What Happened to Kmart? (Incompetence, Fraud and Greed)

At its height, Kmart had over 2,400 stores and employed approximately 350,000 employees globally. As of 2023, the only two remaining Kmart stores in the United States are located in Miami, FL and Bridgehampton, NY.

It begs the question, what happened to Kmart?

In short, a “special strategy group” in the 1970s led to a lack of focus on the core merchandising business, causing growth to stall in the 80s and 90s. CEO Charles Conaway’s subsequent fraud led to a chapter 11 bankruptcy filing in 2002, followed by a second filing in 2018 due to Edward Lampert’s greed.

But as is the case with any 100-year-old company, a short summary hardly paints the full picture…

Kmart Company Timeline

Why Did Kmart Fail?

Because Kmart has had such a historic run for over 120 years, it’s impossible to discuss the underlying reasons the business failed without first defining the time period.

And anyone attempting to truly understand Kmart’s self-inflicted downfall, need look no further than the events surrounding three specific years on the company timeline: 1972, 2000 and 2003.

In my opinion, the events that followed these three pivotal years can be either partially or wholly blamed for the stalling of core business growth in the 80s and 90s, the first Chapter 11 filing in 2002 and the second Chapter 11 filing in 2018.

But as is the case with any major corporation, it is never a year or an event that shoulders the true blame for failure – it’s the CEO who was is in the driver’s seat.

Robert Dewar’s Special Strategy Group

Former S.S. Kresge Co. president and chief administrative officer Robert Dewar, took over CEO responsibilities from Harry Cunningham in 1972.

Cunningham, a man who went from store manager to founder of the original Kmart, to eventual chairman and CEO of the company, left some serious shoes to fill. In fact, Sam Walton, founder of Walmart, would later insist that Cunningham should be remembered as one of the greatest retailers of all time.

Admittedly, a nearly impossible shadow for any executive to get out from under.

Additionally, it is important to first note that Dewar is often credited with Kmart’s continued success and expansion in the early 70s. That is, right up until 1976, when Kmart reached peak new store openings.

It was around this same time that Dewar commissioned a special strategy group. A team built around the fundamental belief that the US merchandising market was saturated.

The group’s marching orders? To look outside of the core Kmart merchandizing business and seek growth through diversification. Dewar even went as far as to set an official company target of 25% of sales coming from new ventures by 1990.

Lack of Focus on the Core Merchandising Business

What followed was a nearly decade long buying spree.

Through the mid 80s and into the early 90s, Kmart would go on to acquire Walden Book Co., Builders Square, The Sports Authority, OfficeMax and Borders, Inc.

Not one of these companies would ultimately work out and by 1997 all five had all been sold off entirely. To make matters worse, even after the sell off, Kmart still had significant lease guarantee obligations in connection with these businesses!

The strategic planning, time and capital that these external companies consumed, meant there was very little of these three key ingredients left over for Kmart.

Competitive Forces

Taking your eye of the ball is a very dangerous thing to do when national level competitors like Wal-Mart, Target, Sears, Kohl’s, and J.C. Penney are gunning for you.

It’s true that Kmart attempted to differentiate from their competitors through exclusive brand deals that included their dedicated Martha Stewart, Jaclyn Smith, Kathy Ireland, Disney, Sesame Street, Joe Boxer and Route 66 lines.

But license agreements alone were not enough to mask a number of key core business failures.

Poor Inventory Management

Perhaps the Kmart executive team’s most detrimental oversight was failing to recognize what Wal-Mart was up to when they installed their first point-of-service (POS) system with a satellite link for automatic reorders in the early 1980s.

While their competitors were significantly improving their inventory management practices, Kmart was incapable of keeping its store shelves stocked with popular items.

It would later be revealed that at one point, 220 corporate employees were authorized to give final approval to purchase orders, while at the same time ordering discretion granted to local store managers was virtually non-existent.

Deteriorating Store Fronts

In addition to empty shelves, their store locations were allowed to gradually deteriorate.

All of their focus went to opening new stores, with virtually zero focus on their existing ones. Eventually, customer complaints about how dirty and outdated Kmart stores were started to build up.

The situation got so bad that during a 2009 interview with CNBC, Martha Stewart expressed concerns with the quality of her own product line and the state of the stores, eventually asking the interviewer:

“Have you been into a Kmart lately? It’s not the nicest place to shop.”

– “Martha Stewart Clarifies Kmart Comments after Jab.” Reuters.com, 16 Oct. 2009, www.reuters.com/article/marthastewart-idUSN1636434720091016/. Accessed 18 Dec. 2023.

With the benefit of hindsight, we now know that Robert Dewar’s strategy led to the gradual gutting of the core Kmart business and ultimately fatally exposed the company to the competition.

But it goes beyond Dewar. Yes, he set the plan in motion. But any number of CEOs after him had the power to course correct, and did not. They too, share the blame.

Charles Conaway’s Fraud

We’ve firmly established that growth significantly stalled through the 80s and 90s. And while the company was not immensely profitable, Kmart remained financially stable.

But that all changed when Charles (“Chuck”) Conaway entered the scene as CEO in 2000.

Conaway is perhaps best known for recklessly spending Kmart funds to enrich himself and other senior staff. During his tenure, he made countless new hires by offering outrageous, unauthorized compensation packages. Executives were then further pampered with $12 million worth of corporate airplanes that were routinely used for personal trips.

It was Conaway’s “The BlueLight Always” program though, that represents his greatest strategic misstep.

The program, enacted in the summer of 2001, was a direct attempt to enter into a price war with Wal-Mart. Without any analysis or appropriate approvals, leadership would go on to buy $850 million in new merchandise.

Perhaps unsurprisingly, The BlueLight Always was a catastrophic failure. As liquidity problems quickly mounted, vendor payment dates were shuffled around and revenue was fraudulently reported in an attempt to cover up the massive hole in Kmart’s balance sheet.

As 2001 came to a close, holiday sales fell short and the company was facing a $2.42 billion loss.

The business was in grave financial trouble and Conaway knew it. But that didn’t stop him from approving ~$29 million worth of “retention loans” for top-level executives that same year.

The writing was on the wall and all at once, vendors started refusing to ship product. Kmart was officially out of options and would quickly file for chapter 11 bankruptcy protection in January 2002.

At every step of the way, Conaway obfuscated the truth and demoted or transferred employees who questioned him. The Detroit News would later refer to his tenure as a:

“Two-year program of deceit, intimidation and unauthorized spending.”

– “How ‘frat boys’ drove Kmart to ruin,” by Karen Dybis, The Detroit News, January 26, 2003.

Justice would ultimately be handed down in 2009, with the SEC announcing that Conaway had been charged by a jury with misleading investors.

Approximately 15 months later, Kmart would emerge from Chapter 11 bankruptcy protection in 2003 with $7.8 billion in debt eliminated from the balance sheet.

They had a plan to reach profitability by 2004 and it seemed as though the business had a genuine second chance at life.

Edward Lampert’s Greed

One of the key architects of Kmart’s 2002 chapter 11 restructuring was billionaire Edward S. Lampert. Lampert’s hedge fund “ESL Investments” took a majority stake in Kmart, resulting in his election as Chairman of the new Board of Directors.

To his credit, Lampert saw what many other’s did not – that Kmart’s true value was in its real estate. And so, as his ~$1 billion investment that bought him control of Kmart quickly became worth north of $2.5 billion, it looked like his winning streak would only continue.

Come March 2005, Lampert would make another huge gamble and use Kmart’s inflated stock to purchase Sears for $11 billion. The plan was for the new company, Sears Holding Corporation, to continue to operate both stores independently and seemingly give Wal-Mart a run for their money.

Straight away, expenses were ruthlessly slashed for both organizations. And with hardly any reinvestment back into the business, sales continued to steadily drop year over year. Despite having zero retail experience, Lampert would eventually appoint himself as CEO of Sears Holding Co, in 2013.

As both businesses continued to crash and burn, it became clear to many that Lampert never truly intended to turn things around. Instead he viewed Sears the same way he viewed Kmart – as a valuable real estate asset.

In my opinion, his endless web of financial and personal entanglement with the business seems to corroborate this view.

To recap, Lampert is the founder of ESL Investments. ESL Investments bought controlling share of Kmart, resulting in Lampert becoming Chairman of the new Board of Directors. Kmart then purchased Sears, creating Sears Holding Co. But it doesn’t stop there.

As Sears continued to go deeper into financial trouble, Lampert made $1.3 billion in loans to the business through ESL, making him Sears’ largest creditor. Over the years, Lampert also began purchasing hundreds of Sears and Kmart properties through a real estate investment company, Seritage, where he was the chairman and a major shareholder.

In my mind, these are the dealings of a man who’s sole interest was in positioning himself to personally win, even if (when) the broader business lost.

With Kmart’s sales hitting lows of $5.8 billion in fiscal 2018, down from from $31 billion in 2004, the company filed for chapter 11 bankruptcy a second time in October 2018.

Following this second filing, Sears Holding Co. sold it’s assets to ESL Investments’ affiliate, Transform Holdco LLC for $5.2 billion in 2019. Meanwhile, Lampert endlessly appealed to the courts to collect additional financial compensation following the proceedings – an effort he would ultimately lose by a Supreme Court decision in March 2023.

As of December 2023, just 2 Kmart and 12 Sears locations remain in the US.

Final Thoughts

In one of Kmart’s own Chapter 11 filings, they note that “success in this competitive retail environment is based on factors such as price, quality, service, product assortment and convenience.”

Over the course of a couple decades, this 100-year-old company managed to go from excelling across all five of these factors, to falling miserably short.

Looking back, it’s abundantly clear that the core business fell asleep at the wheel through the 80s and 90s, as external investments took priority.

But what’s truly shocking to me is we will never know whether or not this iconic company could have turned things around due mostly to the incompetence, fraud and greed of just two men.

It’s a stark reminder that it takes a lifetime to build a good reputation, and just a minute to ruin it.