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NU OPNS 430 - Loss Leader - How Wal-Mart Outdid A Once-Touted Kmart In Discount-Store Race

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Loss Leader: How Wal-Mart Outdid A Once-Touted Kmart In Discount-Store Race --- When Antonini Took Over,His Chain Was in Front; Walton's On-Line Bet --- Shabby to Chic -- and BackBy Christina Duff and Bob OrtegaStaff Reporters of The Wall Street Journal03/24/1995The Wall Street JournalA1(Copyright (c) 1995, Dow Jones & Co., Inc.)Was Sam simply smarter? The forced resignation Tuesday of Joseph Antonini represents an official verdict. For seven years, he led a discount storeto battle against what appeared to be its twin. The two chains looked alike, sold the same products, sought each other'scustomers. They even dated back to the same year -- 1962 -- and bore similar names: Kmart and Wal-Mart.The competition, however, is over: Sam Walton's Wal-Mart Stores Inc. won. So bleak are the prospects for Kmart Corp. that in February an advertising agency bidding for its business, N.W. Ayer &Partners, recommended that it stop competing against Wal-Mart and transform itself into a big convenience chain wherecustomers could go for milk and cigarettes. "It seems that the only way for [Kmart] to survive is to find a different niche,"says one person familiar with the presentation. Kmart rejected the idea. Though a savvy new leader could spark high hopes for ringing cash registers, Kmart still has "major operational andmanagerial issues to deal with," says Marilyn Weinstein of the College Retirement Equities Fund, a Kmart shareholder. While an air of inevitable defeat had recently settled over Kmart, a short look back finds many observers believing deeplyin Kmart and Mr. Antonini. In fact, many of the investors who demanded his ouster as president and chief executive officerthis week gambled on him to outfox his counterparts at Wal-Mart not so long ago. They questioned some of the strategiesof Mr. Walton, Wal-Mart's founder. They also thought Mr. Antonini had more pizazz, better locations and a solidturnaround plan. "He's taken a tired, dispirited company and revived it," declared a prominent retail analyst in a 1991 Forbes magazinearticle that described Wal-Mart's stock as overpriced and Kmart as a good bet. Considering the similarity of their stores and missions, analysts attribute the different fates of Kmart and Wal-Martprimarily to management. Sam Walton, they say, was smarter than Mr. Antonini. That is easy to say this week. But itwasn't always a simple call. When Mr. Antonini took the reins of Kmart in 1987, he had his hands full. He inherited some stores that were as old as 17years, with water-warped floors, broken light fixtures, shelves placed too close together and cheap displays set in themiddle of aisles. Also, his predecessors had neglected to implement the sophisticated computer systems that werehelping Wal-Mart track and replenish its merchandise swiftly and efficiently. But considering that the two chains had begun the same year, Kmart was way ahead. It had nearly twice as many discountstores, 2,223 to 1,198. The Troy, Mich., chain also had sales of $25.63 billion, compared with $15.96 billion for Wal-Mart.Thanks to advertising and its large urban presence, Kmart and its red "K" logo also had greater visibility. Although Wal-Mart had a more consistent record of earnings and revenue growth, in the eyes of many experts it had neverplayed in the major leagues. Unlike Kmart, whose stores sat on expensive urban real estate and competed against otherbig discounters, Wal-Mart sat in pastures outside small towns and picked off the customers of aging mom-and-pop shops.Like a minor leaguer admiring a star in the bigs, Mr. Walton regarded Kmart with awe. "So much about their stores wassuperior to ours," Mr. Walton said in his autobiography, "that sometimes I felt like we couldn't compete." For his part, the 53-year-old Mr. Antonini was heard by company insiders to dismiss Wal-Mart executives as "snake-oilsalesman" -- something he denies. So rapidly was Wal-Mart multiplying across the rural landscape that an invasion of urban America -- and a confrontationwith Kmart -- became inevitable. To prepare for the encounter, Mr. Antonini focused on his own strength: marketing andmerchandising. A self-promoter with a boisterous voice and wide smile, Mr. Antonini invested heavily in national televisioncampaigns and glamorous representatives such as Jaclyn Smith, a former "Charlie's Angels" television star who has herown line of clothes for Kmart. 1 of 3 2/16/2001 4:22 PMDow Jones Interactive http://ptg.djnr.com/ccroot/asp/publib/stor...AAAAAMjAwMTAyMTYxNzAwNDgAAAAK&referer=truThat effort only widened a public-awareness gap between the two retailers. Even before the successful campaign with Ms.Smith, Kmart's "blue-light special" was famous around the country. Meanwhile, as recently as the late 1980s, mostAmericans had never seen a Wal-Mart advertisement, not to mention a store. Mr. Walton did little to change that. He avoided publicity. And instead of marketing, he became obsessed with operations.He invested tens of millions of dollars in a companywide computer system linking cash registers to headquarters, enablinghim to quickly restock goods selling off the shelves. He also invested heavily in trucks and distribution centers, aroundwhich he located his stores. Besides enhancing his control, these moves sharply reduced costs. That was a gamble. While Kmart tried to improve its image and cultivated store loyalty, Mr. Walton kept lowering costs,betting that price would prove more important than any other factor. As discounting fever deepened across America, analysts and shareholders came to expect huge growth from theseretailers. In trying to meet these expectations, Messrs. Antonini and Walton once again trod different paths. Mr. Antonini tried bolstering growth by overseeing the purchase of other types of retailers: the Sports Authoritysporting-goods chain, OfficeMax office-supply stores, Borders bookstores and Pace Membership Warehouse clubs.Besides additional revenue, these chains would decrease dependence on profits from discounting. "It's the way of thefuture," Mr. Antonini declared of such diversification. In Bentonville, Ark., meanwhile, Mr. Walton was taking precisely the opposite tact -- betting everything on discountretailing. He started Sam's Club, a deep-discount, members-only retailer that was modeled after California-based PriceClub, which devised the concept. Then Mr. Walton tried a brand of discounting that Kmart had already tried andabandoned in the 1960s -- groceries. His first


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NU OPNS 430 - Loss Leader - How Wal-Mart Outdid A Once-Touted Kmart In Discount-Store Race

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