Kmart's blue light flickers

First big discounter files for bankruptcy with hopes of recovering. But can it regain its market niche?

Stephen Allsopp, bearing a circular of coupons, is wending his way through the tool aisles of a Target store in Boston. He used to shop at Kmart. But now he's switched.

"Target has more variety, and the stuff is a lot better," he says. "And it's better lit, and the people are more knowledgeable."

Mr. Allsopp's change in allegiance illustrates one of the truisms of modern retailing: The consumer is fickle, and stores have to adapt quickly to changing trends. Unfortunately for Kmart, it didn't adapt fast enough.

The 105-year-old retailer filed for bankruptcy yesterday. Its downfall leaves the future of a discount shopping icon in limbo - and represents a parable of how retailing is changing in America.

Although the Troy, Mich., company expects to keep open most of its 2,100 stores, analysts aren't certain the nation's No. 2 discount chain will be holding many blue light specials anymore.

"I don't have a positive feeling about them," says Jack Gifford, a marketing professor at Miami University in Oxford, Ohio.

Whatever the ultimate fate of Kmart, the bankruptcy shows how much American shopping habits have shifted. At one time, buyers went to downtown department stores that offered personal service and full retail prices. Then, malls sprang up to service suburbanites.

Finally, discounters opened up big stores with longer hours and cheaper prices. Along came Kmart, with its trademark blue-light specials that alerted shoppers to a specific item on sale.

But the company was competing against an increasing number of competitors. Discounting, in fact, is one of the fastest-growing segments of the retail universe.

"Now, it's fashionable to get the best price on an item," says Al Bell, vice chairman of Big Lots, another discount chain.

The growing competition has led to different levels of discounting - and different approaches to retailing, down to the size of the aisles. Big Lots competes against Kmart in many shopping centers, and Mr. Bell says they often win the war. His explanation: Kmart stores, at 120,000 square feet, are too large for consumers to navigate compared to his 40,000-square-foot facilities.

"Each retailer must have a niche they fill or the customer will go elsewhere," says Bell from Columbus, Ohio.

Discounters, too, have to be nimble in using the latest technology to track their huge inventories. Last March, Mr. Gifford spent time at Kmart and discovered they had a 26-week supply of snow shovels at a them when they really should have only had a four-week supply.

"They were not watching their turnover," he says.

The company also did not keep its stores looking up to date. For example, at a Target in Everett, Mass., the aisles are spacious and well-organized. The shelves chockablock with shower heads, plants, pillows, and Mr. Potato Head pants. Shoppers can choose from 19 varieties of coffeemakers alone.

In contrast, a local KMart - at least on this day - feels cluttered. Merchandise is piled toward the ceiling, where balloons promote "new low prices!" In the food section, supplies are thinning.

In recent years, Kmart has been trying to change its image. The big retailer has invested heavily in the Martha Stewart Everyday Brand, which now accounts for about $1 billion in sales of sheets, towels, paint, and kitchenware.

Analysts say Ms. Stewart gives the chain the image of casual elegance. With the bankruptcy, she may have the opportunity to market her name elsewhere, though last she indicated she was sticking with Kmart.

Two years ago, the company tried to upgrade its image by shutting down 72 stores in out-of-the-way places like Bessemer, Ala. and Shrewsbury, Pa.

But, in some cases, it's still making lease payments for some of these facilities. The bankruptcy filing will allow Kmart to get out of the lease contracts.

Still, for Kmart to survive it's also going to have to rethink it's marketing. Young people especially seem to prefer Target or Wal-Mart.

Target commercials show hip 20-somethings surrounded by colorful merchandise. The clientele now includes college students outfitting dorm rooms and young professionals on a budget. By contrast, Kmart mainly pitches price.

"The typical teenager does not want to be seen near a Kmart," says Arun Jain, a marketing professor at the State University of New York at Buffalo. "They don't want their friends to know they bought their clothes at Kmart, while Target has created an image as a cool store. Target has better colors, better cuts. They are more in tune."

If Kmart is to survive, it will also have to redesign its stores, according to Gifford. He says Kmart currently thinks in terms of square footage, whereas other discounters think in terms of "verticality."

"They have to think of adding another dimension - using vertical cubes instead of horizontal," he says, citing Bed, Bath & Beyond as an example of new store layout.

Kmart's problems are actually resulting in even steeper discounts for customers. Bell says many vendors are now stuck with merchandise they normally would have shipped to the bankrupt company. "Our merchants say they have never seen more merchandise available," he says. "There is a lot of inventory out there at deep discounts."