How Kmart went from bargain basement to global success story

Kmart boosted its earnings by 16.3 per cent to A$371 million in its half year results, revealed on February 15. Photo / Creative Commons image by Flickr user Cliffano Subagio

On closed Facebook groups with more than 100,000 members, obsessive fans swap advice and tips about their shared obsession.

"Matching Easter pjs for my girls," writes one. "Not even 30 seconds after this pic my youngest was crying because she doesn't want to look like her sister [crying laughter emoji]."

"How much and what sizes are available?" others are desperate to know.

"Kmart. $16."

These are the Australia's "Kmart mums", who congregate in groups where devoted shoppers trade photos of bargain $9 beach towels, beg others to check their local stores for a coveted $10 rose gold planner and exchange photos of "pantry porn" and customised product "hacks".

From succulent fairy gardens in a Kmart tub filled with Kmart sand, to a $3 Minnie Mouse T-shirt sewn into a romper, gazing at dirt-cheap items you never knew you wanted is dizzyingly addictive.

Emma Powderham, from Berwick in Victoria, said she loved the store's homewares. "I can have all the latest champagne looks on a beer budget," she said.Hayley Sweeney, from Craigie in WA, told news.com.au she was "living the fancy life for bottom dollar".

Jen Webster, from Aberglasslyn, NSW, added: "The million dollar question is, why wouldn't you love Kmart?"

CUT-PRICE CACHE

The budget retailer, which came to Australia from the US in 1960s, has in just the past few years turned its fortunes around, moving from bargain basement to the nation's number one department store.

"It has created at a social level an aspirational model," Retail Doctor CEO Brian Walker told news.com.au. "That's unheard of in this space. They've created a community. They've developed a cut-price cache, a bit hip, a bit cool."

Under the leadership of Guy Russo, Kmart Australia is now a global case study in harnessing social power, leaving the likes of Target, also owned by Wesfarmers, and Big W languishing in its wake. It has ditched the traditional marketing model in favour of putting customers in the driving seat.

These days, every retailer in Australia is fighting to recreate Kmart's magic formula.
Key to its success is its harnessing of free advertising in the form of social media. Facebook and Instagram groups and the popularity of hashtags like #Kmartstyling and #Kmartlove are a marketer's dream.

"We just let it happen," chief operating officer John Gualtieri told news.com.au.

But it is certain steps the company has taken that have succeeded in transforming perceptions to make Kmart cool.

REINVENTING THE BRAND

Back in 2008, Kmart was where so many other Aussie stores are today. "There was no clear strategy, too many products, no one really understood the pricing," says Mr Walker.
The retailer stocked more than 150,000 products at that time, but it has been dropping hundreds of items. Next week alone, 220 lines will be discontinued.

While that may sound counterintuitive, it's all part of the plan. "It's smartened up the product-pricing relationship and reduced the breadth of products," says Mr Walker. "They've taken away the everybody appeal."

Zumo Retail director Mal Scrymgeour told news.com.au Kmart knows its customers. "The target market is families and inside that target market there are two important groups - mums and, perhaps most importantly, kids," he said. "Mums want to make kids happy."

Mr Gualtieri says the store is divided into three categories: home, apparel and kids. He emphasises the importance of listening to customers and giving them what they want - everyday items that look good, at low prices all the time.

Like Target, Kmart doesn't do seasonal sales.

The retailer has 48 designers working away at creating those must-have products, with around 75 per cent of the stock being own-brand. And its buyers are tuned in to exactly which big brands customers want. Lego and Barbie are top sellers, but the store is currently reducing its stock of DVDs, for example, while improving its offering and price in the pets category.

Kmart says it's this move to bulk buying a streamlined range, and direct sourcing that cuts out middle men, that allow it to keep those prices super-low, insisting it is committed to ethical sourcing.

"They know who they want to be," said Mr Scrymgeour. "Everything stems from that. They own their spot."

Its TV campaigns have been given a fun, fresh overhaul and the look of the stores has been brought into line, ditching old untidy and confusing layouts for a tried and tested model.

"They're easier to walk through, [Mr Russo] understands impulse purchasing, there are better adjacencies," says Mr Walker. "They've reinvented the brand."

CUSTOMER EXPERIENCE

Now, it's up to Kmart's competitors to get in the game. "Its competitors are not sure who they're talking to, they try to talk to too many people at the same time," said Mr Scrymgeour.

"Target doesn't know if its upmarket, mid-market, budget. As soon as you're confused in terms of your positioning, people don't know who you are and you get lost."

He said Kmart had a "clarity of purpose" that meant people saw it "as something distinct". Bunnings, Aldi and Priceline and Chemist Warehouse have achieved similar effect.

While Coles, Woolworths and Aldi are engaged in a bitter price war in the supermarket space, Australian retail more broadly is doing little that is compelling on the international stage.

Myer is exploring useful data insights and David Jones is revamping its food offering, but Big W and Target are scrambling to keep up.

But Kmart boosted its earnings by 16.3 per cent to A$371 million in its half year results revealed on February 15, with a revenue growth of 8.9 per cent. Target's earnings, meanwhile, fell by A$58 million to A$16 million, with revenue down 17.7 per cent.

"Big W has a confusing price structure, it's bloated, there are too many products," says Mr Walker. "Target tries to be all things to all people.

"If you look at the demise of businesses like Howard's Storage World and Pumpkin Patch, it's no coincidence that it's in these areas that we've seen Kmart grow."

This shrewdness is putting it ahead. While Bunnings grew by 7 per cent in its February earnings, it did not achieve a comparable uptick in homewares from the demise of rivals like Masters, for example.

Meanwhile, there are 40 comments and counting on the thread about the rose-gold planner, with customers seeking out stores with stock and buying it up for themselves, while others are flogging the popular product for an inflated price on eBay.

The dollar signs will be flashing in shareholders' eyes.