I.OverviewSebastian S. Kresge opened the first Kmart store on March 1, 1962, in Detroit, Michigan. A total of eighteen Kmart stores opened that year, ranking the largest discount retail store in US at that time. The following are some important historical events of Kmart. In 1977, Kmart was formally renamed as Kmart Corporation. In 1984, Kmart merged four companies of various industries, heading for Conglomeration operating mode. Meanwhile, it started its first Super Kmart Center, selling various products. In 1994, because of its weak management and lack of competitiveness, it was criticized as a retail store of low quality. In 1997, it sold some of divisions and focused on discount retail product line. In 1999, it founded a website which was named, Blue Light. Com, beginning to sell merchandise via the Internet. In May 2000, Conaway was appointed as new CEO. In Dec. 2001, it was ranked as the third largest retail chain store after Wal-Mart and Target. In Jan. 2001, it couldnt afford to repay account payable to Fleming (the second largest wholesaler in US), so the supply was cut out. In Jan. 2002, Kmart finally filed for bankruptcy.

I.

Strategic Risk Analysis

1. Market, Customer and Product 1.1. General Situation 1.1.1. Macro economics United States macro economics indicators from 1995 to 2001:Year 1995 1996 1997 1998 1999 2000 2001Source: www.census.g ov

Disposable Income* 20,287 21,091 21,940 23,161 23,968 25,472 26,235

Customer Price Index** 152.4 156.9 160.5 163.0 166.6 172.2 177.1

Gross Domestic Product* 27,749 28,982 30,424 31,674 33,181 34,759 35,491

Interest Rate (% ) 7.000 6.875 6.875 6.875 5.750 5.875 6.375

Retail Sales*** 1,642 1,734 1,819 1,897 2,043 2,191 2,251

* Real value per capita ** 1982-1984 =100 *** In billion dollar, excluding motor vehicle and parts dealers

Figure 1. Macro Economic Indicators Table [1]

Disposable Income per capita showed a tendency of increase with average growth 4.6 % every year (1995-2000). Meanwhile Customer Price Index (CPI) that shows inflation could only increase at 2.4 % every year (1995-2000). Even when disposable income growth dropped to 2.9 % in 2001, it was still above CPI growth (2.8%). This condition was supported by stable GDP which increased at range 4.1 % 4.9 % every year during 1995 to 2000 (but in 2001 plunged to 2.1 %). Government, apparently, tried to stimulate economic by keeping the interest rate at low level. As a result, from 1995 to 2001, sales retail had a robust increase with average growth 5.4 % every year. Thus, generally there was no serious threat from macro economics condition to business entity, although in 2001 it experienced slow down (retail sales only grew 2.7 % from previous year) but still had positive trend.1.1.2.US demographic trends (1990-2000)

A growing number nontraditional household Traditional household consists of parents (father and mother) and children, and nontraditional household is a family which does not have characteristics like the traditional family. For example: single parent, unmarried partner The aging population The population was getting older, which was shown by the increased median age (from 32.8 years in 1990 to 34.8 years in 1996). One of critical issues from this situation was Baby Boomers (as majority of population) changed their attitudes as aging. They became less concerned with brand, less emotional in buying, and more prices sensitive. More working women There were more women going to work. In 1999, labor force participation rate for women reached 60 % compares with 43.3 % in 1970 (for women age 16 or older). Generation X This generation was born from 1965 to 1985, and by 2000 there were 44 millions. Considering they were in productive age and making first time and big purchase, generation X had significant role. They have characteristics like: getting married later than their parents, having broader definition of family, buying products is not just to connote status or make a statement. Higher education attainment In 2000, four out of five adults had completed senior high school, and college completion rates increased to one adult of four attained bachelor level. In the same way the population with less than high school diploma decreased 3.6 million from 1990 to 2000. Total 80.4 % of population had high school diploma or higher by 2000, and more than one-quarter of them had bachelor degree or higher. Growth of ethnic markets Hispanics that were the fastest growing ethnic of USs population changed demographic condition. In 1997 Hispanics were estimated about 28.4[2]

millions and became 31.7 million in 1999 (11.7 % of the total population). Even as July 2001, the Hispanic population surpassed the African American population for the first time. Although their purchasing powers were still lower than white customers, but increased seven times faster than them in few recent years. Geographic location People began to move out from cities to suburban or tertiary (the less important areas than suburban). Usually, middle and high income population are as the fore runner of moving.1.1.1.US retail industry trends

Greater time constraints People became valuing time more, and shopping was considered as more a chore rather than a fun. They would prefer general merchandise stores which provide more various products and could eliminate their trips frequency. Expanded usage of technology As technology development was getting more sophisticated by the end of 20th century, retailers used it to foster their growth. Applying technology in their systems will enhance sales, cut costs, and obtain more information about their shoppers. The increase of store less shopping This means that people can pick and buy a product without coming physically. This kind of shopping is as a substitute for traditional retail store. For example: internet sales, catalogs, home-shopping networks. Convenience requirement Customers demand more convenience while shopping. It can be store appearance (cleanliness, organized stacks) or sales-clerk service. Demand for specialty items Retailer-supplier alliances Retailer and supplier have more intense and close relationship. Micro-merchandising The central headquarter grants local store more power to determine which products should be stored and at what level. This is based on idea that every area has different demand depends on local need (store-on-store basis). Micro-marketing Retailers establish one-to-one relationship with customers as a way to communicate with and create loyalty among customers. Declining labor supply1.1. Kmarts strategy

1. Customer Kmart typical customer is a blue-collar high school graduate in the $ 15,000 to $ 25,000 income (low income customer). From 1990s to 2000s, Kmart target customer changed to middle income families (from modest income customer in[3]

1.

2.

3.

4.

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1960s and 1970s). Then it also tried to specify its target market to young mother with children. Families who earned between $ 15,000 and $ 60,000 a year (CEO Bernard Fauber). Kmart will become the store of choice for low and middle income families with children by satisfying (CEO Floyd Hall, 1995-2000). Our goal is to rebuild Kmart brad as the authority for moms, homes and kids (CEO Chuck Conaway, 2000 2002). Unfortunately, some polls showed contradictory opinions: Gallup poll: shoppers that prefer Kmart to Wal-Mart or Target are less educated urban and rural dwellers and with less than $ 20,000 in annual income. New York Times: Kmart customer had the lowest median income ($ 35,000 versus $ 37,000 and $ 45,000 for Wal-Mart and Target, respectively), the fewest college graduates (30 % versus 31 % for Wal-Mart and 40 % for Target), the lowest percentage households with children under age 18 (38 % versus 39 % for Wal-Mart and 44 % for Target). Ethnic Market Because of Kmarts urban location which is convenient for many Hispanics (most of them live and work near major cities), 40 % of Kmarts sales were derived from ethnic minority shoppers. But only after 2002, Kmart seriously paid much attention to this untapped market. Location Kmart location strategy was city/urban focused and primarily operated in leased facilities with 25-year contract and 50-year renewal option. Only 133 of stores were owned. Kmart also had no relocation policy due to the cost and inconvenience. It chose to stay at existing locations, while for other retailers picking up and moving is a regular practice in order to stay close with their shoppers. Time Constraint Kmart opened Super Kmart (1991) and Big Kmart (1997), and gradually reduced its traditional store to be replaced with Big Kmart. Both were hoped that could provide more various products. Super Kmart has 140,000 to 190,000 square feet width, and Big Kmart has smaller width (84,000 to 120,000 square feet), but was better designed, better lighted, and less cluttered stores. Technology Started in the late 1970s, Kmart tried to catch up with other retailers technology by investing more and more in new technology adoption to its supply chain system ($3 billion in 1980, $ 1 in 1987, $ 2.5 million in 1992, $ 1 billion in 2000). These investments was paid off, when Kmarts Seasonal Merchandise Management System could generate an incremental $ 28,9 million in profit in 1992 and by 1999, its database could track 2 billion transactions a year from more than 85 million households. Store less shopping

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In 1998, Kmart launched www.kmart.com as site for internet sales and one year later replaced with www.bluelight.com which was joint venture with Soft Bank, Yahoo and Martha Stewart. Although this website sold limited products, in first six months attracted more than 3 million subscribers and sales grew 1,060 % in 2000. Other factor that pushed sales was free internet service for customers who made a minimum amount of purchases via web site. 6. Shopping convenience Since 1981 Kmart (CEO Bernard Fauber) had planned and tried to remodel and upgrade its stores. Even by 1986, restoration budget increased to $ 2.2 billion, but the program never been finished until Chuck Conaway era, last CEO before Kmart went bankrupt. 1.1. Risk 1. Dissonant market (between managements target, real implementations, and population trends). Kmart did not focused on particular customers (neighborhoods, income levels, educational, backgrounds, gender, and etc) and grabbed all people who lived around its stores as its customers. For example: Circulated millions of newspaper advertising circulars each week to household nationwide without any constraint. Launched Pantry area which sold lower margin food and drug items located at front of the store. Meanwhile at back of the store, it had brand area which sold branded apparel and toy. Kmart was looked like not consistent with defined target market, or perhaps because of weak execution. Similarly, Kmart had targeted women as customers, had to face the fact that women got declining time spent on shopping caused by work, family, or community responsible. The less time they spend in store, the less they would buy. 1. Untapped Market. Opportunity cost was caused by lack of attention to the ethnic shoppers which were Kmarts significant and potential market. 2. Lousy location. Kmarts stores located in the area which had traffic in the past, and when (middle and high income) people began to move out from cities, Kmart stores located in lower-income neighborhoods and made much more difficult to grab middle income customer as Kmart stated. City area also brings consequences higher rent and smaller parking lots. Conversely, Wal-Mart and Target preferred suburb areas which have opposite natures.3. Outdated technology.

Although Kmart had invested billions in technology, but there was a possibility that it did not keep pace with technology development. Thus, to evaluate needs a benchmark and Wal-Mart which has many similarities would be an ideal comparison.Figure 2. Kmart and Wal-Mart Technology Development [5]

Year 1960s

Kmart

Wal-Mart Decided to invest in process automation Leased an IBM 370/135 computer system to maintain inventory control, distribution and F/S statement Equipped each store with back end computer, electronic cash registers and UPC scanners

Early 1970s

End 1970s

Equipped its stores with computer

Built a computer network and deployed system for ordering merchandise Began to use bar codes for scanning POS data, and adopted Texlon technology to provide a description of the merchandise, quantity, shelf label and other data when reordering Completed to set own satellite communications system which enables headquaters to communicate directly with each store with out paying long-distance phone charges Deployed Retailink (EDI) that made suppliers could access sales data , inventory level, projections and propose new sales strategies Used data warehouse prototype to store historical sales data

Early 1980s

Started to adopt scanners, credit card processor linked by satellite and the ability to monitor inventory and sales data in nearly 500 stores

1987

1 $ billion investment in technology adoption

1990 1992 1996 Early 2000s Used email to send promotional materials and renewed inventory system, scanners and faster cash registers Owned EDI network and win Smithsonian award

Made Retail Link available via the Internet and used it as an application form Used the internet for data exchange with thousands of its global suppliers

4. Internet sales as a new business model.

Internet sales which do not required customer to come physically have different characteristic from retailers store. And Kmart was a new player in this model. 5. Internet sales could not reach target market. From 3 million subscribers in the first six months www.bluelight.com launching, 40 % of them were new to the internet, and the fact that 57 % million of Kmarts customers did not yet have Internet access. 6. Less convenience due to store appearance and lack of employee. Most of Kmarts stores were built during the expansion push (1960s and 1970s), and just 10% was built during 1980s. This made Kmarts stores look like older than other retailers stores. Even some negative images about Kmart stores were in shoppers mind, like: dirty floor, disheveled displays, and crowded aisles. Another aspect that influences customers convenience is sales clerk service. The number of sales clerk and the mean of sales clerk interact determine this factor. As a comparison, Kmart had the lower employees with the same or more stores[6]

relative to Wal-Mart and Target (by 1999, Kmart had 275,000 employees and 2,171 stores, meanwhile Wal-Mart employed 910,000 employees in 2,389 stores and Target employed 281,000 in 912 stores). 1. Competitors 2.1. Competition and Competitors Business which sells standardized product, such as general merchandise, faces harder competition due to customers have low switching cost (they can move from one supplier to others in cheap or free cost). Basically, Kmart just had two main competitors, Wal-Mart and Target. They had stable growth and squeezed Kmarts market from above and below. Wal-Mart with lower price strategy (and technology aided) which had had the mid-to-down target market across the family life stages grabbed Kmarts original market for general merchandise product, and from other side, Target with brand discount strategy which had had the mid-to-upscale target market grabbed Kmarts branded product market. Wal-Mart, mainly, has a phenomenal growth, from a single small discount store to the largest retailer in the US in three decades. In 1994, Wal-Mart sales exceeded the combined sales volume of Kmart and Sears, and by 1996, it exceeded the combined sales volume of Sears, Kmart, and Target. On the other hand, new entrants would be difficult to compete in the market. Since retail market was dominated by few players that the top ten stores accounted for 95 % of sales of discount store and three-quarter of them were captured by Wal-Mart, Target and Kmart. 2.2. Kmarts Strategy Some strategies (for example: price cuts on 10,000 products and exclusive agreement with many branded product vendors) had launched to compete with Wal-Mart and Target, but apparently they were not enough (see figure.1.1). Kmart looked like inferior whether in price, image, strategy implementation, or even corporate culture.

Branded Product

General Merchandise

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Figure 3 Kmarts Branded and General Products Position

2.3. Risk Hard challenge (competition) from Wal-Mart and Target1. Suppliers (and Resources)

Kmarts suppliers could be divided based on its product: Special (branded) good For example: Martha Stewart, Jaclyn Smith, Kathy Irelands, Sesame Street, Route 66, Bench Top and Disney General good (merchandise) For example: Fleming Co. (food), Scotts (gardening products) Basically, Kmart as the largest retailer in early 1990s and the third largest retailer in late 1990s had good bargaining power over its suppliers. But as Kmarts tendency in developing more exclusive brands, Kmarts position was less strong over special good supplier, especially when it had had established brand, than general good supplier. Since outsourcing became alternative business model in procurement, Kmart also outsourced some its processes. Such as, Kmarts food department was subcontracted to Fleming. Co, or its information system and distribution fleet were subcontracted to third party (i2 Technologies and Advanced Logistics). In short term, outsourcing will lower cost, but as a consequence Kmart would be likely of losing of control of its own process. 1. Internal Processes In Floyd Hall era (1995-2000), Kmart had a mission: Kmart will become the discount store of choice for middle-income families with children by satisfying their routine and seasonal shopping needs as well as or better than the competition. Afterward, in 2001, Kmart, although not clearly stated as mission, restated its mission to: Transforming Kmart into the authority of moms, home, and kids. The focuses (strategies) to achieve these missions also had changed from competitive pricing, , great promotions with never beaten advertised prices, better store formats to fixing supply chain, effective marketing, reducing SG & A expense. Some strategies during 1990 to 2000 showed Kmart experienced transformations from core business as discount retailing, like as: Launching brand name products such as Martha Stewart, JOE BOXER, Sesame Street as if moving toward upscale consumer. Expanding to food sales (as Wal-Mart and Target did) whether in Pantry format (lowpriced) or other formats. Grabbing noncore income as charging manufactures which advertised on Kmarts circular. Acquiring specialty retailers and warehouses, such as: Office Max (office supplies, Marko Inc, Borders (books), Builder Square (improvement product)s[8]

Acquiring automotive and sporting goods specialty stores whereas claimed to stay focus to mom and kid segment. Re-launching Blue Light which lowered price on about 45 % of more than 30,000 products. Even though changes are needed for every company in order to grow and sustain, but it also brings a possibility of loss of focus. 1. External Agents Some external agents which have influence to Kmart, for example: Government, whose policies affect Kmart, such as tax, antitrust, national holiday, labor. Retailer organization which can be industry representative in negotiating with government, such as: National Retailer Federation. Financial analyst which they could work for banks, insurance companies, mutual funds, and securities firms. Labor union which has significant role in amid of declining labor supply and the need of sufficient number of employees, such as: Retail Wholesale and Department Store Union. 1. Strategic Partners Strategic partners here were partners whom their existences were vital to Kmart and so otherwise. For example: single Kmarts food distributor, Fleming Company Inc; or Martha Stewart which helps Kmart get its mom market and Kmart provides distribution channel for Martha Stewart.

II.

Business Processes and Internal Risk Analysis

1. Retail Industry Business Process

The primary process of retail industry incorporates inbound logistic, operation and out bond logistic, or its supply chain. Because these processes continuously recur, they are also called retail process life cycle (see figure 3.1).

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Source: www.wipro.com

Figure 4. General Retail Process Cycle

The first phase is planning, and it determines location and capacity, sort of product, how much and when to order, how much to store (safety stock), and mode of transport. Then, order is sent to supplier. Supplier responses it by delivering goods to warehouses to be temporarily stored. Next, warehouses distribute these goods to each store to be sold to customers. At the same time, the information system records the inventory data from the beginning to the end which become feedbacks for planning phase at the end of the year (such as, which products are most popular, which merchandises should be promoted and so on). Again, the processes start, and replenish inventory. In more sophisticated process, retailer exploits the advance of technology which could reduce lead time, minimize the amount product stored, sale as what and when downstream needs, and finally reduce cost. There is a direct and accurate linkage between retailers customers and retailers suppliers. Every time product passes through point-of-sale (e.g. cash register), the sales are record and sent to network database which supplier can access to determine product replenishment. Meanwhile, warehouse functions more in preventing bullwhip effect (demand variability) and anticipating seasonal product.2. Kmarts Strategies Information system.

As the stores number growing and to support sales strategies, Kmart had tried to improve its upstream (supplier) and downstream (customer) information system many times. For example: In 1997, Kmart bought software from EXE Technologies to build its warehouse management system, but it was scrapped in 2001 (as part of software and hardware write-offs), and adopted new software from i2 Technologies.[10]

In 1998, Collaborative Planning, Forecasting, and Replenishment (CPFR)

program that enabled collaboration on sales forecasts, promotional planning and replenishment with suppliers gave Kmart 14 % sales increase and stock rates raise from 86 % to 94 % (from cooperation with supplier KimberlyClark). This program expanded to other suppliers (P&G, Colgate-Palmolive, etc) but suddenly was stopped in early 2000 due to subscription fees required by its provider. Wal-Mart had begun the similar program in 1995 with supplier Warner-Lambert and boosted stock rates to 98 % from 87 % and increased sales by $8.5 million. In 2001, Dan Hammond, divisional vice president, developed a project that enabled to capture sales information from cash register every time soft-line product sold, automatically update the on-hand inventory, use a high-speed connection to report to a central computer that suppliers could access. This project would involve 29 vendors. But in 2000, Hammonds project was downgraded and replaced with new outsourced hardware and software. At the same time, Wal-Mart had successfully held a real-time data at more than 2.500 stores for more than 10.000 suppliers. Compared with Wal-Mart, Kmarts information system is obviously outdated. As a result Wal-Marts supply chain outperformed Kmarts and other retailers supply chains. This reason also can explain why Wal-Marts warehouses could replenish almost 85 % of their inventory, meanwhile other retailers could only replenish about 50 to 65%; or Wal-Mart could make daily deliveries to its stores, Target made deliveries every three to four days, while Kmart could only deliver every five days to its stores. Product allocation was determined centrally. Kmart did not practice fully micro-merchandising even when Conaway decided to reduce percentage of merchandise being allocated by central planners from 60 to 40 % in 2001. Warehouses had responsible to receive, store and redeliver goods to its chain. Before merchandise was distributed to stores, warehouses received and stored it. That was why warehouse needed large stockrooms. Kmart shunned further supplier involvement. Otherwise, Wal-Mart shifted this responsible to vendors. Suppliers with the help of inventory system took responsibility for ensuring that product was available in stores when it was needed. As a result, Wal-Marts warehouses had little need for large stockrooms and Wal-Marts stores had smaller lead time in ordering a product. Distribution Center Kmarts stores, mainly Super Kmart, were not located around its distribution centers. They tended to be scattered, made distribution center difficult to distribute efficiently. While Wal-Mart seemed developing grocery distribution system by locating stores (Supercenter) around its distribution centers. Outsourcing its entire trucking operation (distribution). Although outsourcing distribution system was a common practice in that period (like Kmart and Target) as company wanted to be cost effective, Wal-Mart had its own fleet (by 1992, there were more than 2,000 tractors and 11,000 trailers) Having two information systems.

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Until mid 1990s, Kmarts apparel sales were handled by Kmart subsidiary, and it was not tied into the hard-line system which managed general merchandise. These two systems could not share information each other.1. Risks Unreliable information (timeliness, relevance and completeness)

Kmarts information system had not been able to provide accurate and real time information that made the company did not know which products were hot sellers or which stores needed and when. It could trigger other consequences (risks), like as, out of stock or overstock and theft (theft and bad information system could raise shrinkage rates, Kmarts shrinkage rate was 3 %, when industry average shrinkage rate was below 1.5 %, and Wal-Marts was 0.0075 to 0.0100 %). This condition also could explain when in 2000, Conaway got rid of nearly 15,000 truck trailers full of inventory that had been sitting behind stores because there was no space inside. Longer cycle time and obsolescence Central allocation and warehouse-through-distribution makes time needed from ordering to receiving a product longer and having possibility of obsolescence, besides the possibility that product determined by central is not what local needs. That Kmart distribution center was not around its stores deteriorates this risk. Resource wastage Two separated systems would create double similar processes and works. It would produce an inefficiency, not to mention a work to combine two reports (from different systems). So is system change. Kmart changed information system many time, it made resources that had been used in previous project futile. Another condition that could create resource wastage risk is warehouse-through-distribution, otherwise supplierdirect-distribution can increase efficiency, but it requires supplier-retailer intense collaboration. Loss of power to improvement By outsourcing, Kmart losses its control on distribution system and when delivery mistiming happens, Kmart is more difficult to fix delivery schedule or inventory management system as a whole.

I.Risks Assessment

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Risk Strategic Risks Dissonant Market Untapped Market Lousy Location Outdated Technology Internet Sales Less Customer Convenience Hard Competition Loss of Control Loss of Focus Internal Risks Unreliable Information Longer Cycle Time and Obsolence Resource Wastage

Low

Medium

High

Figure 5. Risk Assessment Table

Assessment, evaluated qualitatively, is based on the impact of the risk to the performance of Kmart and the possibility of that risk happens. And as a result, six risks are categorized high, five risks are medium, and one risk is valued as low. Among those risks, the most critical one is loss of focus, because this reflects the management strategic step. It determines where company wants to go or to be (vision), longterm targets, short-terms targets, and strategies to achieve them. So, it is like an underlying strategy for other strategies and risk from this strategy would trigger other risks. Kmart seemed did not know that it should be a discount store, specialty store or specialty discount store. Those were why Kmarts information technology was often changed (billions investment was spent in vain), got no progress and remained behind Wal-Marts. Then, it would threat the reliability of information produced. Finally, Kmarts supply chain would be difficult being effective and efficient without eligible information. What would happen next be longer cycle time, obsolete product, out-of-stock, and over-stock. Other effects caused by losing of focus were not able defining its customer (moreover paralyzing customer target with demographic or retail industry trend) and not able finishing its store restoration program, and providing convenient shopping experience to its customers. Some risks had been mitigated by some conditions or strategies. Therefore they are categorized as medium or low. Lousy location, for example, the impact would be weakened by the increase of Hispanics which Kmarts location convenient for them (without realizing demographic trend and Kmart did not exploit yet), even Wal-Mart tried to move to urban area. Cooperation with Yahoo also would reduce Kmarts less experience in internet sales, and it could hit branded product customer target as Kmart moving to upscale segment. In competition, basically Kmart only got Wal-Mart and Target as competitor, and as ex-market leader Kmart still had many resources and potentials to compete. Instead, after Kmart got[13]

declining, Kmart was still the third largest retailer. It would make Kmart had enough bargaining power with suppliers and required better product standard from them.

II.

Financial Analysis*

Analyses use three types of ratio, there are: Solvency (to measure Kmarts ability to fulfill its both short and long term liabilities). Operating (to measure how efficient Kmart operates and utilizes its asset), and Profitability (to measure how effective Kmart operates and utilizes its asset). And to evaluate those ratios, Wal-Marts financial performances are compared as benchmark.

*We analyze Kmart financial performances from 1997 to 2000 to understand trends what Kmart wasundergoing. We do not use data 2001, because it was ended in January 2002 (Kmarts fiscal year is ended in January) the same period when Kmart announced its bankruptcy (Kmart filled under chapter 11 in January 2002).

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RATIO Solvency Current ratio Cash ratio Debt to asset ratio Operating cash flow ratio Interest coverage* Interest coverage** Operating Gross Profit/Sales (%) SG&A/Sales (%) Interest Expenses/Sales (%) Inventory Turnover Avg Acc Pay Period*** Profitability Profit Before Taxes/Sales (%) x Sales/Average Assets x Avg Assets/ Avg Equity x (1- Average Tax Rate) =Return on Equity (%) * Earning Basis** Cash flow basis *** Days

KMART 2000 2.1 0.11 0.58 0.27 -0.16 4.31 1999 2.3 0.08 0.58 0.25 4.64 5.97 1998 2.1 0.19 0.58 0.34 3.72 6.18 1997 2.9 0.15 0.60 0.26 2.15 3.78 2000 0.9 0.07 0.63 0.32 9.89 12.17

WALMART 1999 1.3 0.11 0.58 0.45 10.19 13.95 1998 1.3 0.1 0.59 0.49 8.29 12.78 1997 1.6 0.08 0.57 0.54 6.77 10.14

19.90% 20.03% 0.78% 4.39 27.64

21.75% 18.13% 0.78% 4.12 27.6

21.84% 18.55% 0.87% 4.08 27.53

21.85% 19.07% 1.13%

21.42% 16.39% 0.62% 7.03 32.88

21.00% 16.25% 0.58% 6.48 32.54

20.79% 16.41% 0.66% 5.77 32.72

20.36% 16.16% 0.81%

-0.90% 2.49 2.40 59.60% -3.19%

2.84% 2.45 2.38 67.00% 11.13%

2.37% 2.43 2.43 71.20% 9.96%

5.50% 2.74 2.56 63.25% 24.47%

5.32% 2.89 2.41 62.59% 23.14%

4.85% 2.78 2.38 63.03% 20.22%

Figure 6. Kmarts and Wal-Marts Financial Performances Table

From figure, there are some points: Kmart outperforming Wal-Mart in solvency is spurious. In short term, Kmarts and Wal-Mart looked like similar liquid (current and cash ratio), even Kmart was a little bit better than Wal-Mart. In the same way, debt to asset ratio shows that they had no difference ability to cover their obligations. But if it is scrutinized further, Wal-Mart had stable average account payable periods longer than Kmart. It means that Wal-Mart had a strong relationship or more powerful bargaining power with or to supplier that it can defer the payment of its liabilities longer. That was the cause that made Wal-Mart current liabilities larger, and then its solvency ratios seemed worse than Kmart. Interest coverage ratios make clear Kmarts real condition. Kmart had a tendency of declining, otherwise Wal-Mart tended to increase. Negative earnings had enervated Kmarts ability to satisfy its interest in future. Kmarts profitability deteriorated.

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It is quite clear that Kmarts ROE dropped sharply, even being negative in 2000. It is an alert that there were problems. Compared with Wal-Mart, it showed opposite result, a robust stable increase. Operating ratios answer why Kmart was getting less profitable. At least, from operating ratios, there are two reasons why Kmarts profit kept declining. One is the increase of cost of sales (see figure 7) which causes percentage of gross profit to sales plunged down in 2000 and second is the sales, general and administrative expense was climbing up.Kmart

Wal-Mart

Figure 7. Kmarts and Wal-Marts Gross Profit-COGS Composition

Based on Kmart 2000 annual report, it is explained that those increase was due to some strategic action taken, such as: Store closings that required Kmart to pay lease obligation and maintenance expense $ 191 million and elicited $ 75 million of inventory write off. Inventory reduction amounted $ 290 (Kmart had a high shrink rate). Information technology write off amounted $ 60 million (in 2000, Conaway had software and hardware write off program). Besides that, Kmart also suffered $ 64 million loss from investment in bluelight.com subsidiary. Those reasons are quite enough to show that Kmart committed poor strategic strategy and inefficient supply chain caused by outdated technology.

I.ConclusionRisk analysis, whether strategic risk analysis, internal risk analysis, or financial analysis, obviously find that Kmarts performance would be declining and other retailers (Wal-Mart, especially) would outperform Kmart. But it is still quite unpredicted that Kmart would experience illiquidity problem and go bankrupt, although perhaps negative earnings is a warning that Kmart could not provide enough cash in the future.

References Bradley, Robin.H. 2001. Automated Replenishment Rings Up Sales. Supply Chain eBusiness June. Chopra, Sunil and Meindl, Peter. 2004. Supply Chain Management 2 ed. Upper Saddle River: Pearson Prentice Hall.[16]

Graff, Thomas.O. 1998. The Locations of Wal-Mart and Kmart Supercenters: Contrasting Corporate Strategies. The Professional Geographer 50 (46-57). Greg, Jacobson. 2002. A Study in Contrast (Wal-Mart Stores Inc. and Kmart Corp). Racher Press, Inc. _______.2002. Kmart: SCM Gone Wrong. Baseline Magazine January. _______.1998. Kmart Annual Report. _______.1999. Kmart Annual Report. _______.2000. Kmart Annual Report. _______.2001. How Kmart Fell Behind. Baseline Magazine December. Markham, Jerry.W. 2006. A Financial History of Modern U.S Corporate Scandals: From Enron to Reform. M.E. Sharpe 234-235. Shields, Martin and Kures, Matt. 2007. Black Out of The Blue Light: An Analysis of Kmart Store Closing Decision. Journal of Retailing and Consumer Services. Turner, Marcia.L. 2003. Kmarts Ten Deadly Sins: How Incompetence Tainted An American Icon. John Wiley and Sons, Inc. Wilson, Lisa H. January 2001. Retail Industry Study. Business and Research Services.

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