The rise and fall of Kmart

At its peak, Kmart had nearly 2,500 stores and did $31 billion a year in sales. Today, after decades of mismanagement and bad decisions, just 3 Kmarts remain in the entire world. This video is the rise and fall of Kmart.

Oh, and by the way, thanks to Fabric by Gerber Life for sponsoring this video. More on them later.

In 1899, a 32-year-old traveling salesman named Sebastian Kretzschky saved up and opened a Five Dime in downtown Detroit, Michigan. By 1912, he'd grown to 85 stores, and by 1918, S.S. Kresge was listed on the New York Stock Exchange. By 1924, Kresge himself was worth $375 million. That's $4 billion in today's money. Turns out the five and dime business was pretty good. But by the late 1950s, the retail culture was changing in America, driven primarily by postwar baby booms and the rise of color culture. Americans wanted wanted bigger stores, bigger parking lots, and they wanted those stores out in the suburbs where they were moving in droves. At this time in 1959, Harry B. Cunningham was the president of S.S. Kresge, and he decided that what America wanted wasn't more Five Dime stores. It wanted massive department stores. So they pivoted the entire business. And on March 1st, 1962, the first Kmart, it opened in Garden City, Michigan. It was designed as an 80,000 square foot, all-in-one, everything-you-could-need store for suburban families. That same year, Sam Sam Walton opened the first Walmart in Rogers, Arkansas, and Dayton Hudson Corporation opened the first Target up in Minnesota. So if you look back on modern discount retailing, 1962, that was the year it was all born. And Kmart was leading the charge. In that year alone, by the end of 1962, Kmart opened 17 of these discount stores and they had $463 million in revenue of growth. Turned out these guys went pretty damn hard. Just 4 years later, in 1966, they had 166 stores and sales topped $1 billion for the first time. And that year, founder Sebastian Kresge, the founder originally of the dime stores, he died at age 99, having changed the world and pretty darn rich. Also in 1966, a cultural icon was invented. A store manager of Kmart in Fort Wayne, Indiana, invented something called the Blue Light Special, where he put a blue light inside of the store to let customers know that there was a time-bound special deal going on and they should come buy it right away. And this was one of the first times that people hit on the idea that you could gamify the shopping experience inside of these stores and get people hooked and excited. Eventually, other chains like Bed Bath Beyond and today Luckin Coffee, they exploit this nature where we want to play games and we love it when shopping is involved. Kmart rode all these trends and executed really well. Sales grew 22% annually from 1972 to 1976, eventually topping over $8 $1.4 billion a year. In 1976, Kmart set a record. They opened 271 stores and opened the most retail square footage in one year in history, with over 17 million new square feet rolled out. By 1977, the old five-and-dime store model, it was basically just a blip on their profit and loss statement. The new Kmart superstores comprised 95% of the company's sales. To show that, they retired the name S.S. Kresge and changed the entire corporation's name to Kmart. By 1981, Kmart was everywhere. They opened their 2,000th store that year. And if you grew up like I did back in the 1980s, you remember what kind of cultural phenomenon Kmart was. I mean, there is not a person alive over 40 who doesn't remember "Attention Kmart shoppers!" And, uh, basically you knew that meant there was a deal on one of these aisles and you needed to go find it. They were winning. And by the mid-1980s, Kmart was the number 2 largest retailer in the United States. Behind only giant Sears. And at this point, the future looked limitless, like Kmart couldn't lose. And that's when the downfall began. But before I tell you how that happened, here's a quick word from our sponsor.

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You see, the first thing to go wrong for Kmart was that there was this upstart competitor down in Arkansas that everybody kind of dismissed named Walmart. And down there, Sam Walton was worrying about one big thing that Kmart wasn't obsessing about, and that was supply chain. By the end of the 1980s, Sears was spending 5% of revenue on distribution costs. Kmart was doing slightly better. They were spending 3.5%. But Walmart, they were only spending 1.7%. You say, oh, that's no big deal. It's only a 1.8% difference between Walmart and Kmart. Well, it turns out in low-margin retail, that difference is the difference between life or death for a chain. Sam Walton had realized something that Kmart and Sears executives hadn't, which is retail isn't about footprint. It isn't about advertising, and it isn't about blue lights. It's about logistics. Sam Walton at the time was interviewed and people asked, why was Walmart winning? And he said, look, most people think Walmart is winning because we're putting these big stores in small towns. But the reality is we're replacing inventory with information and running better than anybody else can. In 1975, Walmart was one of the first consumers as corporations of big mainframes tracking all the data of everything going on in their stores. And the way they gathered that was by being one of the early adopters of having electronic point of sale systems, a.k.a. cash registers. Kmart didn't get serious about any sort of inventory management, electrification, computers until 3 years later in 1978. Walmart's lead continued. By 1983, Walmart was one of the first retailers to roll out barcode scanning in all their stores. By 1987, they were operating a private satellite network to share data instantaneously between their stores, headquarters, and the distribution centers. And it wasn't like Kmart executives weren't aware of the difference. Procter Gamble, the guys who make a lot of the household products that we know and love today, back in 1988 went to Kmart first with their idea of doing a continuous replenishment program, making sure their aisles and shelves were always stocked. Kmart said no. Walmart said yes. That P&G partnership helped Walmart keep stores stocked. Kept things cheaper for them on the cost side, and they could turn around and keep prices lower for consumers. So while Kmart had seen the shift to the suburbs back in the 1950s and responded appropriately, they missed the digital age. And by the 1990s, the unthinkable happened. Walmart surpassed Kmart in total sales for the first time ever, beating them out by just a few million dollars. But it was still $32 billion that year. The future was set at this point based on decisions from a decade earlier. Clearly, Walmart was on the rise and Kmart was on the decline. And while Kmart was losing ground, fund on logistics, you would say, okay, well, go, go work on the business, make it better. Now, they decided to get into other businesses instead. At headquarters, Kmart leadership decided if they couldn't beat Walmart at the retail game, they would spend their money and to get into other businesses instead. In 1984, Kmart used their free cash to buy Waldenbooks, which is kind of a bookstore chain in malls, of all places. And they also bought Builders Square for $88 million, which was kind of a Home Depot clone. In 1987, they even took ownership of a Japanese retail chain called Daiso and started to open up stores in, of all places, Eastern Europe. In 1990, they bought the Sports Authority, athletic supplier of stuff. In 1991, they bought 90% of OfficeMax. In 1992, they bought Borders, and they decided at that point that their goal was at least 25% of revenue should come from brands other than Kmart. But what happened instead was every dollar that they spent on buying these outside things was a dollar they didn't spend on making Kmart better and more competitive. While Kmart executives were flying around in private jets learning about books and sporting goods, Walmart executives were flying around figuring out how to get their inventory right and their customers delighted. By 1995, all of those acquisitions would be flipped and sold off. Sports Authority, OfficeMax, Borders, Waldenbooks, all gone. Oh, and here's a crazy stat for you. Kmart, to prove it had an amazing ability for investing in losers, every one of those businesses, Waldenbooks, Borders, and so on, eventually went bankrupt. And the reason they had flipped and sold all these businesses quickly was they had so mismanaged their core business that they needed to basically generate cash to get a lifeline and some funding in order to avoid bankruptcy in 1995. But battleships don't sink all at once. And then the next year, in 1993, 1994, Kmart hit its peak. 2,500 stores, 350,000 employees, billions in sales. The numbers on the top line still look good, but those numbers they were showing in the boardroom, they masked the rot that was going on underneath. The inventory systems were outdated. Many stores hadn't been updated since the 1970s. Kmart next tried to compete with Walmart on price, but they didn't have the infrastructure to be able to match them on the cost side. They tried to compete with Target by having cheap chic and be more fashionable, but they couldn't do that very well either. They were suddenly stuck in the middle, neither the cheapest nor the coolest, which is a dangerous place to be in retail. I'll give credit to Kmart's management. In the 1990s, they solved the problem. They put money into the stores. They started to renovate them and try to make them look better. They were even early to provide online e-commerce services with BlueLight.com, which, believe it or not, started out pretty good. They gave people free internet in exchange for shopping at BlueLight.com. But to some extent, management was just handed an almost impossible task. The rot had been growing for decades and they were suddenly tasked with fixing it in just a few months. The board started to get super worried. In May 2000, they hired a guy named Ron Conway, He came and was a turnaround artist. He was the type of guy who had helped CVS get back on track. In 2001, he made a fateful decision and rolled out the Blue Light Always program, which lowered prices on 30,000 items intended to compete directly head-on with Walmart. But Walmart had spent decades building an unmatched supply chain, and it meant Kmart just couldn't compete. So Walmart attacked ruthlessly. They didn't get that big by being nice guys. They cut prices and pushed Kmart to the limit. To save money, Kmart stopped doing its circulars and advertising. Customers had grown up on these types of things for decades, expecting their Kmart circular to remind them to come into the store and know which deals to get. And when they didn't get them, well, these customers stopped coming in. With this happening, same-store sales started tanking and the company had one of the worst holiday seasons, well, in retail history. Vendors stopped shipping and they stopped sending them product, which, as you've seen in other videos on this channel, can put a retailer into a death spiral. In fact, Fleming's, one of their main suppliers, cut them off from any new merchandise because they owed them $78 million. Fresh off of that horrible holiday season, on January 22nd, 2002, Kmart filed for Chapter 11 bankruptcy, throwing in the towel. It was the largest bankruptcy at the time in U.S. history, $17 billion in assets and $11 billion in debt. They closed 600 stores through the bankruptcy process and laid off 34,000 workers. The Detroit Free Press at the time shat all over the idea of Conaway's turnaround. They called it a 2-year tenure of deceit, intimidation, and unauthorized spending, looting the company. Eventually, in 2009, the SEC would charge Conaway with misleading Kmart investors about the state of the company and how bad things were. When the company emerged from bankruptcy in May 2003, it had a new owner, a hedge fund manager named Eddie Lampert. And if you're familiar with my video on Sears, This is where his name is going to be pretty familiar to you. And he got control of the company by buying up its debt and then converted that into ownership. At the time, Lampert was riding high. Businessweek had lately named him as the next Warren Buffett, and Fortune had called him a genius. Lampert wasn't an operator. Lampert was a financial engineer. So the next thing he did was some surprise financial engineering. In 2005, he merged Kmart with fellow failing retailer Sears. In the boardroom, the pitch sounded pretty compelling. You merge these two retailers and suddenly we have scale enough to compete with Walmart—3,500 stores—and you have brands that both of them had brought along that would be compelling. You had Sears Craftsman and Kenmore lines. From Kmart, you had the Martha Stewart line of things. While it looked good in the boardroom, what followed was one of the most amazing destructions of retail value in the history of American business. Instead of running the business for growth, Lampert basically ran a 20-year wind-down of the company, sucking out as much cash as possible as quickly as possible for him and his investors. Along the way, Lampert ran the company mostly from his Florida mansion, communicating with executives by conference call and rarely visiting stores. And if you remember Kmart during this time of the early 2010s, you'd go into a store and be like, what the heck is going on here? These places are run down, tired, and the employees— well, it'd be a miracle if you saw one that was smiling. The combined company of Sears and Kmart, Sears Holding Company, had its last profitable year in 2010. And from there it was just further downhill. On October 15th, 2018, the combined Sears and Kmart, they declared bankruptcy, bringing Kmart down with it. Year after year, more and more stores went dark as they just weren't competitive. Target at this time was growing like crazy. Walmart got to $640 billion in revenue. And Amazon, well, it ate everything else that they weren't eating. On October 20th, 2024, the last full-sized Kmart closed. For good in Bridgehampton, New York. That store had survived for 25 years. You want to know why? Because the nearest Target and Walmart was almost 45 minutes away. Today, all that remains of Kmart is one tiny store crammed into a former garden store in Miami and a handful of full-size locations in the U.S. Virgin Islands and in Guam. Kmart had gone from 2,500 stores to 3, from 350,000 employees down to a handful, and from $37 billion in sales down to basically zero. This story is a testament in business to the power of focus. If you look at the great businesses in history, the restaurants, they often have very simple menus like In-N-Out Burger or Raising Cane's, or in the case of Walmart, they just focus on being the best discount retailer they could. And in the '90s, when Kmart executives decided they were going to branch out into other stuff, well, they should have just been working on making their core business better rather than trying to be something they weren't. All right. That's it for the story of Kmart. If you're interested in that, check out this video of Sears that I did here. It's hugely popular. And they're definitely tied into Kmart and some lessons there that were awesome as well. And if you enjoyed this video, let me know in the comments below that you liked it. It helps me get motivated to do some more. Catch you next time.