Kmart Scrambling As Rivals Join Fray Discount Retailer Is Running Out Of Lucrative New Markets In The United States While Its Competition Keeps Growing

Last spring, Kmart opened one of its big, new gray and red stores here, in one of the last regions of the United States that lacked a national discount retailer.

Juneau, population 29,000, is the kind of place where the opening of a chain store is still a big event. Kmart’s parking lot was nearly full opening day.

Not anymore.

“I drive by the Kmart every day and that huge parking lot is never more than 10 percent full,” said Gregg Erickson, a local economist.

The apparently slow business in Juneau points to one of the biggest problems Kmart’s next chief executive must confront in trying to turn the struggling retailer around. Kmart is running out of lucrative new markets in the United States while its competition keeps growing.

Wal-Mart Stores Inc., with fewer stores but more than twice the sales volume, continues to expand aggressively on Kmart’s welldeveloped turf.

A similar scenario to the one in Juneau unfolded in Moscow, Idaho.

Until Wal-Mart opened a 94,000-square-foot in late 1992, Kmart was the only national discount store in town.

Wal-Mart opened on the outskirts of town, pulling shoppers not only away from Kmart, but away from its downtown location.

Such business shifts are common when Wal-Mart enters a new market.

For communities as a whole, Wal-Mart usually brings enough positive attributes to offset any negative side effects.

Wal-Mart has kept a lot of Latah County shoppers spending locally instead of driving to Spokane, pointed out Eldonna Gossett, executive director of the Moscow Chamber of Commerce.

But, in too many cities, Kmart doesn’t get a big enough share of the market when Wal-Mart comes to town.

Under plans initiated by Joseph Antonini, the chief executive and president who resigned under stockholder pressure Tuesday, Kmart at most will add only a few stores to its total this year.

Wal-Mart, meanwhile, expects to add 200.

And Kmart, which recently closed 110 less profitable stores, may board up more this year as it tries to recover from eight consecutive quarters of lackluster earnings. Retail industry analyst L. Wayne Hood of Prudential Securities in Atlanta predicted Kmart will close 60 to 80 more stores.

“It is possible,” Kmart spokeswoman Teri Kula said at the company’s headquarters in Troy, Mich. “We have not made any final decisions. We are continuing to hold all of the stores to profitability standards.”

Kmart does plan to open 80 to 90 stores this year. But most will replace smaller ones or expand its presence in cities where it already operates. Only about a dozen Kmarts are planned in new markets this year, including Kimball, W.Va., and the Pacific island of Guam.

Of Wal-Mart’s 200 new stores, half will be in new markets. Another strong competitor, Dayton Hudson Corp.’s Target division, plans about 70 new stores, nine in new markets.

“Between the two of them, they’re dropping a lot of new stores in Kmart territories,” said N. Richard Nelson Jr., an analyst with Duff & Phelps in Chicago.

“It’s very difficult to compete when Wal-Mart comes in with a brand new 120,000-square-foot store and Target comes in with 130,000-square-foot store. Kmart’s sitting there with an out-of-date, smaller store that’s been repainted several times.”

Kmart and Wal-Mart are in virtually every state (Wal-Mart is still trying to open a store in Vermont). But even after the latest closures, Kmart has 2,316 outlets. Wal-Mart trails with 2,137.

Arkansas-based Wal-Mart has been focusing its expansion on the West Coast and New England, where it has a smaller presence than Kmart.

Where one goes, the other tends to follow. Consider Alaska, which until recently had been largely ignored by the big discounters because of its remoteness and relatively small population of about 600,000.

In the past two years, Kmart opened two stores in Anchorage and one each in Fairbanks, Kenai and Juneau. Wal-Mart built three stores in the Anchorage area and reportedly was looking for land in Juneau.

The flurry of store openings had many Alaskans asking, “What do they know that we don’t?” Alaska’s economy and population were nearly stagnant, the big industry - oil - was cutting back, and the future looked uncertain.

Wal-Mart spokeswoman Jane Arend said it was just a case of tapping one of the last markets where only regional chains and independents ruled. “The consumer was being underserved,” she said.

Both retailers said they were happy with how their new Alaska stores were performing. But anecdotal evidence suggests they may have overestimated the market.

Erickson said the Juneau store faces tough competition from a nearby Fred Meyer and a busy Costco warehouse store.

The competition in Anchorage, a city of 250,000, is extraordinary.

One of the new Kmarts is across the street from a new Wal-Mart and next door to a new Sam’s Club, WalMart’s warehouse store subsidiary.

“We’re overmerchandised,” said state economist Neil Fried. “I don’t think there’s any doubt about that.”

Analysts say that with few untapped markets left, the battle is increasingly over shares of such oversupplied markets.

“Retailing has become sort of a zero-sum game,” Nelson said. “For every winner there is an offsetting loser. The retail pie isn’t growing very quickly.”

To compete, the analysts say, Kmart has to become more efficient.

“It’s more what they can do to improve the productivity of their existing sales space,” Hood said. “Their competitors have more merchandise on the shelf in a timely basis than Kmart does.”

Nelson agreed. “One of the advantages that the competition has is they generate higher sales per square foot, so they can operate at lower expenses as a percentage of sales.

“They, in turn, pass that onto customers by sharpening prices.”