The Green Light

As every retailer knows, the holiday season amounts to the year’s report card. For those who’ve been struggling, it’s even more than that—it can be make-it-or-break-it time. Virtually everything retailers need for the season is locked in by now. Christmas merchandise is arriving at some distribution centers. And the only outstanding question is how customers will respond to the holidays’ marketing and merchandising efforts.

One of the season’s biggest outstanding question marks hangs over Kmart Corp. Beset by woes ranging from January’s bankruptcy filing and subsequent closing of some 13% of stores, to the PR fallout from troubles at Martha Stewart Living, the source of one of its best-selling brands, to falling stock prices that prompted a notice of possible delisting from the New York Stock Exchange in July, Kmart needs to pull off a stellar Christmas this year—some say a miracle—to turn itself around.

The company has spent much of the past two years scrambling to put out fires, and that includes ongoing and significant changes at Kmart.com, formerly known as BlueLight.com. Chief architect of those changes is Kmart.com CEO Richard Blunck. Recruited from Deloitte Consulting America’s e-business unit, DC.com., Blunck first got Kmart’s attention when he consulted with the company in connection with the WorldWide Retail Exchange he’d helped launch while at DC.com. Prior to his eight-and-a-half-year stint at Deloitte, he worked in information systems for Ford Motor Co. and was an instructor in management information systems at Indiana University.

A blend of talents

Time was, it was unheard of for an executive with virtually no retail experience to land a CEO title at a retail company of Kmart’s size, but then, times have changed. When it comes to fixing an ailing BlueLight.com—losing as much as $14 million a month between its e-commerce operation and its ISP when it troughed last year—Kmart’s management says Blunck is just what the doctor ordered.

“He has a blend of two talents that don’t always come packaged together,” says Randy Allen, chairman of BlueLight and Kmart’s senior vice president of strategic initiatives, who worked with Blunck at Deloitte. “One is an in-depth knowledge of technology and understanding of operational processes. Secondly, he has very solid financial acumen and a wilingness based on that to make tough decisions and hard calls. He has a good sense of what items are going to sell, how to drive profitability through margin, and what kind of goods we should have. “

That said, Blunck never set out to be CEO. He’d signed on late in 2000 as CTO and e-business officer for Kmart, and was looking forward to overseeing what was to be a $1 billion-plus, multi-year program to restructure Kmart’s technology platform with a focus on supply chain technology. By May 2001, however, as Kmart decided to scale back on spending and the web site’s problems emerged, he was tapped for a different job: stabilizing operations at a wildly overspending and underperforming BlueLight.com.

BlueLight.com had troubles emblematic of the times. Focused on a potential IPO and metrics such as traffic versus the more telling sales or cross-channel effect, it was losing $10 million per month on e-commerce and another $3 million to $4 million on the ISP when Blunck arrived. And accompanying the departure of BlueLight’s original CEO, the entrepreneurial Mark Goldstein, was industry buzz about whether focusing on operations would kill the web site’s VC-era creativity.

Blunck bristles at some of those comments. “I won’t agree that creativity died, but they sure did need someone who was operationally focused,” he says. Blunck has cut a workforce of about 200 by half, reduced the flow of red ink, and helped usher key functions of BlueLight back into Kmart Corp. But it will take a post-season review of this, Blunck’s second, holiday at the helm to tell if those efforts will ultimately pay off.

More focus

Kmart re-launched BlueLight this past June, updating the look, adding an expanded selection of brand name merchandise such as Disney’s children’s apparel and Pentax cameras, and perhaps most importantly, aligning the web’s offering and marketing messages with the store’s “Stuff of Life” campaign for tighter cross-channel integration and uniform brand marketing. For the first time, the site features the same logo, imagery, even the same type fonts as every other Kmart communications platform, from TV to newspaper inserts.

The new BlueLight also is more focused on merchandising and getting the right assortment, and is continually refining the product mix with online product testing. To get ready for the holidays, it’s added the popular Joe Boxer line online as well as in-store, and is supporting it with a new TV campaign. It also will offer the Martha Stewart Holiday line, the first time the brand has created a dedicated holiday assortment. (A word on Martha: Kmart says her products continue to sell “above trend.”) The updated site, renamed Kmart.com, features more information on Kmart stores and an area on the home page that alerts web customers to nationwide events, promotions and sales.

It’s a 180-degree turn from BlueLight’s original strategy of distancing the web site from Kmart stores in hopes of attracting a new customer base. Blunck inherited that strategy, and it was one he never really embraced. “The idea was to grow as fast as possible, at whatever expense, and to create a separate corporate entity that could generate value as an IPO, with the potential to grow into billions in online sales,” he says. “There was some appeal to a different audience, and positioning it as a separate company was attractive to some people. I don’t know that that was the way I would have chosen to go and clearly, we proved that all of it didn’t make sense.”

Brand power

Blunck’s first charge was to take a hard look at whether the money-losing BlueLight was worth salvaging and accept that a negative answer would put him out of a job. While the web operation had experienced significant growth, it had even more spectacular growth in expenses that more than offset the increase in top-line revenue. In short, BlueLight was broke.

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.

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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.

“Kmart has to find a way to prove itself as a geographical or physical destination for shoppers before BlueLight really gets active,” says William Brandt Jr., CEO of Development Specialists Inc., a bankruptcy and turnaround specialist firm. “If you can’t exceed past performance at similarly open stores, that’s a measure of declining market share and traffic.” In fact, Kmart in June reported that on a comparable store basis, its first quarter declined 8.8% from the first quarter of last year. “BlueLight.com is not going to be able to do anything about that; it’s got to be the other way around,” Brandt says. “As competent as the efforts may be to get the Internet strategy in order, this is the tail wagging the dog. Kmart has got to perform really well this Christmas to show viability.”

Recent sales figures show that some Kmart customers spooked by the bankruptcy filing may be returning. While there’s been a downward trend in comparable store sales this year, the rate of decline has been shrinking since May. May’s comparable store sales were 16.4% less than April’s, while June’s declined 11.4% from May’s and July’s declined only 8.7% from June’s.

Blunck knows what he’s up against and how critical the holidays will be for both the web site and its parent. No stranger to the uphill climb when he signed on with Kmart and BlueLight, he remains guided by his original assessment of BlueLight’s prospects. “Before I take anything on, I want to know if most of the elements required for success are around. I like nothing more than to go into a tough situation and fix it up,” he says. “I did it for a long time as a consultant and I’m very good at it.”

At the same time, realism tempers Blunck’s confidence. “We pull our one oar in the Kmart boat, do that great, and keep hoping for the best for Kmart,” he says. “We all realize that the fate of BlueLight hinges on that.”