The two firms will become independent publicly traded companies in 2015. The move follows pressure from investor Carl Icahn to spin off the payments ...
(Page 2 of 3)
But Blunck saw assets worth saving that he believed gave Kmart’s web site an edge over pure-plays. For one thing, it was well known. “We already had a brand to make use of, though I don’t think we were doing it then, which gave us an advantage over places like Amazon,” he says. “And we would get to ride on the back of the stores’ hundreds of millions of dollars in advertising.” Blunck also believed that BlueLight’s ISP could not only turn a profit, but be a valuable marketing tool for Kmart.
Even as he was planning to ride on Kmart’s ad dollars, Blunck was putting in place a policy that required a payback on any investments. “If we were going put a dollar into BlueLight, we were going to get money back over time,” he says. Judging that there was enough in place to do that, Blunck put stringent cost cuts to work. Immediately on his arrival as CEO, some 20% of the workforce was laid off according to a bailout plan he’d already started formulating at Kmart’s request while still functioning as CTO. “It was a tough day for everybody involved. I vividly remember that day,” he says.
Over the next few weeks, Blunck took online inventory down from 15,000 to 3,000-4,000 SKUs, clearing out stock that wasn’t moving online and through store closings. He instituted a rule that still holds today: To make it into the online inventory, an item must contribute $10 or more to profits, or directly affect the sale of an item that does. Under those criteria, Martha Stewart brand washcloths, though priced at about $4, make the cut, because they are typically sold as part of a larger towel set. Product categories such as automotive supplies, difficult to fulfill, were dropped.
The Porsche-Ferrari spin-out
Blunck slashed BlueLight’s marketing budget to $200,00 from the previous year’s $20 million in his first weeks as CEO, eliminating all PR and marketing contracts with outside concerns. He began migrating functions such as merchandising, planning and finance from BlueLight’s California headquarters back to Kmart corporate headquarters in Troy, Mich. And with a technology background, he was quick to spot a drain-and an opportunity-in the web site’s e-commerce platform.
“I had 100-plus people out in California managing the technology platform. But I’m a tech guy, and so it was easy for me to get my hands on exactly what they were doing, how we were spending money on technology, and whether we were any good at it,” he says. He concluded that while the company had spent big on the best applications from top technology vendors, the disparate parts didn’t work effectively as a unit. “It was like having a Ferrari engine with a Porsche transmission. When you put it together, it wasn’t working very well. By the time an order fed through all the systems and got to the back end, there was a propensity for it to be messed up,” Blunck says.
Blunck believed that concentrating the platform and support functions among fewer providers would improve performance. Within months, he’d had replaced SubmitOrder Inc. as BlueLight’s fulfillment vendor and reassigned most of BlueLight’s e-commerce operation to Global Sports Inc., now GSICommerce Inc.. Unlike many of GSI’s customers, however, BlueLight retains responsibility for merchandising, pricing, content management, branding and some online marketing. GSI handles customer service and e-commerce applications such as hosting, checkout and order processing, fulfillment, and the rest of the back end operation. Some of the e-commerce applications for which BlueLight still holds licenses are “still used, but used less,” says a spokesman.
Blunck took the web site down for three weeks in August 2001 to make the switch to the new platform. It went back up Sept. 7, 2001, with 8,000-9,000 SKUs, which rose to 15,000 items that met his new criteria on profits by the holidays. At about that time, he also switched the company’s free ISP to a paid model that charged $8.95 per month.
The sweeping changes have had an impact on site operations. Blunck says initial cutbacks reduced the monthly burn rate on e-commerce to $5 million from $10 million, while subsequent changes such as the switch to GSI and better use of Kmart’s buying power have now cut it to about $1 million per month.
Blunck says the ISP has been profitable since November of last year. From its highest enrollment of 1 million active subscribers among some 7 million subscribers, the ISP now has about 160,000 paying customers. The ISP also has proved itself as a marketing tool, according to a spokesman. Though the company would not disclose numbers, ISP subscribers on average have a larger basket size per order and spend more than other online customers, he says.
Countering the bankruptcy
Kmart.com slashed its operating expenses and says its holiday 2001 results topped most analysts’ forecasts of 10% to 20% growth. But January 2002 had big changes in store at the corporate level. Blunck says Kmart’s Chapter 11 bankruptcy filing, which he learned about one day in advance, came as a surprise. “We spent the whole year killing ourselves to get BlueLight working, and then there’s a new challenge,” he says.
Having cut costs and strengthened operations, Blunck has been working to counter the effects of the filing. E-mail messages and home page displays for ISP customers seek to reassure them that the service will stay operational, while on the e-commerce side, Blunck and his team have worked to reassure suppliers.
But as long as the larger question mark remains over Kmart Corp., even a successful Kmart.com Christmas could be overshadowed by the corporation’s fortunes, depending on how events turn. Hanging over Kmart.com is the larger issue of the Kmart brand with which the web site is now aligned. Some industry watchers say the brand has yet to find a firm footing in relation to other big-box retailers like Wal-Mart Stores Inc., which consistently beats Kmart on price, and Target Corp., whose discount Target stores attract a more upscale audience.