Bargains with Few Frills

Other department stores may try to win back recession-scarred consumers with glamorized decor, personalized service and accordion-like credit arrangements. But K mart Corp, knows that the way to the shopper's heart is still through the pocketbook. Most of the 1,750 stores around the country that show off the company's big red K are riding out the recession relatively well, and the discount chain may displace Sears, Roebuck and Co. as the U.S.'s leading retailer.

K mart has prospered because of a no-frills policy that places the premium on value. In stores that usually have the ambience of a supermarket, customers can wander amid clothing, lawn chairs and stereos, rarely encountering a sales assistant. But the prices, as much as 15% below those at tonier stores, make up for the inconvenience.

The discount chain rang up $12.7 billion in sales last year, with profits of $358 million, second only to Sears' $17.5 billion volume. In the first six .months of 1980, K mart's sales grew by an additional 14.1%, while Sears slid 2.2% and Penney's rose a mere 1%. Since K mart's sales have averaged a 19.3% annual growth since 1970, many analysts expect that it will pass Sears by the mid-'80s. Says Detroit Investment Analyst Mariann Kotas: "Leaving aside Sears' insurance business, K mart already is No. 1 in retail profits."

Founded in 1962, K mart was the brainchild of Harry Cunningham, the former chairman of S.S. Kresge Co., a stagnant chain of central-city dime stores. Convinced that Kresge's inner-city stores held little promise, Cunningham persuaded the company's board to invest $80 million in some 60 suburban K mart outlets. In four years, K mart's sales overtook those of Kresge stores, and in 1977 Kresge was renamed in honor of its successful spinoff.

Keeping prices low is not easy, even for a large chain.

K mart has succeeded primarily by careful planning and by accumulating remarkably little debt. The company leases all its buildings to avoid construction loans and mortgages. The chain will soon complete its network of eleven regional warehouses, located within a one-day drive of most stores, allowing K mart stores to keep inventories at a minimum, reducing a major source of debt. The distribution network also allows local managers to order merchandise independently. As a result, K mart's Sunbelt stores never get stuck with too many Snowbelt specialties, like ice hockey sticks.

K mart's new chairman, Bernard M. Fauber, 57, has plans to keep the chain expanding. He intends to open 180 to 190 new stores a year, many of them in urban and rural areas that the chain does not reach now. New stores are likely to be only about half the size of K mart's normal retail barns.

Fauber insists that by 1990 K mart will have 3,000 outlets, making it nearly as ubiquitous as McDonald's or Burger King.

Fauber is also planning a perhaps dangerous shift in retail strategy. The chain is now expanding its range of goods, especially in clothing, and spiffing up the looks of its spartan stores. Says Fauber: "We aim to get a bigger share of customers' paychecks." Sears tried that same tactic, but ended up losing many low-budget customers to K mart. While K mart's efforts to draw better-heeled patrons should further broaden its appeal, they could also backfire and leave the company vulnerable to the same consumer malaise that has afflicted other retailers during the recession. Fauber, nonetheless, feels confident that he can polish his money machine by giving K mart a little glamour.

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