What happened to Kmart? The retailer’s demise explained

Kmart store in Elmhurst, Illinois

Kmart, one of the most recognizable brands in the United States, will only have three stores left in the US mainland after the closure of its Avenel branch in mid-April 2022. At its peak, Kmart had over 2,000 stores and had hundreds of thousands of employees on its payroll. 

Millions bought from its stores; children made memories on its aisles; celebrities promoted its products; filmmakers incorporated the store in productions; rappers made Kmart rhyme. All that praise now seems like a eulogy for a dying store overtaken by bigger and more innovative competitors and crushed by poor management and greed. 

Key Takeaways

  • Kmart launched operations in the early 60s and dominated over other major discount outlets.
  • Kmart’s poor strategies and refusal to innovate led to its decline in the 90s.
  • After losing a pricing battle with Walmart, Kmart filed for bankruptcy in 2002.
  • Kmart emerged from bankruptcy with billionaire Eddie Lampert as its head.
  • People point to Eddie Lampert’s poor decisions and greed as the reason for Kmart’s downfall.

Kmart was once the second-largest retail store in the United States

American businessman Sebastian Spering Kresge founded the company that would become Kmart. Sebastian founded two five-and-dimes stores in the late 19th century: one in Memphis and another in Detroit. 

The company grew rapidly, and in 1918, the SS Kresge Co. went public with Sebastian Kresge as its head. By the time executive Harry Cunningham opened the first Kmart in 1962, there were several hundred Kresge stores across America. 

Kmart replaced Kresge permanently in 1966, but the name lives on through the Kresge Foundation. “It was a bold move at the time,” Erik Gordon, an assistant professor at the University of Michigan, told The Detroit News. He continued:

“It was expensive. It showed a real pivot, and they were a leader at the time by opening one of the first big-box discount stores. Tired old Kresge put on dancing shoes and turned into Kmart, one of the great retail transformation stories.”

Kmart’s Blue Light Special discounts introduced in the mid-60s attracted droves of customers. Its links to products promoted by celebrities such as Jaclyn Smith, Martha Stewart, and Adam Levine also drew in clientele. 

The store also strived to improve the customer experience by introducing concepts such as store credit cards. “They were a company that lived really close to its customer,” Gordon continued. “They found a way to bring aspirational products to the mass market.”

Kmart was once the second-largest retailer in the United States. However, by 1990, Walmart had usurped Kmart. Kmart had the tools to recover, however. Ken Nisch, an executive of brand strategy and retail firm JGA, told The Detroit News:

“Up until surprisingly recent history, they were one of the most innovative companies. It’s a whole series of coulda, woulda, shoulda. They had more stores than Walmart, better systems, better merchants. They were a better company.”

Kmart’s decline started when it failed to compete with Target, Wal-Mart, and online shopping

In 1992, Kmart’s profits and sales hit record highs. The store kept expanding, but competition from Walmart and Target slowed the company’s growth. 

Kmart was still a huge retailer, but market forces placed it in a difficult position. Walmart drove its prices down while Target increased prices, targeting up-scale markets. Kmart failed to react, placing itself in the middle of two rapidly rising giants. 

Instead of following Target’s or Walmart’s lead, Kmart consolidated itself in the middle, a lousy strategy that left it with no identity. Walmart was a low-price entity, Target a high-price store, and nobody understood where Kmart lay.

Without a clear identity, Kmart lost customers to Target and Walmart – and later to online shopping pioneered by Amazon. By 2001, Kmart’s space in the middle was dwindling, so it tried to adopt Walmart’s low-price strategy. 

By then, however, Walmart had established itself as the industry leader in the low-price arena and wasn’t about to cede its position. Kmart also fell behind its competitors in terms of technology and innovation. Nisch continued:

“Kmart fell behind in technology and logistics. They lost their pricing edge against Walmart. They were at a point where they could never catch up again.”

Another reason why Kmart fell behind Target and Walmart was its slow reaction to population movement. Kmart initially built stores in cities and first-tier suburbs, where most people lived. 

Unfortunately for the retailer, people started shifting from urban centers to suburbs. Target and Walmart were prepared for this shift.

Walmart established itself in rural areas and moved with the population to the suburbs. Target set up in the suburbs, absorbing the pain of low sales for several years. However, as people moved to the suburbs, Target’s gamble and resilience started to pay off. 

Kmart filed for bankruptcy in 2002 but successfully overcame the setback

In January 2002, Kmart filed for Chapter 11 bankruptcy protection, confirming speculation of the company’s dwindling financial health. At the time, it was the biggest retail bankruptcy in the US. 

Kmart held $17 billion in assets and collected around $37 billion in revenue. The bankruptcy filing would undoubtedly shrink its operation, but many analysts predicted Kmart’s recovery. 

“We are determined to complete our reorganization as quickly and smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future,” then-CEO Charles Conaway said. 

Kmart announced a plan to close unprofitable stores and lay off workers in a project designed to restore the company’s profitability. Conaway stated that Kmart planned to cut about $350 million in expenses through job cuts and reorganization. 

“Within the past 24 hours, they’ve opened a number of different options that weren’t available 24 hours ago,” Wayne Hood, a retail analyst, told CNN Money. “They could reemerge as a smaller, more competitive company with stable cash flow. If I were Wal-Mart, I would be more concerned now than if Kmart hadn’t filed.”

The bankruptcy protection filing reassured suppliers and creditors that Kmart would negotiate the choppy waters. Fleming CEO Mark Hansen said: 

“Kmart’s debtor-in-possession financing gives it the critical liquidity needed to fund its operations during the reorganization process, a necessary first step in resuming our relationship.”

Stakeholders in Kmart hoped that the retail store wouldn’t repeat the mistakes that had led it to bankruptcy. “Competing on price with Walmart doesn’t work,” Kurt Barnard said. “Hopefully they will never do it again. It was a bloody experience for them.”

Kmart emerged from bankruptcy in May 2003 as a subsidiary of the Kmart Holding Corporation. 

Kmart’s merger with Sears could have saved both giants, but it sank them both

Kmart emerged from bankruptcy a wounded and rapidly deteriorating entity. Sears, a former retail giant, was also ailing. Billionaire Eddie Lampert saw an opportunity to save both Sears and Kmart by merging them – it was the wrong decision. 

Kmart and Sears

As expected, the merger drove the stock price up, but the company couldn’t maintain such heights for long. 

The company’s hierarchy failed by refusing to reinvest in the company’s sales. Eddie Lampert had promised to ‘transform’ Sears and Kmart into ‘great companies,’ but he employed flawed strategies. 

Lampert oversaw quick fixes that yielded immediate yet temporary results. The decision to invest in non-core businesses failed miserably as Kmart couldn’t sustain or grow these chains. It placed added pressure on stores to generate profit. 

Eddie’s focus on short-term gains effectively crushed Kmart. He focused on the company’s earnings before interest, taxes, depreciation, and amortizations (EBITDA). It grew to over 3.6 billion in 2006, but that figure would inevitably fall: the company’s store sales were dwindling. 

The company generated profits by cost-cutting rather than through sales. Instead of expanding, Kmart was rapidly consuming itself, and the EBITDA figures soon started reflecting that reality. 

By 2010, the EBITDA figure stood at $1.4 billion. The company reacted by dismantling Sears Holdings into smaller stores that would generate sales, further shrinking the company. Sears Holding also sold half of its stake in Sears Canada. 

By 2016, EBITDA had fallen to -$808 million. 

Eddie Lampert stands accused of stripping Kmart’s assets for personal enrichment

“Eddie did not destroy Kmart and Sears,” Erik Gordon told The Detroit News. “He took two weak retailers and made them even worse. Kmart is one of the saddest retail stories.”

Unlike Gordon, many view Eddie Lampert as the main reason for the downfall of Kmart and Sears. His poor financial decisions and alleged stripping of the company’s assets led to the demise of both companies. 

“It’s a study in greed, avarice and incompetence,” Mark Cohen, former CEO of Sears Canada, told CBS News. “Sears should have never gone away; Kmart was in worse shape, but not fatally so. And now they’re both gone. In the case of Kmart, everything they used to sell, people are buying but they’re buying it from Walmart and Target.”

The people who’ve suffered most from Kmart’s decline are its former workers, most of whom faced layoffs without severance pay. Meanwhile, in December 2019, a court allowed Sears to pay $25 million to top executives. 

“They don’t give severance pay to people who dedicated their lives to this company,” Lakisha Williams, a former part-time employee at Kmart, told CBS News. “That’s unfair.”

Onie Patrick, another former employee at Kmart, feels Eddie Lampert owes a responsibility to former employees. She told the outlet:

“America is hard right now. We need to change the future for retail. I want to know what his thoughts are. Is he [Lampert] struggling on a food-stamp card too?”

Eddie Lampert
C.E.O Of Sears Holdings Corp, Eddie Lampert | Bloomberg

In April 2019, Sears Holding Corp. filed a lawsuit against Lampert, accusing him of stripping the company of more than $2 billion during his reign as its head. Three years on, the case has yet to be resolved and is in the hands of mediators. 

Kmart filed for bankruptcy in 2018 and was acquired by Lampert’s Transformco

In 2018, Kmart under Sears Holdings filed for Chapter 11 bankruptcy. Eddie Lampert bid $5.2 billion for the company, drawing opposition from labor advocates, unsecured creditors, and workers pressing Lampert for unpaid severance. 

Nevertheless, the court approved Lampert’s bid for the company. “If I am a betting person, which I am, I would say at some point we would be public again,” Eddie told The Wall Street Journal. Few shared in his enthusiasm, however. 

“The bankruptcy doesn’t turn a retailer that shoppers are shunning into a retailer that shoppers will buy from,” Erik Gordon said. “I think Lampert has time to turn it into something viable. I don’t know if Eddie can execute it. But I think time is up at Kmart.”

It would be nothing short of a miracle if Kmart revived its operation in the United States. The remaining stores will likely close, costing people their jobs and expelling an iconic brand. 

However, Transformco, the owner of Sears and Kmart, hasn’t given up. In January 2022, the company released the following statement

“Transformco’s go-forward store strategy for Sears and Kmart is to operate a diversified portfolio consisting of a small number of larger, premier stores with a larger number of small format stores.”

The reality is that stores continue closing, and people have accepted that Kmart may never return to its former glory. “It’s maybe a little nostalgic because I’ve lived my whole life in this area, but it’s just another retail store closing,” Jim Schaber, an Iselin, New Jersey resident with ties to Kmart, said. 

“It’s like history passing right in front of our eyes,” Mike Jerdonek, a former Kmart customer, told CBS News. “When I was younger I didn’t have any money, so it was a good place to shop because the prices were cheap. And to see it gone right now, it’s kind of sad.”

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