Kmart slashes prices and looks abroad

Kmart CEO Ian Bailey is expecting increasingly cash-strapped consumers to show out in force for his latest round of price cuts, as the DDS chain looks to a customer-first strategy that widens its price differential with competitors.

The discount department chain will slash prices by as much as 20 per cent on selected items across its entire range, with 320 products set to be reduced later this week.

Speaking to us, Bailey said that the move was a reinvestment of cost savings, born from a shift in manufacturing from China to Indonesia, stressing that the cuts weren’t a threat to earnings and would drive sustainable profitability.

“There’s a strong reaction from customers when we lower our prices, even if we’re already the lowest price on the market,” Bailey said.

He explained that price investment was primarily for customers and was less about making a defensive play against competitors, but he told shareholders last week that the introduction of international players such as Amazon and Decathlon into the market has prompted Kmart to put “more energy” into assessing its customer offer.

The plan, which will see key lines such as men’s and children’s tees reduced by 50 and 25 cents respectively, is not the first price cut for the discount department store in recent years and is likely not the last, so long as cost savings can continue to be leveraged, Bailey indicated.

It’s part of a broader ambition flagged for the brand at Wesfarmers’ strategy day last week, to double annual sales to around $10 billion and lift earnings from $470 million to $1 billion.

Bailey, who sees the target as an aspiration, said last week that the $80 billion market Kmart plays in is relatively static and that achieving Kmart’s goals would require taking market share from competitors.

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Kmart goes global

Kmart is looking at alternative growth verticals to achieve its lofty goals, laying the groundwork on an international expansion that’s seen its products trialled in Thailand and India recently.

Bailey has struck a deal with Southeast Asian retail giant Central Group to launch Kmart’s products in select Robinson Department Stores in Thailand, as concessions.

While Wesfarmers aren’t interested in taking the Kmart brand overseas, partly due to confusion with the American owned Kmart, the conglomerate is interested in launching Kmart’s products in other countries, leveraging synergies with withstanding production.

“We have this range of products that we design, develop and produce and then we only offer it to the population of Australia and New Zealand,” Bailey said.

“Many of our competitors are global competitors who are [selling] across the world, so it’s a logical step for us to say, ‘how do we connect our product with customers elsewhere’.”

Bailey laid out a 3-5 year timeframe for accelerating growth on the wholesale venture, where Kmart still controls replenishment, ranging and display.

“The next two-years from here are really about learning, which is us working very closely with Robinsons and maybe a couple of others to really make sure we’ve got a model that works with the end-customer in Thailand or whichever other country we pick,” Bailey explained.

Kmart doesn’t intend to open its own stores overseas at this stage, but Bailey has already outlined his desire to make wholesale a strong vertical for the business in the medium term.

Analysts sceptical; Wesfarmers backs stores

Back at home analysts remain unconvinced that Kmart can emerge unscathed from the entry of Amazon and other competitors, with widely reported Morgan Stanley research predicting that Kmart and Target could lose $201 million in earnings annually to Amazon by 2026.

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While Kmart’s focus on everyday low prices and direct sourcing has seen it emerge as the jewel in Wesfarmers’ Department Stores division in recent years —outpacing its struggling sister company Target with third quarter sales growth of 2.5 per cent this year— concerns remain over its ability to go toe-to-toe with the American e-commerce giant.

Kmart’s online offer remains an identified point of weakness among some analysts, with delivery currently offered at 3-5 days for metro customers, slower than many domestic competitors and far behind Amazon’s next-day model, which it is looking to roll-out in Australia.

Bailey said Kmart are working hard on the online side of the business and that a relatively seamless omnichannel strategy was a focus for the team. He doesn’t, however, intend to compete with Amazon or other pure play retailers on their core strengths.

“We aren’t static in the online space, our offer will continue to improve, but if you compare us to an online pure play player like an Amazon that’s their core expertise and they’ll be very good at that,” Bailey said.

“We’ve expressly not grown online at an incredible rate until we know we can do it with good economics,” he added.

Bailey and Department Store CEO Guy Russo are backing Kmart’s network of 217 physical stores across the country in their bid to secure and expand market share, having recently completed a portfolio review that will increase the number of Kmart stores and decrease the number of Target stores.

The move will see Kmart open between 8-10 stores a year alongside an estimated 35 refurbishments, which is part of a store renewal process to a new format that is currently two-thirds complete.

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