266 PART 3 Striegy Formulation Ending Case for Part Three KMART AND SEARS: Kmart was also challenged by "category killers" STILL STUCK IN THE MIDDLE? that competed in only one or a few industry categories, but in greater depth within any category than could any On January 22, 2002. Kmart Corporation became the department store. Some of these were Toys "R" Us, largest retailer in U.S. history to seek bankruptcy protect Home Depot. Lowe's. and drug stores such as Rite Aid. tion. In Kmart's petition for reorganization under CVS. Eckerd, and Walgreens. Chapter 1I of the U.S. Bankruptcy Code, Kmart man- Kmart had been established in 1962 by its parent agement announced that they would outline a plan for company S.S. Kresge as a discount department store of- repaying Kmart's creditors, reducing its size. and re- fering the most variety of goods at the lowest prices. Un- structuring its business so that it could leave count pro- like Sears, the company chose not to locate in large rection as a viable competitor in discount mass-market shopping malls but to establish its discount stores in retailing. Emerging from bankruptcy in May 2003. highly visible corner locations. During the 1960s. '70s. Kmart still lacked a business strategy to succeed in an and "80s, Kmart prospered. By 1990. however, when extremely competitive marketplace. Wal-Mart first surpassed Kmart in annual sales, Kmart's The U.S. discount department store industry had stores had become dated and lost their appeal. Other reached maturity by 20104 and Kraut no longer pos well-known discount stores, such as Korvelle's, Grant's. sessed a clearly-defined position within that industry. Its Woolco. Ames. Bradlees. and Montgomery Ward. had primary competitors were Wal-Mart, Sears. Target. gone out of business as the industry had consolidated and Kohl's, and J C. Penney. with secondary competitors in reached maturity. Attempting to avoid this fate. Kmart certain categories. Wal-Mart, an extremely efficient re- management updated and enlarged the stores, added tailer, was known for consistently having the lowest name brands, and hired Martha Stewart as its lifestyle costs (reflected in low prices ) and the highest sales in the consultant. None of these changes improved Kmart's fi- industry. Having started in rural America, Wal-Mart was nancial situation. By the time it declared bankruptcy, it now actively growing internationally. Sears, with the had lost money in five of the past 10 years. second-highest annual sales. had a strong position in Out of bankruptcy. Kmart became profitable- pri- hard goods, such as home appliances and tools, Around marily by closing or selling (to Sears and Home Depot) 40%% of all major home appliance sales continued to be around 600 of its retail stores. Management had been un- controlled by Sears. Nevertheless, Sears was struggling able to invigorate sales in its stores, Declared guilty of in with slumping sales as customers turned from Sears sider trading, Martha Stewart went to prison just before mall stores to stand alone. big-bos retailers, such as the 2004 Christmas season. In a surprise move, Edward Lowe's and Home Depot, to buy their hard goods, Tar- Lampert. Kmart's Chairman of the Board and a control- get, third in sales but second in profits, behind Wal- ling shareholder of Kmart, initiated the acquisition of Mart. had distinguished itself as a merchandiser of Sears by Kmart for $1 1 billion in November 2004. The stylish upscale products. Along with Wal-Mart, Target new company was to be called Sears Holdings Corpora- had flourished to such an extent that Dayton-Hudson, its tion. Even though management predicted that the com- parent company, had changed its corporate name to Tar- bined company's costs could be reduced by $500 million get. Kohl's, a relatively new entrant to the industry, op- annually within three years through supplier and admin- erated 420 family-oriented stores in 32 states. J.C. istrative economies, analysts wondered how these two Penney operated more than 1,090 stores in all 50 states struggling firms could ever be successful. Both Kohl's and J.C. Penney emphasized soft goods, By the end of 2007, the stock of Sears Holdings had such as clothing and related items. fallen to 1 1 1 from its peak of 195 earlier in the year. Like many retailers, both Sears and Kmart struggled to attract shoppers in an overcrowded industry and a slumping This case was written by I. David Hunger for Strategic Management and economy. Sears Holdings did, however, have $1.5 bil- Business Policy, 12th edition and for Concepts in Strategic Management lion in cash. a significant advantage during lean times. and Business Policy. 12th edition Copyright O 2008 by J. David and more than its rivals J.C. Penney. Kohl's, and Macy's Hunger. Reprinted by permission. References available upon request. combined. The company's debt load was only 25% ofCHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 267 the total capital on its balance sheet, compared to 46% profit margins and same-store sales. After months of for Penney's and 53% for Macy's. It also had significant cutting the number of employees and reducing other real estate assets on its balance sheet. For example. expenses, industry analysts felt that there was little left to Sears owned outright 518 of its 816 locations and many cut. They were also concerned that management had failed of the Kmart stores were located in strip malls close to to invest in store improvements. Sears Holdings had just large cities. Since fewer shopping malls were now being launched a bid in November 2007 to purchase Restoration built, it was becoming harder to find space for "big-box" Hardware, a home-goods retailer. Even though Restora- retailers in metropolitan areas. tion Hardware was also facing sluggish sales, it was The most recent quarterly results for 2007 of Sears thought that Sears' management could use the acquisition Holdings reported the third straight quarter of deteriorating to create an upscale boutique within its stores