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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 Back
By Christina Duff and Bob Ortega
Staff Reporters of The Wall Street Journal

03/24/1995
The Wall Street Journal
A1
(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 store
to battle against what appeared to be its twin. The two chains looked alike, sold the same products, sought each other's
customers. 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 where
customers 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 and
managerial 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 deeply
in Kmart and Mr. Antonini. In fact, many of the investors who demanded his ouster as president and chief executive officer
this week gambled on him to outfox his counterparts at Wal-Mart not so long ago. They questioned some of the strategies
of Mr. Walton, Wal-Mart's founder. They also thought Mr. Antonini had more pizazz, better locations and a solid
turnaround plan.

"He's taken a tired, dispirited company and revived it," declared a prominent retail analyst in a 1991 Forbes magazine
article 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-Mart
primarily to management. Sam Walton, they say, was smarter than Mr. Antonini. That is easy to say this week. But it
wasn'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 17
years, with water-warped floors, broken light fixtures, shelves placed too close together and cheap displays set in the
middle of aisles. Also, his predecessors had neglected to implement the sophisticated computer systems that were
helping 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 discount
stores, 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 never
played in the major leagues. Unlike Kmart, whose stores sat on expensive urban real estate and competed against other
big 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 was
superior 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-oil
salesman" -- something he denies.

So rapidly was Wal-Mart multiplying across the rural landscape that an invasion of urban America -- and a confrontation
with Kmart -- became inevitable. To prepare for the encounter, Mr. Antonini focused on his own strength: marketing and
merchandising. A self-promoter with a boisterous voice and wide smile, Mr. Antonini invested heavily in national television
campaigns and glamorous representatives such as Jaclyn Smith, a former "Charlie's Angels" television star who has her
own line of clothes for Kmart.

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That 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, most
Americans 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, enabling
him to quickly restock goods selling off the shelves. He also invested heavily in trucks and distribution centers, around
which 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 these
retailers. 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 Authority
sporting-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 the
future," Mr. Antonini declared of such diversification.

In Bentonville, Ark., meanwhile, Mr. Walton was taking precisely the opposite tact -- betting everything on discount
retailing. He started Sam's Club, a deep-discount, members-only retailer that was modeled after California-based Price
Club, which devised the concept. Then Mr. Walton tried a brand of discounting that Kmart had already tried and
abandoned in the 1960s -- groceries. His first experiment, a massive Hypermart more than 230,000 square feet in size,
suffered. Customers complained that produce that wasn't fresh or well-presented -- and that they were having trouble
finding things in stores so big that stockers wore roller skates. The Hypermart, Mr. Walton conceded, didn't work.

Undaunted, he launched a revised concept: the Supercenter, a combination discount store and grocery that was smaller
than the Hypermart.

By 1990, three years after Mr. Antonini took charge of Kmart, Wal-Mart surpassed it. For the retail year that ended in
January 1991, Wal-Mart had sales of $32.6 billion, compared with Kmart's $29.7 billion. For Kmart, the scary part was that
Wal-Mart still had fewer stores -- 1,721 to Kmart's 2,330.

But Mr. Antonini and other Kmart supporters took comfort in knowing that Wal-Mart was running out of small towns to
conquer. To continue growing, it would have to invade Kmart's turf: the more-expensive and competitive big city.

To prepare for that invasion, Mr. Antonini launched a $3.5 billion, five-year plan to renovate, enlarge or replace Kmart's
oldest and shabbiest stores. Analysts called him a "visionary," and often joined him on tours of prototype stores.

But the least visible difference between Wal-Mart and Kmart was beginning to matter a lot. Wal-Mart's incredibly
sophisticated distribution, inventory and scanner systems meant that customers almost never encountered depleted
shelves or price-check delays at the cash register.

The halls of Kmart, meanwhile, were filled with distribution horror stories. Joseph R. Thomas, who oversaw distribution,
said that in retrospect, he should have smelled trouble when he found warehouses stuffed full of merchandise on Dec. 15,
the height of the Christmas season.

Although Mr. Antonini poured a fortune into a frantic attempt to catch up, Kmart was so behind that a November 1993
internal company report found that Kmart employees woefully lacked the training and skill to plan and control inventory.
Kmart's cash registers often didn't have up-to-date information and would enter wrong prices. That led to a lawsuit by the
Riverside County district attorney's office, claiming that 72 California Kmart stores had overcharged customers. In May
1994, Kmart settled for $985,000.

Take the case of Anita Joy Winter. She went to a Naperville, Ill., Kmart with three items on her list: underwear for her
husband, contact-lens cleaner and dish towels. The store was out of everything but the towels, and even then didn't have
the beige color she wanted. After that, the register rang up a price more than 70 cents above what the shelf advertised,
which took 10 minutes to straighten out.

The consequence? "It's been `Thank God for Wal-Mart' ever since," says Ms. Winter, who shops at a suburban Chicago
Wal-Mart at least twice a week.

To the surprise of many, the higher cost and greater competitiveness of big cities hardly registered at Wal-Mart, now
under the leadership of David Glass, the successor to Mr. Walton, who died in 1992 at age 74. The company had pared
costs so aggressively in so many areas that it was passing on the high cost of, say, Long Island, N.Y., real estate and still

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easily underpricing Kmart. Moreover, its stores were often twice as large as older Kmarts. "The effect, when Wal-Mart put
in a 125,000 square foot, slick new store across from an old 60,000-square-foot competitor, was just devastating," says
William W. Whyte, retail analyst with Stephens Inc. in Little Rock.

Of the two retailers' diversification efforts, Kmart again proved the least successful. Mr. Antonini's plan to make Kmart a
combination discount and specialty-retailing empire began to unravel at the end of 1993. While the specialty stores --
those offering books, office supplies or sporting goods -- had contributed 30% of sales the year before, they only made up
15% of operating profit. And Kmart's discount stores were quickly losing market share to Wal-Mart. Shareholders
demanded Mr. Antonini get rid of his prize jewels and focus on the discount stores. At the insistence of shareholders and
against Mr. Antonini's wishes, Kmart announced at the end of last year a plan to sell majority stakes in three of its specialty
retail chains.

Wal-Mart, meanwhile, couldn't roll out its new Supercenters fast enough. The concept of buying general merchandise and
groceries in one store -- at a discount -- was proving successful around the country, prompting Kmart to start a similar
chain.

But the cost of opening Super Kmarts only detracted from the continuing, and largely disappointing, effort to renovate
general-merchandise Kmarts. Though the stores were all supposed to have a new look by 1996 -- with wider aisles,
gleaming floors and expanded departments -- a third of them remain untouched. And those that have been renovated
aren't producing the sales gains that had been anticipated.

As a result, even after $1.8 billion in asset sales last year, Kmart's operating profit was so disappointing that the company
could barely cover its 96-cents-a-share annual dividend and had to scale back capital spending to about $800 million from
at least $1 billion.

The most telling statistic: Since Mr. Antonini took over as chairman, president and chief executive officer in 1987, Kmart's
market share of total discount sales has dropped to 22.7% from 34.5%, according to Tactical Retail Solutions Inc. in New
York. Wal-Mart's soared to 41.6% from 20.1%.

In the end, attitude may have made a bigger difference than strategy. In Bentonville, Mr. Walton and Mr. Glass asked
subordinates what wasn't working, and chided them for failing to deliver any bad news. Executives, expected to spend
much of their week visiting stores, actively solicit proposals from subordinates. And Mr. Walton always acted as if a fierce
competitor was just behind him and gaining. Even publicly, he and Mr. Glass were likelier to discuss Wal-Mart's
weaknesses than its strengths.

In Troy, by contrast, Mr. Antonini didn't think others could tell him much about the business. A Kmart employee since
1964, when he started as an assistant manager, he bristled at criticism and was known as a "Teflon-coated" boss
because suggestions for change slid right off. Insiders say he didn't do much hiring of managers from outside the
company who might challenge him, and he flayed or fired consultants who recommended everything from management
changes to targeting a narrower consumer market.

In the fall of 1993, munching a sandwich in a shiny new Super Kmart store, Mr. Antonini expressed the possibility of
following the lead of Mr. Walton and writing a book detailing a retail success.

"We've got a few things to get done first," he said. "But we're on our way."

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.

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