/credit card which is expected to generate additional receivables of $2.1-$2.7 billion for fiscal 2001, $4.0-$4.5 billion the following year and $5.0-$6.0 billion by 2003.
In food, Target has been very 'deliberate' in its expansion. "They've built it up step-by-step in the Greatlands and SuperTargets because they understand the importance of having the supply chain in place before building food stores," says Hauptman. And, say other observers, they've survived by not trying to go head-to-head with Wal-Mart on price.
In fiscal 2002, the company is planning to build 28 additional Super Target locations. Along with this comes the expansion of its private label food line - Archer Farms. The line is still in its infancy. However, several observers note that Target has the expertise to develop its own brands as successfully as Wal-Mart has done. Target's success is clearly the result of its trend-focused brand image, which has been developed through a highly successful bulls-eye ad campaign and fashion merchandising. Both have given Target an upscale image and the support of younger consumers. At the same time, management has not lost sight of the value shopper, hence the phrase 'cheap chic'.
At the same time, the chain has rolled out a new ad campaign for 2002 with the tagline "Prices so low you don't have to hold back."

Kmart fights back
Bankruptcy may be the best thing for Kmart, which could emerge stronger than it's been for a decade and as a formidable competition for Wal-Mart.
However, at present the future of the chain remains a question mark. Management said recently that as many as 700 of its 2,114 stores are under performing. Industry sources thought 300 to 500 of these would be closed; closure of 284 was recently announced. While the bankruptcy gives Kmart the opportunity to walk away from 350 bad leases - some Kmarts and others occupied by former subsidiaries Sports Authority or Borders Books - a successful turnaround depends on exploiting the potential of several hundred urban stores with low-cost, long-term leases.
"Turnaround experts are fine for the short term, but are generic. They're all about cutting costs and saving cash," says Dell. "After that, you need a strategy to move forward and that requires a merchant. It's a different industry to straightforward grocery. There's a lot of seasonal merchandise along with style and trends. You have to have a feel for it and even the best can lose their way."
Overall, Kmart's future organisation depends on several factors:

• Creating a defined merchandising strategy to match consumers' needs.
• Investment in stores to keep them fresh, clean and stocked.
• Developing an infrastructure, including updated technology and distribution strategies.
• Converting smaller stores to a new Super Kmart format and scaling back on general merchandise.

Last year, the company switched from promotional pricing on individual items to an everyday low price strategy. This proved to be disastrous. Kmart simply didn't have the credibility or systems, or prices low enough to make it work. In addition, Wal-Mart quickly beat them on price and Target filed a lawsuit, accusing Kmart of listing inaccurate prices in advertisments comparing its prices to Target's. Moving forward, grocery will continue to be a major part of Kmarts supercenter strategy. Although gross margins on food are far lower than for general merchandise, significantly higher sales bring more dollars to the bottom line, according to Dell. Whatever Kmart might do with food, the relationship with Fleming Cos., Texas will continue. As a 'critical vendor' Fleming's decision to begin shipments after the chain missed its weekly payment kept Kmart alive.
It also keeps Kmart out of the food distribution business. The chain operates over 200 warehouses with a staggering 18,000 employees - but not for food. Because supercenter locations were opportunistic, there was no critical mass to support separate warehouses and the company decided to use wholesalers first Supervalu, then Fleming. "Kmarts success will come from its ability to sell food, not its ability to procure it," says Hauptman.