Kmart moves to catch up on IT

Big dollars to go for long-needed upgrades

Even $670 million in technology and logistics investments this year won't change the hard reality that Kmart Corp. is facing an uphill battle trying to catch rival Wal-Mart, widely regarded as the leader in retail IT systems.

Retail analysts said the improvements Kmart committed itself to last week - including a new inventory management system and new scanners - have long been needed and are especially critical now that Minneapolis-based Target Corp. is nipping at Kmart's heels for the No. 2 spot behind Wal-Mart Stores Inc.

"There's been a lot of Band-Aiding, if you will, and the time has come. They have to make these changes in order to survive," said John Hutchins, an analyst at AMR Research Inc. in Boston. "In order for them to synchronize their logistics and buying mechanisms, they're going to need to update their systems."

Last week's announcements mark the first decisive action taken by Kmart CEO Chuck Conaway since he took the helm May 31. Besides launching the technology investments, Conaway announced the closing of 72 poorly performing stores as well as accelerated inventory reductions and organizational and executive-level changes.

Troy, Mich.-based Kmart plans to spend $460 million to upgrade its information technology systems. Those plans include adding state-of-the-art scanners in all 2,165 stores to help speed the check-out process; faster cash registers in 300 of Kmart's highest-volume stores; a new business-to-business collaboration, planning, forecasting and replenishment system; and a new system for buyers to track and manage inventory to help Kmart and its suppliers get closer to real-time inventory management.

The last item is "a system that has been used internally for over a year, but what we're doing now is making it available to our vendors as well, so there's better communication between our suppliers and merchandisers," said Kmart spokeswoman Mary Lorencz.

Another $210 million will be spent on improvements to the company's distribution and logistics network, including the enlargement of two distribution centers and the installation of new sorting equipment. The company is also taking a pretax charge of $75 million to shelve "certain systems previously under development and related hardware" that are "no longer applicable."

Conaway's 2000 technology and logistics investment figures represent a $135 million increase over his predecessor's projections.

Before former CEO Floyd Hall left in May, he told shareholders that Kmart would invest $328 million in technology this year, up from $131 million last year. He also said Kmart would spend another $207 million on distribution center improvements this year, up from $92 million last year.

Hutchins said Kmart has had "a significant problem with inventory control," often running out of stock on popular items. He predicted that it will take a multiyear effort to develop an improved inventory management system in parallel with the existing homegrown applications.

Many large retailers are forced to develop homegrown systems because packaged applications can't scale to handle the hundreds of thousands of stock-keeping units the retailers have in thousands of stores, analysts said. Those retailers then try to get as much mileage as they can out of their systems.

"Margins are slim, and there is a great desire to wring every day out of a product or service," said Cathy Hotka, vice president of IT at the National Retail Federation in Washington.

In recent years, Kmart has faced the added challenge of rebounding to profitability after losses in the mid-1990s (see chart) and holding on to a CIO. Joseph Osbourn is the retailer's third CIO in the past five years.

Brian Hume, a retail consultant at Atlanta-based Martec International Inc., said Kmart's $670 million technology cost estimate suggests that the company will do more than improve the systems specified by Lorencz. Hume predicted that the retailer will also upgrade its NCR Corp. Teradata warehouse and improve its warehouse management systems.

Hume also noted that Kmart will need to implement software in-house in order to interface with the WorldWide Retail Exchange's online business-to-business marketplace, in which it plans to participate.

"They're exactly the right things to do," Hume said. "The secret now is all in the execution."

That, analysts said, won't be easy for a company the size of Kmart.

"All the technology in the world is not going to work unless you have the proper training and processes in place in the stores, and I think that's going to be a real challenge for them," said Carol Ferrara, an analyst at Stamford, Conn.-based Gartner Group Inc.

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