K mart nudges past Sears in merchandising marathon

While Sears, Roebuck & Co. was busy turning itself into a new power in the US financial industry, K mart Corporation was chipping away at the base of Sears' business: retailing.

Finally, with US consumers cutting their spending and hungry for bargains when they do buy, K mart has toppled Sears from its longtime position as the largest US retailer.

By snatching price-conscious consumers, ''K mart hit Sears where they live,'' says Louis W. Stern, a Northwestern University marketing professor. ''In this inflationary and recessionary period, people are looking for values. K mart has been good at providing that, while Sears' (pricing) image has been muddled over the last decade.''

As a result, retail sales figures for December showed that discounter K mart had rung up sales of $2.74 bilion for the month while Sears trailed with $2.71 billion. It was the first time K mart had outperformed Sears.

''Sears is heavy on hard-good, high-ticket items,'' like appliances, says a Wall Street retail analyst who asked not to be named. ''K mart is offering low-price goods and benefited.''

Sales numbers for one month can be distorted by a number of technical factors. So Sears may regain the top spot, at least temporarily. ''But K mart is fast on its heels,'' says Ellen R. Harris, portfolio manager and vice-president of American General Capital Management Inc in Houston. Last year alone, K mart opened 170 new stores while Sears opened only a handful. K mart plans to add 100 more outlets this year, says K mart vice president Robert Stevenson.

The two chains' battle for the top underscores the difficult conditions retailers face and the various strategies merchants are employing to deal with them.

In the face of high interest rates and rising unemployment, consumers are holding back on spending. In December, for example, retail sales totaled $87.5 billion, up 4.5 percent from 1980. But since inflation was climbing faster than sales, real spending fell.

And retail sales are not expected to climb significantly in 1982. Analysts expect sluggish sales until midyear, when a tax cut and expected recovery in the economy may make consumers more willing to buy.

To compete in this tough environment, K mart is in the midst of a strategic repositioning aimed at winning more style-conscious consumers.

The chain has long had a strong following among price-conscious buyers with household incomes up to about $35,000, and it wants to retain these customers. ''These people are as likely to buy apparel as health and beauty aids'' at K mart, says spokeswoman Susan McKelvey.

But more-affluent buyers have stopped in largely for low prices on utilitarian items like motor oil or tennis balls. So now K mart is making ''an effort to encourage these people . . . to shop in more departments in our store, '' Ms. McKelvey says.

Store remodeling is a key aspect of K mart's bid for upscale buyers. Some 450 stores were remodeled in 1981 and more face lifts are planned for this year. The redecorating is needed. K marts had become ''tacky'' in appearance, says Professor Stern.

''They had let some modernization lapse and in some cases let their housekeeping lapse,'' says Mrs. Harris at American General. ''People don't like shopping in dirty stores.''

In addition to beautifying the premises, K mart is also offering more brand-name merchandise. Last week, for example, K mart announced it had arranged to sell selected items of Jonathan Logan brand women's sportswear.

Since earnings per share slipped from $2.84 in 1979 to $2.07 in 1980, K mart is also making an effort to boost profits by tightening supervision of local stores and improving inventory control. ''Management dropped the ball but they have picked it up and started to run with it,'' Mrs. Harris says.

Sears, meanwhile, is running in a different direction. Long America's largest retailer, it is in the midst of a major diversification into financial services. Last year it purchased both the real estate brokerage firm Coldwell Banker & Co. and Dean Witter Reynolds Inc., the securities brokerage firm.

''Sears' merchandising business is one of the most mature in the country,'' says Stanley H. Iverson, vice-president of Duff & Phelps Inc., a Chicago-based investment research firm. ''Merchandising will be the least growth segment of Sears over the next decade.''

While it may not grow as fast as other Sears businesses, it is still important that the stores do well, since in 1980 they accounted for 74 percent of corporate revenues.

Merchandising profits have slumped at Sears since 1977 as the firm reacted to moves by competitors. In 1980, the company had a profit margin of only 0.7 percent on retail sales, while its Seraco real estate unit sported an 11.3 percent profit margin.

First the company tried to woo upscale customers, then moved to discounting, and next tried aggressive promotions which it later abandoned. ''Sear's image has been rather muddled over the last decade,'' Stern says.

Now, the company has been trying to strike a balance between promotions and reasonable everyday pricing, although price cutting has been stepped up to deal with the current depressed market. And greater corporate control over local stores has been put through. As one Wall Street analyst notes, ''They have made mistakes but they are getting better managed.''

The two retail giants at a glance Sears, Roebuck & Co. K mart Corporation Sales: $25.19 billion Sales: $14.20 billion Net income: 606.0 million Net income: $260.5 million stores: 854 Stores: 2,380 Employees: 390,000 Employees: 208,500 For year ending Jan. 31, 1981 For year ending Jan. 28, 1981 Source: Moody's Investors Servic