At its peak, Kmart boasted over 2,400 stores and a global workforce of approximately 350,000 employees. However, as of 2023, only two Kmart locations remain operational in the United States, situated in Miami, FL, and Bridgehampton, NY.
This drastic reduction naturally leads to the question: Why Did Kmart Go Out Of Business?
The concise answer points to a “special strategy group” from the 1970s that diverted focus from Kmart’s core merchandising strengths, leading to stalled growth in the 1980s and 1990s. Subsequently, CEO Charles Conaway’s fraudulent activities precipitated a Chapter 11 bankruptcy filing in 2002. A second filing followed in 2018, largely attributed to Edward Lampert’s actions driven by profit maximization.
However, the story of a century-old company is far more complex than a brief summary can convey. To truly understand the factors behind Kmart’s decline, it’s essential to delve into its history and pivotal moments.
Kmart Company Timeline: A Century of Ups and Downs
1899: Company Is Founded
The S.S. Kresge Company, Kmart’s original name, was established by Sebastian Spering Kresge in Detroit, Michigan. Initially, these stores operated as “dime stores,” offering everyday household goods at affordable prices, primarily around ten cents.
1912: S.S. Kresge Co. Early Growth
Demonstrating rapid expansion, the S.S. Kresge Company exceeded 80 stores and achieved sales surpassing $10 million within just 13 years of operation, marking a significant early success.
May 23, 1918: NYSE Public Listing
The S.S. Kresge Co. achieved a major milestone by being listed and traded on the New York Stock Exchange (NYSE), opening up new avenues for investment and growth.
March 1, 1962: New “Kmart” Division Is Created
Kresge initiated a new discount department store division, marking a strategic shift. The first “Kmart” store opened in Garden City, Michigan. By the end of 1962, Kresge had expanded the Kmart division to 18 locations.
October 18, 1966: Founder Sebastian S. Kresge Dies
Sebastian S. Kresge, the company founder, passed away at the age of 99. In honor of his passing, all 930 Kresge stores, including 162 Kmart locations across the US, Canada, and Puerto Rico, closed during funeral services. That same year, the company’s sales exceeded $1 billion for the first time, a testament to Kresge’s lasting impact.
1972: Robert Dewar Named CEO
Robert Dewar succeeded Harry Cunningham as chairman and CEO of S.S. Kresge Co., ushering in a new era of leadership.
1977: S.S. Kresge Co. Name Changed to Kmart
Reflecting the increasing dominance of its discount division, S.S. Kresge Co. officially changed its name to Kmart Corporation. By this time, Kmart stores constituted over 70% of the company’s locations (1206 out of 1647) and generated over 90% of total sales.
1981: 2000 Kmart Stores
Kmart reached a significant milestone with the opening of its 2,000th store, showcasing its widespread national presence.
1984: Kmart Acquires Walden Book Co. And Builders Square
In a move towards diversification, Kmart acquired Walden Book Company for $295 million in stock. Waldenbooks was a leading book chain with 845 stores nationwide. Kmart also purchased the home-improvement chain, Home Centers of America, for approximately $90 million, later rebranding it as “Builders Square.”
1986: Martha Stewart Brand Introduced
Kmart partnered with Martha Stewart, introducing the Martha Stewart brand to its product offerings, aiming to enhance its appeal in home and lifestyle categories.
Early 1990s: Kmart Goes on a Buying Spree
Continuing its diversification strategy, Kmart acquired The Sports Authority in 1990, took a majority stake in OfficeMax in 1991, and purchased Borders, Inc. in 1992, expanding its reach beyond traditional retail.
1995: Acquisition Sell Off
By 1995, Kmart divested from its diversification efforts, selling off its remaining stakes in The Sports Authority, OfficeMax, and Borders Group, signaling a shift in strategy.
1996: Kmart Completes New Financing
Kmart secured $4.7 billion in new financing to address existing debt and fund capital expenditures and working capital, aiming to strengthen its financial position.
1997: Builders Square Is Sold Off
Kmart sold Builders Square to Leonard Green, an investment banking firm, further streamlining its portfolio and focusing on core retail operations.
December 1999: Kmart Goes Online
Kmart ventured into e-commerce, launching BlueLight.com with investment partners. This online platform offered e-commerce capabilities and internet services, later evolving into www.kmart.com.
January 22, 2002: Kmart Files for Chapter 11 Bankruptcy Protection
Facing mounting financial pressures, Kmart filed for Chapter 11 bankruptcy protection and announced the closure of 284 stores. SEC filings at the time listed Kmart’s assets at just over $17 billion.
2003: Kmart Reorganization and Emergence From Chapter 11
Between 2002 and 2003, Kmart closed 600 stores as part of its reorganization, reducing its store count from 2,114 to 1,514. Kmart presented a five-year retail strategy aimed at returning to profitability by 2004. The U.S. Bankruptcy Court approved the plan in April 2003, and Kmart emerged from Chapter 11 in May, with Edward S. Lampert becoming Chairman of the new Board of Directors. By June, the company was relisted on NASDAQ under the ticker ‘KMRT’.
March 24, 2005: Kmart Acquires Sears
In a surprising move, Kmart acquired Sears for $11 billion, forming Sears Holding Corporation. The intention was to operate both Kmart and Sears stores independently under the new holding company.
June 1, 2009: Charles Conaway Charged by SEC
The SEC charged former Kmart CEO Charles Conaway with misleading investors about Kmart’s financial condition in the period leading up to the 2002 bankruptcy, highlighting the consequences of financial mismanagement.
December, 2011: Slumping Holiday Sales Leads to 120 Store Closures
After four years of declining sales, disappointing holiday sales in 2011 led to the announcement of 120 Sears and Kmart store closures, reflecting ongoing financial struggles.
February 2, 2013: Lampert Officially Takes Over as CEO
Sears chairman Edward Lampert formally assumed the role of CEO of Sears Holding Co., a move met with criticism due to his lack of retail experience and perceived inability to reverse the company’s decline.
October 15, 2018: Sears Holding Co. Files for Chapter 11 Bankruptcy Protection
Sears Holding Co., encompassing both Sears and Kmart, filed for Chapter 11 bankruptcy protection. Lampert stepped down as CEO as the company’s sales had plummeted from over $50 billion in 2008 to $16.7 billion in 2017.
February 11, 2019: Sears Holding Co. Sells off Assets
Sears Holding Co. sold its assets to Transform Holdco LLC, an affiliate of ESL Investments, for $5.2 billion. This sale put Sears and Kmart back under the control of Edward Lampert, founder and CEO of ESL. At the time of sale, there were 223 Sears and 202 Kmart stores remaining.
March 20, 2023: Lampert’s Appeal Denied
Following the second bankruptcy, Lampert’s appeals regarding underpayment by Sears Holding Co. were denied by the US Supreme Court, upholding the original rulings.
The Core Reasons Behind Kmart’s Downfall
To truly understand why Kmart went out of business, it’s critical to analyze key periods in its history. The company’s trajectory can be largely understood by examining the decisions and events surrounding three specific years: 1972, 2000, and 2003.
These years mark pivotal shifts in strategy and leadership that ultimately contributed to the erosion of Kmart’s market position and financial stability, culminating in its decline. While many factors played a role, the decisions made—and not made—during these periods were particularly impactful.
The Diversification Detour: Robert Dewar and the Special Strategy Group (1972)
In 1972, Robert Dewar took over as CEO from Harry Cunningham, a figure greatly admired even by Walmart founder Sam Walton for his retail acumen. Dewar inherited a successful and expanding Kmart. Initially, Dewar oversaw continued growth, particularly in new store openings, until around 1976.
However, it was during this period of apparent success that Dewar commissioned a “special strategy group.” This group operated under the premise that the US merchandising market was becoming saturated. Their mandate was to identify growth opportunities outside of Kmart’s core merchandising business, pushing for diversification. Dewar set a goal for 25% of sales to originate from these new ventures by 1990.
Losing Focus on Core Merchandising
This strategic shift led to a decade-long acquisition spree. Throughout the mid-1980s and early 1990s, Kmart acquired Walden Book Co., Builders Square, The Sports Authority, OfficeMax, and Borders, Inc.
However, none of these acquisitions proved successful in the long run. By 1997, all five had been divested. Compounding the issue, Kmart remained liable for significant lease guarantee obligations even after selling these businesses.
The resources—strategic planning, time, and capital—diverted to these external ventures significantly detracted from the core Kmart business. Focus on improving and maintaining Kmart’s fundamental retail operations waned during this period of diversification.
Competitive Pressures Intensify
Distraction from core operations proved particularly detrimental as competitors like Walmart, Target, Sears, Kohl’s, and J.C. Penney aggressively competed in the discount retail space.
Kmart attempted to differentiate itself through exclusive brand partnerships, featuring lines from Martha Stewart, Jaclyn Smith, Kathy Ireland, Disney, Sesame Street, Joe Boxer, and Route 66.
However, these licensing agreements were insufficient to compensate for fundamental failures in core business areas, such as inventory management and store maintenance.
Inventory Management Missteps
A critical oversight was Kmart’s failure to adopt advanced inventory management systems as effectively as its competitors. Walmart, for instance, implemented point-of-service (POS) systems with satellite links for automatic reordering in the early 1980s, significantly improving their inventory efficiency.
In contrast, Kmart struggled to keep shelves stocked with popular items. Operational inefficiencies were rampant, exemplified by a structure where 220 corporate employees had final purchase order approval authority, while local store managers had minimal ordering discretion. This cumbersome system led to frequent stockouts and lost sales.
Store Appearance Deterioration
Alongside inventory issues, Kmart stores suffered from neglect in maintenance and modernization. The company prioritized opening new locations over investing in existing ones. Consequently, Kmart stores became increasingly outdated and poorly maintained, leading to mounting customer complaints about store cleanliness and overall shopping environment.
Even Martha Stewart, a key brand partner, publicly expressed concerns about the state of Kmart stores. In a 2009 CNBC interview, she questioned the shopping experience at Kmart, highlighting the deteriorating store conditions.
Robert Dewar’s diversification strategy, while intended to drive growth, inadvertently led to the neglect of Kmart’s core retail business, leaving it vulnerable to competitors and internal operational weaknesses. While Dewar initiated this strategy, subsequent CEOs also bear responsibility for failing to correct course and reinvest in Kmart’s fundamentals.
The Conaway Era: Fraud and Financial Mismanagement (2000)
While the 1980s and 1990s saw stalled growth, Kmart remained financially stable until Charles (“Chuck”) Conaway became CEO in 2000. Conaway’s tenure marked a period of financial recklessness and mismanagement that rapidly accelerated Kmart’s decline.
Conaway became notorious for lavish spending and self-enrichment at company expense. He authorized exorbitant, often unauthorized, compensation packages for new hires and senior staff. Executives were further provided with corporate jets, worth $12 million, frequently used for personal travel.
Conaway’s most damaging strategic initiative was the “The BlueLight Always” program launched in the summer of 2001. This program was a poorly planned attempt to engage in a price war with Walmart. Without proper analysis or approvals, Kmart leadership committed to purchasing $850 million in new merchandise for this price-cutting strategy.
“The BlueLight Always” initiative proved to be a catastrophic failure. Liquidity problems quickly arose, leading to delayed vendor payments and fraudulent revenue reporting to conceal the growing financial crisis.
By the end of 2001, holiday sales fell significantly short, and Kmart faced a staggering $2.42 billion loss. Despite the dire financial situation, Conaway approved approximately $29 million in “retention loans” for top executives that same year, further depleting company resources.
As Kmart’s financial distress became evident, vendors began refusing to ship products. Facing a complete lack of options, Kmart filed for Chapter 11 bankruptcy protection in January 2002.
Throughout this period, Conaway reportedly suppressed dissent and punished those who questioned his decisions. The Detroit News described his tenure as “a two-year program of deceit, intimidation and unauthorized spending.”
In 2009, Charles Conaway was charged by the SEC for misleading investors about Kmart’s financial state. Kmart emerged from Chapter 11 bankruptcy in 2003, having eliminated $7.8 billion in debt. A plan was in place to achieve profitability by 2004, offering a potential second chance. However, the damage inflicted during Conaway’s leadership was profound and lasting.
Edward Lampert: Asset Stripping and Financial Engineering (2003)
Edward S. Lampert, through his hedge fund ESL Investments, played a key role in Kmart’s 2002 bankruptcy restructuring. ESL Investments acquired a majority stake in Kmart, making Lampert Chairman of the new Board of Directors.
Lampert recognized the underlying value of Kmart’s real estate assets. His initial investment of approximately $1 billion rapidly appreciated to over $2.5 billion, indicating a significant financial gain.
In 2005, Lampert orchestrated Kmart’s $11 billion acquisition of Sears, creating Sears Holding Corporation. The stated goal was to operate Sears and Kmart as separate entities and challenge Walmart’s dominance.
However, under Lampert’s leadership, expenses were drastically cut across both Sears and Kmart, with minimal reinvestment in store improvements or customer experience. Sales continued to decline year after year. Despite lacking retail experience, Lampert appointed himself CEO of Sears Holding Co. in 2013.
Critics argue that Lampert’s primary interest was never revitalizing the retail businesses but rather maximizing value from their real estate holdings. His complex financial dealings and personal investments intertwined with Sears and Kmart support this view.
Lampert’s involvement included:
- Founder of ESL Investments, which acquired a controlling share of Kmart.
- Chairman of the Board of Directors after Kmart’s emergence from the first bankruptcy.
- Led Kmart’s acquisition of Sears, forming Sears Holding Co.
- Provided $1.3 billion in loans to Sears through ESL, becoming Sears’ largest creditor.
- Chairman and major shareholder of Seritage, a real estate investment company that purchased hundreds of Sears and Kmart properties.
These interconnected roles suggest a strategy focused on extracting value from real estate and financial maneuvers, rather than long-term retail viability.
Kmart’s sales plummeted to $5.8 billion in fiscal 2018, down from $31 billion in 2004. Sears Holding Co. filed for Chapter 11 bankruptcy again in October 2018. Following this second bankruptcy, Sears Holding Co. sold its assets to Transform Holdco LLC, an ESL Investments affiliate, for $5.2 billion in 2019, once again placing Sears and Kmart under Lampert’s control. Lampert’s subsequent appeals for further financial compensation were ultimately rejected by the Supreme Court in March 2023.
As of December 2023, only a handful of Kmart and Sears stores remain, marking the end of an era for these once-dominant retailers.
Final Conclusion: The Perfect Storm of Failures
Kmart’s own Chapter 11 filings acknowledged that retail success hinges on “price, quality, service, product assortment and convenience.” Over decades, Kmart deteriorated across all these critical factors, transitioning from a leader to a laggard.
The company’s decline can be attributed to a combination of strategic missteps and leadership failures. The diversion of focus from core retail operations in the 1980s and 1990s, coupled with fraudulent and self-serving management in the early 2000s, created a downward spiral.
Ultimately, the story of why Kmart went out of business is a cautionary tale of how even iconic companies can be undone by strategic drift, mismanagement, and a failure to adapt to changing market dynamics. The combined impact of Robert Dewar, Charles Conaway, and Edward Lampert’s decisions raises the question of whether Kmart could have been saved with different leadership and strategic priorities. It serves as a stark reminder of the fragility of corporate reputations and the long-term consequences of short-sighted decisions.
By:
Keith X. Donovan
Founder, Startup Stumbles
