Kmart boss Guy Russo has delivered a blunt message to Australia’s retailers: Your business models are outdated and you’re charging consumers too much.
In an interview in the Australian Financial Review, Russo says most Australian retailers pursue a pricing model that involves marking up products and then offering percentage-off discounts to stimulate sales.
But Russo has turned Kmart around using a pricing model of offering consistently low prices, thus lessening his reliance on discounts. Prices across Kmart’s range have fallen by 30-50% during Russo’s three years in charge.
“The word ‘sale’ has been destroyed – they’re not sales, they’re retailers trying to drive customers in every week to one particular area.”
“The best you can offer for consumers is the best price you can 365 days a year – that way the consumer decides when they want to shop.”
Kmart’s performance under Russo – the former chief of McDonald’s – has been impressive, with earnings before interest and tax improving from $109 million in 2009 to a forecast $236 million this year.
But Russo told the AFR the company is just three years into a 10-year turnaround plan, which he expects will see prices fall even further.
“We inherited a business that, in my mind, overcharged consumers. The new model Kmart will always have prices as keen as we can make them.”
Here are three strategies that have been at the heart of Kmart’s turnaround:
One of the keys to Russo’s strategy has been a savage reduction of Kmart’s range, from about 50,000 products to 12,000. Many big-name brands – underwear giant Bonds is the best example – have been dumped in favour of private-label products.
By reducing the size of his range, Russo has been able to more tightly focus the business. Stock control, sourcing, merchandising and logistics all become much simpler and cheaper, with the savings passed on to customers.
One of Russo’s criticisms of the Australian retail model is its reliance on middlemen and wholesalers rather than direct sourcing. Kmart targets low-cost countries for its sourcing, and has increased the number of staff it has in Bangladesh, India and China tenfold in the last three years, with 300 people now working in direct sourcing. Other large retailers are now following Russo’s strategy, but he clearly believes small players should do the same.
Anyone who has seen a Kmart advertisement in recent months would appreciate Russo has very tightly defined his target market – mums. While Kmart comes from the typical department store heritage of “everything to all people” Russo has subtly moved away from this, positioning Kmart as a store where everyday essentials – clothes and homewares – are priced as cheaply as possible. Nothing more, nothing less. Like cutting the chain’s range, this has the effect of focusing the business and reducing complexity and cost.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
