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.
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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.