How good management saved a retail chain

March 2, 2012
The Age

While some retailers whinge about business being tough, some change their business and boost profits. There’s no better example than the remarkable job a former hamburger flipper has done in saving a major Australian retail chain from liquidation.

It’s only a sideshow to the main supermarket war between Coles and Woolworths, but the skirmish between Big W and Kmart is a story that explains much about legacy Australian retailing and its management’s mindset.

Kmart is a brand three owners wanted to kill, but each set discovered that breaking long shopping centre leases would be too expensive. Instead it was allowed to flounder along, not making any money and visibly deteriorating.

But having discovered what the two previous outfits knew, Wesfarmers turned to left field, hiring Guy Russo as Kmart CEO in late 2008. That’s the Russo whose entire working life had been spent at McDonalds, rising from hamburger flipper to running the company in Australia and then China.

There was a lot of low-lying fruit to be picked in straightening up the Kmart ship so that it wouldn’t sink, but confirmation of the transformation was provided in yesterday’s Woolworths results.

When Russo took over Kmart, the Big W opposition was streets in front. The latest numbers showed that Big W in the December half recorded a 4 per cent fall in earnings before interest and tax to $120 million on sales of $2,362 million, the EBIT to sales ratio falling to $5.06 per cent.

Kmart’s December half saw an 11 per cent rise in EBI to $193 million on sales of $2,236 million – the EBIT to sales ratio rising to 8.6 per cent.

As the CBD column reports, even in CEO gimmickry Big W has been left trying to play catch up with a “me too” strategy.

Having heard Russo tell the story of the transformation, you have to be amazed at how bad previous senior management had been, yet Russo is quick to give credit for the change to existing staff who knew much more about retailing and just had to be allowed to show it.

It is very simple to stop stocking stuff that doesn’t sell, that you’re not making any more out of, and to concentrate on giving customers more of what they want. The story becomes more inspirational when Russo took the gamble of ditching Kmart’s “bible” – the weekly “on sale” catalogues.

Russo’s interpretation of “50 per cent off this week!” is that the shop is telling its customers “we’re going to double the price next week!”. The “specials” have gone, replaced by an always lower prices strategy that the December half numbers show is working.

What’s more, Russo has dramatically driven prices down. Price reductions in the order of 30 per cent became the norm – Kmart rushed to give consumers the payoff for a stronger Australian dollar and greater supply chain efficiency.

Russo’s directive to his buyers was: “Find the factory.” Kmart has worked to cut out the middleman importers and share the dividend.

The great empowerment of the internet and travel is that consumers aren’t as easily fooled. We all know the shirts all the stores sell come from much the same factory in China or Bangladesh or wherever with a few differences in material and finish and a big one in the brand label that is sewn into the collar and the price tax stuck on.

The canny as well as cautious consumer is more open to paying less for everyday items because the big price differentials of yesteryear no longer reflect as big a quality differential.

A consumer pays three figures for a pair of jeans instead of a low two because that consumer wants to pay more, not because the jeans are fundamentally worth it. There’s only so much that can be done with denim and stitching.

That’s scary for many retailers. Rather than complaining about deflation making it hard to make bonus, Kmart has embraced it as a way of better serving its customers. And it works.

Yes, good management can make a difference for a struggling retailer.

Michael Pascoe is a BusinessDay contributing editor

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