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Polyester Palace

Kmart Corp., once the No. 2 retailer in the country, lost its edge some 30 years before it entered into bankruptcy in early 2002. Here, for the first time, is the untold story of what contributed to Kmart’s bankruptcy, as told by former executives whose public nondisclosure agreements have recently expired.

Polyester Palace
Kmart’s headquarters in Troy was a study in inefficiency, as offices were spread among 23 modules, each three stories high save for one.
Photograph by Nick Martines, Thomas Helicopter

(page 1 of 4)

One summer day in Troy in the early 1980s, a tall, thin man with a syrupy Southern drawl ambled into Kmart International Headquarters (KIH) at Big Beaver and Coolidge and signed in at the security desk.

He was given a visitor’s badge that allowed him unfettered access to the inner sanctum of the then No. 2 retailer in America.
Few of the thousands of employees paid much attention to the silver-haired gentleman as he wandered through the maze of 23 interconnected modules that made up Kmart’s sprawling headquarters. He spent most of the day chatting with managers and executives, quizzing them about retail practices and procedures, and asking technical questions about everything from current store layouts to merchandising trends to new store designs.

The courtly and curious gentleman was none other than Sam Walton.

At the time, Walton and his fledgling Wal-Mart stores were shrugged off by Kmart’s brass as a rural, regional operation in the South. The upstart was hardly a threat to Kmart’s $18.6 billion in annual revenue (FY 1983). But what Kmart’s brass didn’t know, or chose to ignore, was that Walton was a force. Long before Kmart, Walton had developed his own well-oiled warehousing and distribution system, because none of his suppliers would directly service the small Southern towns where Wal-Mart dominated.

“The senior folks at KIH just smiled and said: ‘Shucks this, and shucks that,’ as Mr. Sam built his knowledge base,” recalls James Carlson, a Kmart systems analyst at the time. “Almost all of Kmart’s executives gave uncensored information to Mr. Sam. Wow!”

That Kmart’s management team, led by Chairman Ben Fauber, allowed Walton to examine their organization up close and personal showed how fatally insulated management had become. The state of denial that permeated Kmart’s executive ranks alarmed some like Carlson, who saw that Wal-Mart — along with up-and-coming Target Corp. — were taking dead aim at them.

The same was true for Dave Carlson (no relation to James), who joined Kmart in the summer of 1985 as vice president of electronic merchandise systems. Dave Carlson was the first outsider to be hired at the executive level since the retailer’s founding in 1899 as a five-and-dime operation called S.S. Kresge Co.

Shortly after settling into his new job, Dave Carlson witnessed the institutional denial firsthand. In a gathering of executives honoring an employee’s 25 years of service, a vice president of marketing told Carlson that he had just completed a market analysis of  Wal-Mart. The result: Wal-Mart had run out of primary sites in the rural South to locate future stores.

However, the truth of the matter was that Sam Walton had set his sights on being the largest retailer in the world. While Walton readily admits he made lots of mistakes in his early days, Wal-Mart’s problems were well-insulated from potential competitors because, at that point, no one had expanded into the South.

“That afternoon, I took a short position on Wal-Mart futures and put down $400. In about two weeks, my money was gone,” says Dave Carlson, chuckling at his mistake. “I may be the only person who was dumb enough to go short on Wal-Mart.”

David Marsico, another Kmart vice president who spent 30 years with the company, echoed Carlson’s experience. “I remember an executive meeting where they said, ‘Wal-Mart is a regional discounter, leave them alone,’” he says. “We had a lot of our managers from the South complaining about them, and about their prices, but we let them grow.”

The late Walton, who once said he spent more time in Kmart stores than Kmart executives did, was able to pick up on two fundamental weaknesses in his competitor’s operations during his visit. “Wal-Mart developed systems for ordering on-time merchandising (in the mid-1970s), and spent a lot of money on that,” Marsico says. “And their transportation systems were just unbelievable. They figured out how to get product to the stores a lot quicker.”

Marsico, once one of Kmart’s four highest-paid executives, resigned in 2005. Today, he is a regional vice president of Ann Arbor-based Borders Inc., which Kmart once owned.

The Carlsons, Marsico, and other former Kmart executives say the iconic discount retailer imploded over time because of its own internal dysfunction. While today Kmart operates under Sears Roebuck & Co., and is headquartered in the Chicago suburb of Hoffman Estates, the seed of the Kresge legacy was bursting at the seams with hubris when the 1980s rolled around. As far back as 1972, Harry Cunningham, the Kmart chairman who had pioneered the discount segment for Kresge in 1962, warned his fellow managers at his retirement party that Sam Walton was a threat. But no one listened.

Tell Us Your Thoughts

Comments are moderated for appropriate language.

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Jul 9, 2010 02:36 pm
 Posted by  sebastian kresge

Please take Dave Carlson's comments with a grain of salt - this was the "leader" who found himself on the front page of the Free Press due to an embarrassing email he sent to workers. While Kmart had numerous problems, Carlson attempts to make it sound like he had all the answers and was ignored. I suggest that Dave is having a little case of the "self absorbtion" mentality. Sorry Dave, but you weren't that important.

Jul 12, 2010 07:36 am
 Posted by  Valuchain Associates

The sad part of this story is that this is the standard operating procedure still for most retailers today. Although I agree that Dave Carlson is a bit self absorbed in the article, this culture of the ostrich (head in the sand mentality) is pervasive. Unfortunately, results of decisions made today in business take 5 to 7 years to fully manifest themselves. By then, the executives who made the decisions have gone.

Jul 13, 2010 10:36 am
 Posted by  Merchant

Article slanted to Carlson who was "the Problem"..Outsiders killed Km!!!!

Jul 13, 2010 11:01 am
 Posted by  Keyser Söze

Many of us were there during the KM slide from the mid 80's until the frat boys flew things into the ground in 2002.

Most retailers are notoriously greedy - looking mostly at possible killings as opposed to actual accountable performance.

Unfortunately for Kmart and their thousands of tenured employees - not all US retailers were so myopic.

Management performance during the final rein of the Frat Boys starting around 1999 was so bad in practice that it almost appeared to be intentional.

Frat Boys were previously employed by Wal-Mart so things should have worked …

Jul 20, 2010 11:42 am
 Posted by  James Tenser - VSN

My compliments to Mr. Sinclair on this article and especially for the candid interviews he obtained. I'm glad to see this retrospective, which should be read as an object lesson for today's retailers. In my opinion this is a fair and accurate account.
In 1985, as a young reporter for The Discount Merchandiser magazine, I helped conduct a series of in-depth interviews in Troy with Mr. Fauber, Mr. Marsico, Dave Carlson, Mr. Antonini and others on the senior Kmart team. The result was a 250-page "special-issue" incorporating several feature-length articles, with Mr. Fauber's portrait gracing the cover.
My specific assignment was a sit-down with Mr. Carlson, to whom I addressed pointed questions about Kmart's store systems and IT. I recall at the time being disappointed by the vagueness of many of his answers. The present article may explain that perception - Mr. Carlson was unable to tell me that he was in fact an advocate of a more progressive stance that would threaten the status quo.
Our editorial team came away convinced that Mr. Antonini - who at that time masterminded Kmart's apparel merchandising - was the most likely successor to Mr. Fauber, based on his charisma and apparent intellect. I was (and remain) privately convinced that we were witness to the prelude to the company's swan song.
Kudos to Mr. Sinclair for helping to close the circle on this very interesting saga. And to the Kmart executives who granted such extraordinary access to me as a young reporter, I offer my thanks and best wishes.

Jul 21, 2010 09:57 pm
 Posted by  Kevin S. Wilson

I'm going to assume some of you are still in retail, or with the company, and that's why you're hiding behind pseudonyms. That it's not because your words lack conviction. I was with K-mart from 1980 through 1997 - from the end of Fauber's tenure to the beginning of Floyd Hall's. I rose through the ranks from cashier to merchandise/co-manager, and interviewed for a Planner (Asst. Buyer) position, which I declined. I had a few contacts at KIH, and had the opportunity to meet most of the people mentioned in this article. Every word of this rings true based on my experiences. After I left to work for another retailer, and eventually transition out of retail, I cited many of the same reasons as Mr. Carlson for the downfall of K-mart. I saw the inbreeding - the almost exclusive promotion from within - from store manager to district manager to regional to buyer. Although nothing in this career path prepared someone to be a buyer, he might be a candy buyer for a few years, then a hosiery buyer, then move to housewares. I always wondered why they didn't bring in someone from Sathers or Hersheys who knew the industry. Sadly, the Peter Principle was at work, and I worked with several individuals who had risen to the level of their own incompetence. This contributed in part to the centralization of decision-making. Store managers could not be trusted. I remember one frustrating incident in particular: our private label version of Oil of Olay sold for $1.97, while the name brand sold for $6.47. The K-mart brand was perceived as an inferior product. I raise the K-mart product to $4.97 in my store, and it began selling. Very well. KIH couldn't understand why, and asked the DM to look into it. Even though I increased unit sales, and increased gross profit margin, I was instructed to return the retail to list. I was given no real reason other than, "that's policy". I heard Joe Antonini refer to Wal-Mart as the "fly-by-night" operation countless times. That was the attitude. They never took Wal-Mart seriously as a threat, until it was much too late.

Jul 21, 2010 10:08 pm
 Posted by  Kevin S. Wilson

Another huge failing on K-mart's part, in my opinion, was schizophrenia. Once Wal-Mart was on their radar, they began trying to compete on price, while still trying to be upscale and compete with Target on image. Target shoppers for the most part wouldn't be caught dead in a Wal-Mart 10 or 15 years ago (before they began focusing on cleanliness, lighting, and wider aisles), and Wal-Mart customers rarely saw the inside of a Target store. By trying to be all things to all customers, K-mart ended up being nothing to anyone.

Jul 28, 2010 06:47 pm
 Posted by  daringdave

I was there when Kmart began. Each Manager was to learn to be a merchant through training in the Kresge and eventual Kmart stores. We were transferred thoughout the company in order to prepare for the many regional differences in merchandising. What we experienced during the erea that this article deals with, was the discarding of that training in favor of a top down culture where buyers, whose interest lay in ever expanding assortments and advertising "deals" with their vendors, were given more and more control over the merchandising of the stores to the detrement of the regional differences in merchandising. This change in culture led to many very bad merchandising decisions that were not based on Mr. Carlson's analysis or anything other than the ego of the individual in headquarters. Mr. Antonnini epitomized this lack of regard for store level experience and believed in forecasting sales far into the future to justify the erroneous and extrordinay bad buying being done at headquarters. What part Mr Carlson and Mr. Marsico had in this is hard to say. Distribution anmd responsiveness were Walmart's advantage which Kmart tried to match by building massive distribution warehouses rather than more warehouses. Walmart warehouses were store partners, Kmart warehouses were supposed to be profit centers and marked up all merchandise they handled and were often at odds with store interests.Apparel was distibuted seperately and as time passed they took over most if not all soft lines, often to detriment of sales while improving gross (not net) margins. Many of the mistakes made by Kmart are currently being repeated by Walmart, and maybe this is the time to "short" Walmart stock.

Aug 2, 2010 01:59 pm
 Posted by  bubba99

Best view of events can often be from those who were there and close enough to see things w/o being an author. Distance from ground zero distorts the view and can also be blinded due to internally held beliefs.

The Frat Boys were the final downfall - either due to incompetence or other.

In-breeding was certainly evident prior but this is not rare to such companies regretfully.

Judgment on policies and directions were almost always self serving as they made no obviously connected waves - nor was real traceability / accountability ever allowed.

Mr. Carlson was correct.

Mr. Antonini was brilliant but had us way to diversified. Great ideas but often too far from core competencies.

Mr. Hall was never engaged really.

Mr. Marsico was short on vision.

Purchasing was widely about margins and greed (no feedback / accountability).

Central thinking post 80's was fatally flawed w/o the DIRECT input of store managers.

There were highpoints of great critical thinking but this was often in support functions and could not have a direct effect on the bridge.

Personally I wish I was still there and the Frat Boys had never become a part of the scene.

Maybe we could have seen the way and turned things around. Then again I suppose I could be wrong.

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