The rise and fall of Kmart

Michael Girdley

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Video Summary

Kmart, once a retail giant with nearly 2,500 stores and $31 billion in annual sales at its peak, has dwindled to just three remaining locations due to decades of mismanagement and poor decisions. The company's origins trace back to S.S. Kresge's five-and-dime stores in 1899, which evolved into the first Kmart in 1962, a direct competitor to Walmart and Target, pioneering the suburban discount department store model. Kmart achieved remarkable growth, reaching over $8.4 billion in sales by 1976 and changing its corporate name to Kmart in 1977, becoming a significant cultural phenomenon in the 1980s. However, its downfall began in the late 1980s when it failed to prioritize supply chain and information technology, unlike Walmart, which focused heavily on logistics and data. Kmart also made costly strategic errors, such as acquiring numerous other businesses like Walden Books and Borders instead of investing in its core operations, leading to financial struggles and its eventual bankruptcy filing in 2002. A particularly interesting fact is that all the businesses Kmart acquired, including Walden Books and Borders, eventually went bankrupt.

Short Highlights

Kmart, at its peak, operated nearly 2,500 stores and generated $31 billion in annual sales.
The first Kmart opened in 1962 in Garden City, Michigan, as a 80,000 sq ft suburban department store, the same year Walmart and Target were also founded.
The "blue light special," an in-store flash sale promotion, was invented at a Kmart in 1966 to gamify the shopping experience.
By the mid-1980s, Kmart was the second-largest retailer in the U.S.
Kmart's downfall was largely attributed to its failure to invest in supply chain technology and data management, falling behind Walmart, which spent significantly less on distribution costs (1.7% vs. Kmart's 3.5%).
In the 1990s, Kmart made a series of acquisitions, including Walden Books, Builder's Square, and Borders, diverting funds from improving its core business.
Kmart filed for Chapter 11 bankruptcy in January 2002, marking the largest bankruptcy in U.S. history at the time with $17 billion in assets and $11 billion in debt.
In 2005, Kmart merged with Sears, a move orchestrated by hedge fund manager Eddie Lampert, which ultimately led to further value destruction.
The last full-sized Kmart closed in October 2024, leaving only a handful of locations in U.S. territories.

Key Details

The Genesis of Kmart and the Dawn of Discount Retailing [00:22]

The story begins with Sebastian Kresge, who opened his first "five and dime" store in 1909, rapidly expanding to 85 stores by 1912 and going public by 1918.
By the late 1950s, retail trends shifted towards larger stores and suburban locations driven by the baby boom.
In response, Kmart's predecessor, S.S. Kresge, pivoted to a massive department store concept, opening the first Kmart in 1962.
This year, 1962, was a pivotal moment for modern discount retailing, with the simultaneous launch of Walmart and Target.
Kmart quickly expanded, opening 17 stores by the end of 1962 and achieving $463 million in revenue, growing to 166 stores and over $1 billion in sales by 1966.

Founder Sebastian Kresge died at age 99 in 1966, having become a very wealthy man and significantly impacting the retail landscape.

Innovation and Peak Performance [01:42]

The "blue light special," a promotional tactic using a flashing blue light to signal time-limited deals, was invented in 1966, aiming to gamify the shopping experience and create excitement.
Kmart experienced significant growth, with sales increasing by 22% annually from 1972 to 1976, reaching over $8.4 billion.
In 1976, Kmart set a record by opening 271 stores and rolling out over 17 million square feet of retail space in a single year.
By 1977, the original five-and-dime model was largely phased out, with the new Kmart superstores accounting for 95% of sales, leading the company to retire the S.S. Kresge name in favor of Kmart.
By 1981, Kmart had opened its 2,000th store, becoming a cultural phenomenon in the 1980s, and by the mid-1980s, it was the second-largest retailer in the United States.

The phrase "Attention Kmart shoppers" became a recognizable cue for finding deals, signifying Kmart's widespread presence and appeal.

The Rise of Walmart and the Neglect of Logistics [05:30]

Kmart's decline began with the rise of Walmart, founded by Sam Walton, who focused intensely on supply chain efficiency, a factor Kmart overlooked.
By the late 1980s, Walmart's distribution costs were significantly lower (1.7% of revenue) compared to Sears (5%) and Kmart (3.5%), a critical difference in the low-margin retail sector.
Sam Walton understood that success in retail depended on logistics and information rather than just store footprint or advertising.
Walmart was an early adopter of mainframe computers and electronic point-of-sale systems (cash registers) by 1975 to track data, while Kmart didn't prioritize inventory management and computerization until 1978.
Walmart's technological lead continued with the rollout of barcode scanning in all stores by 1983 and a private satellite network for data sharing by 1987.
A prime example of Kmart's misstep was its refusal of Procter & Gamble's continuous replenishment program idea in 1988, a program Walmart readily adopted, further cementing its cost advantages.

"Most people think Walmart is winning because we're putting these big stores in small towns, but the reality is we're replacing inventory with information and running better than anybody else can." - Sam Walton

Diversification and Financial Distress [08:02]

Instead of addressing its core business challenges, Kmart leadership decided to diversify, acquiring companies like Walden Books, Builder's Square, Dai (a Japanese chain), The Sports Authority, Office Max, and Borders.
This strategy meant that every dollar spent on these acquisitions was a dollar not invested in improving Kmart itself.
The vast majority of these acquisitions were eventually sold off by 1995, as Kmart found itself in a desperate need to generate cash to avoid bankruptcy, with all acquired businesses eventually going bankrupt themselves.
Despite its peak of 2,500 stores and $37 billion in sales around 1993-1994, the company's internal systems, including inventory and store infrastructure, were outdated.
Kmart found itself "stuck in the middle," unable to compete on price with Walmart or on style with Target, a precarious position in retail.
In the 1990s, Kmart attempted renovations and launched an e-commerce service, bluelight.com, offering free internet in exchange for shopping, but these efforts were insufficient to overcome decades of underlying issues.

The board grew increasingly concerned, leading to the hiring of Ron Conaway in 2000, a turnaround specialist, though his tenure would be marked by controversy and accusations of mismanagement.

Bankruptcy and Merger with Sears [10:59]

In January 2002, Kmart filed for Chapter 11 bankruptcy, listing $17 billion in assets and $11 billion in debt, leading to the closure of 600 stores and layoffs of 34,000 employees.
Ron Conaway faced charges from the SEC for misleading investors about the company's dire financial state.
In May 2003, Kmart emerged from bankruptcy under the ownership of hedge fund manager Eddie Lampert, who acquired the company by buying its debt and converting it to ownership.
Lampert, known as a "financial engineer" rather than an operator, merged Kmart with the struggling Sears in 2005, aiming for scale and brand synergy.
However, this merger is considered one of the most significant destructions of retail value in American business history, as Lampert reportedly ran the company as a 20-year wind-down, prioritizing cash extraction over growth.
Lampert's hands-off management style, communicating via conference calls and rarely visiting stores, contributed to the further decline and dilapidated state of Kmart and Sears stores, with the combined entity last profitable in 2010.

What followed was one of the most amazing destructions of retail value in the history of American business.

The Final Chapter and Lessons Learned [14:27]

The combined Sears and Kmart declared bankruptcy again on October 15, 2018, marking the continued deterioration of the retail operations.
While Walmart achieved $640 billion in revenue and Amazon significantly impacted the retail landscape, Kmart stores continued to close year after year.
The last full-sized Kmart in the continental U.S. closed on October 20, 2024, in Bridgehampton, New York, having survived due to its relative isolation from major competitors.
Today, only a few Kmart locations remain, including one small store in Miami and several in U.S. territories like the U.S. Virgin Islands and Guam.
The dramatic decline from 2,500 stores to just three serves as a powerful testament to the importance of focus in business, contrasting Kmart's diversification with the focused strategies of successful companies like In-N-Out Burger and Walmart.

The core lesson from Kmart's failure is that when executives decide to branch out into other ventures, they should prioritize improving their core business rather than trying to be something they are not.