Breakeven

Kmart

Kmart is an all-purpose, all-American chain store. In the last decades of the twentieth century, it came to represent the typical shopping experience for millions of blue collar and middle-class Americans. Kmarts generally are single-story, parking lot-size structures, where customers can find and purchase an astonishing array of items at a reasonable price. Everything from bookcases to baby clothes, clocks to CDs, earrings to edibles, paint supplies to perfume to picture frames can be found at Kmart.

In the early years of the twentieth century, Americans made most of their purchases in small, specialized stores known as "mom-and-pop" stores. Meat was available through butchers; dairy products were procured directly from dairy farms; and a range of edibles lined the shelves of grocery stores. Tools, nails, and screws were found in hardware stores. Dresses and suits could be purchased in men's or women's clothing stores. Then, throughout the twentieth century, larger emporiums began replacing specialized stores as primary shopping outlets. Department stores like Macy's and Gimbels offered a wider range of merchandise all under one roof. Supermarket chains replaced grocery stores. Because such stores had the purchasing power to acquire merchandise from suppliers in bulk, prices could be lower than those offered by the smaller, individually owned competition.

The 1960s was the advent of the Kmart-style discount retailer. These large discount stores offered the product variety found in department stores, but at even lower prices. Kmart is a spin-off of S. S. Kresge, a dime store (see entry under 1900s-- Commerce in volume 1) chain. The initial Kmart appeared in Garden City, Michigan, a suburb of Detroit, in 1962. Eight years later, more than four hundred Kmarts were in business across the country, bringing in billions in sales. In the ensuing decades, the chain kept expanding, opening over two thousand stores, some of which were just miles apart. In 1989, Kmart became America's top-grossing retailer. However, Kmart is not the lone store of its type. Wal-Mart (see entry under 1960s-- Commerce in volume 4) and Target, for example, also commenced operations in 1962. Often, competing stores, essentially offering the same merchandise, are found opposite each other along the same roadways.

If one individual came to represent the discount merchandising phenomenon, it was the dynamic Sam Walton (1918-1992), founder of Wal-Mart. In fact, during the 1990s, Wal-Mart--Kmart's arch-rival, whose stores generally were newer and larger--surpassed Kmart as the nation's leading discount retailer. In an effort to modernize its image--and to keep up with Wal-Mart and Target--Kmart began renovating its stores, adding brighter lights, wider aisles, and more sophisticated displays. Model Kathy Ireland (1963-), actress Jaclyn Smith (1947-), and homemaking queen Martha Stewart (1941-) became celebrity-sponsors of lines of inexpensive "designer" merchandise. Kmart even opened a four-level store in midtown Manhattan.

But economic problems began to plague Kmart more seriously in the twenty-first century. In January 2002, Kmart filed for bankruptcy; less than two months later, it announced plans to close 284 stores and lay off 22,000 employees in 40 states in an attempt to reorganize itself. The future of Kmart--the first store of its type to open branches across the country, and the first to challenge the large department stores for retail supremacy--is uncertain.

For More Information

Blackwell, Roger. From Mind to Market: Reinventing the Retail Supply Chain. New York: HarperCollins, 1997.

"Kmart Corporation News." Bluelight.com. http://www.kmartcorp.com/corp/story/ind ex.stm (accessed March 13, 2002).

Peterson, Roger. The Future of U.S. Retailing. Westport, CT: Quorum Books, 1992.

http://www.cio.com/archive/011595/mart.html

We'll Make It Up With Volume" - Not!

© 2003 by Michael C. Gray

April 30, 2003

In times of economic stress (like now), it's tempting to reduce prices to increase sales.

Sometimes this decision is justifiable to turn inventory that is tying up capital and can't be sold into cash. Also, sometimes a business is able to get volume purchase discounts or has operating efficiencies that their competitors do not, like Wal-Mart. Those businesses can temporarily choose acceptable reduced profits with the hope of eliminating competitors (like K-Mart) or creating barriers to entry for new competitors.

Reducing prices is usually an unsound long-term strategy that makes it more difficult to be profitable. Let's look at a break-even analysis to illustrate this point.

Busibuy is a retailer that has been experiencing reduced sales. Traditionally, it has priced goods with a 100% markup over cost, which also could be described as a 50% gross profit margin on sales. Operating expenses are fixed at $300,000 per year. In order to break even, its sales would have to be $300,000 / 50% = $600,000.

What if Busibuy reduced its prices by 10%? That would reduce the gross profit margin to 40%. In order to break even, sales would need to be $300,000 / 40% = $750,000. That means there would need to be at least 25% ($750,000 - $600,000 = $150,000 / $600,000 = 25%) more effort to break even.

What if Busibuy increased its prices by 10%. That would increase the gross profit margin to 60%. How much business could Busibuy lose and still break even? Break even sales would be $300,000 / 60% = $500,000. That means they would need about 16 2/3% less effort ($600,000 - $500,000 = $100,000 / $600,000 = 16 2/3%) to break even.

A similar analysis could be done for a service business by analyzing hourly rates, net of direct hourly costs. Bear in mind that operating costs for given ranges of volume will be fixed.

It's clear that businesses that have operating efficiencies really have a competitive advantage. For example, a competitor to Busibuy is Maxibuy. For the same operating range, Maxibuy's fixed costs are $250,000. When Busibuy is breaking even, Maxibuy will have a profit of $50,000.

Remember this analysis when making pricing decisions for your business. Otherwise, making a knee-jerk response could result in moving from barely making it to a loss.

Kmart's Ten Deadly Sins

Kern Lewis, 10.10.03, 10:41 AM ET