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		What do you think went wrong at Kmart? Vote and add your comments.
	60% say Project Impact is a failure. See full results below.

There’s a really interesting article in dbusiness (a Detroit business magazine) that attempts to explain how Kmart blew the huge lead they had on the discount channel and collapsed into bankruptcy. The article is based on opinions from former managers and executives whose non-disclosure agreements have expired. As such, it needs to be read with caution – anybody in such a position will naturally look back and say, “None of that would have happened if they had just listened to me.” But nonetheless, the article makes for fascinating reading to anyone involved in channel issues – which I think describes just about everybody reading this newsletter – I recommend it highly.

It’s much too long to summarize in any detail, so I’ll just bullet-point some of the main problems the Kmart veterans present:

• The company was insular and inbred. From the earliest days into the eighties, no outsider was hired into the executive ranks.
• They underestimated the competition (perhaps a result of the previous point). “I remember an executive meeting where they said, ‘Wal-Mart is a regional discounter, leave them alone.’”
• Their logistics were inferior. One of the executives compared them unfavorably to Walmart: “Walmart developed systems for ordering on-time merchandising (in the mid-1970s), and spent a lot of money on that. And their transportation systems were just unbelievable. They figured out how to get product to the stores a lot quicker.”
• Merchants had compensation structures based on perverse incentives. Once such was ‘theoretical gross’ – calculations of the profitability of a SKU were based on its full mark-up, rather than on its actual selling price. Thus, over-priced items which had to be severely marked down at the store level continued to be carried because they were contributing mightily to the buyer’s theoretical gross.
• Because they used gross margin percentages instead of sales per square foot as their primary measure, Kmart often stocked high-margin SKUs in many categories and gave less space to high-volume items. An executive cites deodorants, where he says Kmart carried 80-100 SKUs, with the data showing that they were often out of stock on the top brands. He says that “he could guarantee that the top-five-selling deodorants would be out of stock by 8 p.m. on Sunday because there wasn’t enough shelf space allocated to cover the volume of their sales over the weekend.”
• They ignored data. When one of the early scanner reports showed that much of the candy in the stores was selling below cost, the report was tossed aside. “The divisional manager said to me, ‘You cannot issue that report.’ She said it was obviously flawed.” It took two more years of data before change came to the candy aisle.

There’s much more. It’s a fun and instructive read, and you may have had experiences with Kmart that support its points, or counter them. Our exit question, therefore is What do you think went wrong at Kmart? Vote and add your comments.

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Recent Poll


In the last issue, we discussed Walmart’s Project Impact, and asked if you thought it had been successful, and if it would prove successful in the long run.

Has Project Impact been a success?

• 6% Yes – very successful
• 34% Results have been mixed
• 60% Not a success

Will it be successful in the long run?

• 10% Yes -- it will be very successful
• 21% It will have mixed results
• 69% It will not be successful

Not a lot of love out there for Project Impact. Among the comments:

• “They are cutting the wrong SKUs. Consumers are more loyal to brand names than you think.”
• “Prices are very important, but Walmart is so closely priced with its competitors that what shines now is customer relationships and loyalty, which Walmart doesn't have because they have the worst customer service in the market right now. Awful.”

Follow-Ups

Advertiser-Produced Content
We mentioned a few months back that Walmart and Procter & Gamble were jointly producing a made-for-TV movie, "Secrets of the Mountain", and we wondered if it could be the start of a trend. In addition to greater opportunities for product placement, it allowed the sponsoring companies to ensure programming with which they are comfortable.

Whether lots of others will jump on the bandwagon is still unknown, but apparently Walmart and P&G were sufficiently pleased and are going to give it a couple more tries. Their second movie aired this weekend and a third is in production.

The companies say that among moms ages 18-34, 93% percent liked "Secrets of the Mountain," and 88% said it was good/excellent quality. Eighty-five percent thought it was right for families and 79% want it to be a series.

Online Retailing
Luxury brands, as we have discussed before, have tended to avoid online selling because they felt it didn’t fit their image, they didn’t think they could replicate the luxury buying experience, and to avoid channel conflict with their department store customers.

Gradually, those objections are being overcome by the size of the opportunity suppliers see online. Among brands mentioned in this article are Marc Jacob, Jimmy Choo, Hugo Boss, Vince, Lancôme, St. John, Theory, Kiehl’s, Lilly Pulitzer, Donna Karan and La Perla – all of whom have started or announced online stores.

Among the arguments for doing so, in addition to the size of the potential market, are improved margin by elimination of the retailer, and control over pricing and styling.

Hugo Boss uses the same models from its ads so its marketing is consistent, for instance, while Lacoste “won’t have any discount pricing on the Web, never, never, ever,” said Eric Bascle, director of strategic projects and e-commerce.

Media
The first week of July is always the lowest week of the year in terms of TV viewing, but this year it was the lowest week ever (I have a vague recollection that the same thing happened last year).

CBS, NBC, ABC and Fox together had the smallest number of prime-time viewers last week in two decades of record-keeping, the Nielsen Co. said. Given the dominance of the big broadcasters before then, you'd probably have to go back to the early days of television to find such a collective shrug.

Another argument for in-store promotion?

Urban Stores
Walmart has had a lot of trouble opening stores in big cities, in part simply because of land-availability problems, but more importantly in most cases because of opposition from labor unions, which tend to be stronger in urban areas, and therefore opposition from politicians who are allied with the unions.

They have recently had a big breakthrough in Chicago, where the mayor has finally persuaded the council to go along – convincing them that even Walmart’s lower salaries are better than nothing in current conditions.

The plan was approved without objection but council members, known in Chicago as aldermen, repeated complaints critics have been making since Wal-Mart first proposed to build dozens of stores in the third most populous U.S. city.

"I've got to tell you I've got extreme consternation about voting for this," said Alderman Ed Smith, who added that Wal-Mart's planned starting pay of $8.75 per hour is not a fair living wage.

The new store will be in the impoverished Pullman neighborhood, often classified as a ‘food desert’ because of its lack of shopping opportunities. Now that the dam has broken, Walmart is searching out additional locations.

Critics have questioned how Wal-Mart treats its employees in terms of pay, benefits and working conditions. But rising unemployment and the need to generate revenue through sales taxes softened opposition among aldermen.

"We have heard loud and clear from the constituents ... how desperately they want and need this," said Alderman Mary Ann Smith. "Who are we to deny a community these jobs?"

Meanwhile, however, the Washington Post says nothing has changed in terms of opposition to Walmart there. In regard to a proposed new store in the District, they report:

But labor is going to take a stand. The Metro Labor Council specifically asked 2010 city candidates on its endorsement questionnaires: "Will you oppose Wal-Mart's attempts to open stores in the District of Columbia?"

The candidates running for D.C. Council chairman -- At-Large Council member Kwame R. Brown and former Ward 5 council member Vincent B. Orange Sr. -- answered "yes."

SKU Rat
In our article last issue about Project Impact, we mentioned that it may have cost Eduardo Castro-Wright, the Walmart USA president, his job. Possibly a second casualty is Chief Merchandising Officer John Fleming, who was reported by the company to have decided he wanted to spend more time with his family.

Supervalu is doing their version of SKU rationalization, dubbed Project SHE (Simplify Her Experience). Although I have read reports that they plan to implement it across as many as three hundred stores this year, I have also heard from sources that the actual number of implementations will be far lower. They’re getting the same kind of pushback others have received from customers who can’t find favored products.

Complaints about SKU rationalization are not limited to the US, as this article from the Irish Times proves. For example, readers complain about having fewer varieties of Barry’s Tea to choose from at Tesco. Also of interest is one of the factors the Times suggests as a reason for Tesco’s actions:

Tesco is known to drive hard bargains with its suppliers. Earlier this year this newspaper revealed it had been demanding millions of euros from suppliers in return for the continued stocking of their products on the supermarket’s shelves. It told individual suppliers they must pay up to €500,000 in order to have a presence in its 119 stores around the country. Suppliers have also complained about the demands made by other large retailers but say Tesco’s were bigger in scale and breadth.

A number of producers who do business with Tesco were willing to talk to Pricewatch but all declined to be identified. One described Tesco as “a law unto themselves. We have people calling us to say they can’t find our products on the shelves but we have not been told what is going on by the store,” he says.

Private Label
Procter & Gamble is offering a variation on private label for some of its retailers – they are supplying exclusive variations on some of their popular brands.

Pringles recently launched a customized line of flavors that will be sold only at Tesco, Britain’s largest grocery chain. The exclusive line of “Great British Flavours” potato crisps – sea salt & black pepper, smokey bacon, kebab, and curry – were designed by P&G in conjunction with Tesco, said Pringles U.K. spokeswoman Claire Forsyth-Brown.

Apparently this is nothing new for Pringles:

Pringles has created similar products in the United States since 2003, said P&G spokesman Don Tassone. Its Restaurant Cravers and Extreme versions were originally developed with Walmart, and it has also worked with Kroger and other retailers on unique flavors, he said. He couldn’t get into any specifics of future plans, but “you can expect more of them,” he said.

Now Pampers is joining in, with special colors and patterns (including madras, stripes and printed ruffles) for its diapers to be sold at Target. And the expectation is that there will be more such examples from P&G.

World Cup
Congratulations to Spain. Also to ABC/ESPN/Univision – the final was the most-watched soccer game in US TV history, with almost a million watching the English version in New York alone and another 400,000 on Univision.

The biggest brand winners, according to one study, were Hyundai, Visa, Adidas, Nike, and ESPN.

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Quickly Noted

Kmart Posts Online Users’ Video Game Reviews in Retail Stores
Kmart is going to post user reviews of video games in retail stores. If done properly, this could be a good thing, but I wonder if the reviews posted will include any negative reviews. If so, shoppers will wonder why Kmart is carrying the product. If not, the shopper might wonder whether Kmart is being honest. It will be interesting to see how this works.
Mashable, 13 July 2010

Sam’s Club Tests Online Small Business Loan Program for Main Street
Sam’s wants to loan you some money. According to this PR release from Sam’s Club, they are initiating a program to give small loans ($5,000 to $25,000) to business members. “Sam's Club members who apply for a small business loan online during the pilot will receive a $100 off the application fee, a 20 percent discount and a 7.5 APR, which is 25 basis point discount. The terms of the loans will remain at 10 years, which is common to help keep monthly payments low.”
PRNewswire, 6 July 2010

Are We in a Recovery? Check the Underwear
In our never-ending quest for good news on the economy, we present this item which states that a recent uptick in sales of men’s underwear is a sign that the recovery is on. The indicator, endorsed apparently by Alan Greenspan, is based on the assumption that underwear is one of the things men cut back on when money is tight. NPD says that the turnaround began about five months ago, and that underwear sales are now up 8%-9% after dropping 4%-6% during the recession. Come to think of it, some of my stuff is getting a little raggedy.
CNBC, 14 July 2010

Beyond ‘Real Time’ Reporting, Forecasting Future Traffic Jams
Folks who are familiar with the logic behind demand-forecasting software will be interested in this new application of the same principles. We currently get traffic reports that tell us what current conditions are – “On the Dan Ryan, it’s 55 minutes from 95th to the Circle” are words I dread hearing – but new technology will allow forecasts of what tonight’s traffic will be.
New York Times, 3 June 2010

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