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Perception is reality for Kmart

TROY, MI — Since Chuck Conway joined Kmart as ceo this past summer, Kmart has become more concerned with the customer experience, which has resulted in an increase in customer perception, in-stocks and other retail aspects.

"We've made the most amazing progress in the past 215 days," he said in a recent conference call to analysts. "Kmart is a dramatically different competitor now." This first quarter has had several firsts for the company, he said, including beating Kmart's discount competitors — Wal-Mart, Target and Meyer — in same store sales for the most important selling season of the year.

But he added, "We still have a long way to go."

Conway outlined three "strategic imperatives" Kmart has been and will be focusing on in the future, which were to dramatically improve retail execution, to create a customer-centric culture and to aggressively pursue its sales and marketing position.

For example, Conway said that when he joined, Kmart had not implemented eight million price changes. Now price changes are done within 48 hours, he said.

He also mentioned that 14,952 trailers — 150 miles long — were stationed behind Kmart stores, holding "merchandise that should have been on the selling floor. We will have no more trailers holding any excess inventory and I can assume we will never use trailers as a crutch again."

He added that about one thousand Kmart stores have "backrooms that are spotless," which now "process freight at a little over twice the time," as well as improved the time it takes to get the merchandise on the floor by 40 percent. He planned to have all of the stores' backrooms "spotless" by the end of the year.

Kmart is also improving its supply chain, he said. In 1995, its soft lines and hard lines divisions merged, yet their respective systems weren't, so employees had to know both systems, taking twice as long to analyze the business. Now, it's reduced lead time by 10 to 14 days, reduced inventory on hand and can review replenishment needs daily or hourly.

Out of stocks were another concern of Conway's, "the greatest inconvenience and surest way to disappoint our customers and destroy our franchise." Kmart has made "tremendous progress" in this area as well, from 79 percent in October to almost 88 percent today, and soon will be at 90 percent. "We're rapidly closing the gap on our competition."

One way Kmart is meeting these goals is with its Remote Maintenance Unit (RMU), which Conway said makes Kmart "the first in the discount channel to market with this innovation." Employees can scan the number of a product out of stock on the selling floor and find out if it's in the backroom or on order right away. "We know where all the product is, and can correct the product right away."

The RMU can also cut down on long lines at the register, to only about three customers. Employees can scan a customer's basket with the RMU and hand the customer a "line buster" card, which holds all of the customer's product information. The customer then takes the card to the register, and pays for the transaction. Fifteen stores have had the pilot program so far, he said, and the customers love it. The program will roll out to the entire chain by the end of the first quarter, he said.

Another fast checkout program has been piloted at two stores, where customers can go to a self-checkout register, scan and pay for the order without any employee intervention, he said. "Customers love these systems," he said, "and believe they get out of the store more quickly." One quarter of these stores' transactions have been processed this way.

As a result of these and other changes, "there's been a huge change in customer perception," he said. Using what he called a super-service index score, rating the customers' overall shopping experience, Conway said that 161 days ago, when this program was implemented, the SSI was at 40 percent. Today, it's climbed up to 55 percent, but still short of the 70 percent goal, which Conway defined as a "world class" level.

Traffic has also increased, and in the past 215 days, visitor-to-customer conversion has jumped from 80 percent to 89 percent. And these increases are at a time when Kmart is spending the least amount of money on ads in five years.

Register rings are up 20 percent, he said, and inventory turns are up 4.2 to 4.4 times.

Conway also mentioned the 325 Kmart stores in head-to-head competition with Wal-Mart, Target and Meyer stores. The sales performance of these Kmart stores has improved by more than 50 percent, he said, and "have dramatically closed the gap." This was an unbelievable turnaround, he said.

But while Kmart undergoes these changes, other areas will slow. Only 14 discount stores and two Super Kmarts this year are slated to open this year, he said, and sales growth will be in the modest low single digits. "We will not grow and destroy our shareholders' capital until we are fully world class with competitive returns on committed capital," he said.

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