Cut-Price Chic: Six Strategies that Made Kmart Cool

June 2016
Melissa Sorini

Eight years ago it was unimaginable to think Kmart could ever be thought of as hip, chic or cool and yet today they are being lauded as suburban style gurus. Back in 2008 Kmart was languishing behind more successful rivals like Target and Big W, and despite turning over $4 billion dollars a year the company was making zero profit. On the brink of bankruptcy for years, ex-McDonald’s Australia chief Guy Russo was brought in to revive the brand, and what he did is almost miraculous: from zero profit to $289 million EBIT at the end of 2014.

The reinvention was as swift as it is surprising: when Russo took the reigns he gave himself 30 days to start turning the company around, and in a matter of years Kmart shrugged off bankruptcy to became the most profitable retailer in Australia. Russo took a bloated business model with no clear strategy, too many products and a confusing price structure and turned it into a profitable purveyor of cut-price chic. The rebranded Kmart has been enthusiastically embraced as the leading homewares and fashion retailer in Australia, thanks to a winning combination of on-trend products at low everyday prices.

Social media has been one of the biggest markers of Kmart’s recent success. The last 12 months has seen an explosion of social media buzz around the brand, and the biggest revelation is that most of it is organic. The “Cult of Kmart” has taken over Facebook and Instagram, with countless unofficial accounts followed by thousands of Australian women sharing their purchases and personal style with other like-minded Kmart fans. Hashtags like #kmartstyling, #kmartaddictsunite and #kmartswag have a devoted following online, an act that simultaneously creates community and establishes Kmart as an aspirational brand: it’s the stuff that social media managers dream of.

One important take-away from the Kmart example is that it’s never too late to reinvent your brand. No matter how dire the bottom line or how drab your brand, if you know your customers and have a clear set of strategies you can reinvent yourself and resuscitate your business.

Here are the six strategies that made Kmart cool – and profitable:

1. Marketing and Advertising

Kmart completely reinvigorated their marketing and advertising campaigns. The biggest change was to reposition the brand from a broad “everyman” appeal to one that specifically targets women - and mothers in particular. One of their most successful advertising strategies employs a rotating roster of catchy pop songs in their television commercials instead of a corporate jingle. The TV adverts feature simple visuals paired with irresistible earworms: it’s hip, funky and fun, whilst also drawing attention to their low price strategy by focusing on a handful of key products. With a focus on fashion and homewares, these playful campaigns have become a new trademark.

2. Social Media

The biggest revelation for Kmart has been the enthusiastic response its new homewares and fashion lines have received on social media. There are a growing number of websites, Instagram accounts and Facebook pages devoted to “Kmart hacks” and “shelfies”, and Australian women in large numbers are keen to show-off their unique home styling and DIY makeovers using Kmart products. Thousands of women are posting images of their purchases, tagging their wish-lists and sharing moodboards of products they are coveting. Social media interest has been incredibly effective for the brand because the upswell has been viral, organic and authentic: not orchestrated from Kmart head office.

3. In-Store Merchandising

One of the key strategies was aimed at a more focused and more streamlined “back to basics” product range which resulted in a massive reduction in product lines; slashed from 50 000 to around 12 000. Many of the big brands were the first to go, replaced by Kmart’s own private brands. Streamlining the product range had flow-on effects in other areas, simplifying aspects of in-store merchandising, stock control, sourcing and logistics. When Russo took over in 2008 the shop fit-outs were ageing, store layouts were confusing and the outlets themselves were unclean and unappealing. He set about making massive changes to stores, making them easier to navigate and more receptive to impulse purchasing.

4. Pricing Model

Kmart shifted to a permanent low-pricing model, moving away from in-store sales. When Russo took over one of his first tasks was to dismantle an ineffective pricing structure that – despite attracting customers with discounts - required Kmart to sell items below cost. A recent February 2015 press release promised another round of price reductions across 200 product lines, with Kmart managing director Guy Russo reaffirming "We have always been honest with customers about our strategy – and we will continue to do so. We promised not to play games with customers, and instead offer simple, honest pricing.” The new strategy worked: by 2013 Kmart was selling 150 million more items per year than it was back in 2008.

5. Direct-Sourcing Model

The biggest change was the move to a direct-sourcing model, slashing the number of suppliers that Kmart deals with by cutting out the middle-man and liaising directly with manufacturers. Kmart has a number of low-cost sourcing relationships with manufacturers in China, India and Bangladesh, among others. The shift to a model that by-passes domestic wholesalers for imported merchandise has been a smashing success for Kmart, and it’s a move that now has other retailers on watch. The immense saving allows Kmart to keep prices low 365 days of the year, without the need to rely on discounting strategies that make customers more likely to withhold their spending until sales are announced.

6. Supply Chain Logistics

The move to a low-pricing strategy required a complete overhaul of the supply chain process. With the focus on shifting a higher volume of fewer products, Kmart introduced a lean methodology which included processes like pick and pack, with reduced carton sizes and lowered shipping costs.  The transition was not without issue: Kmart’s existing infrastructure was ill-equipped to cope with a direct-to-manufacturer relationship, with too many manual processes and not enough transparency or efficiency. The implementation of a Direct Sourcing System solved that problem, via Core Solutions’ CBX software platform. The result was streamlined operations with reduced costs, tripled volumes and no need for staff increases.

After ten years of near-bankruptcy, Kmart is now the envy of the retail landscape: not only is it the most profitable department store in Australia, it is now one of the coolest too: the envy of its stablemates and department store rivals. Under Russo’s leadership, Kmart’s cut-price chic continues to win the hearts and minds of Australian consumers.

The great news for your business is that you can do it too – and i​t’s never too late to start.

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