How Kmart Outwitted Walmart At Their Own Game
For the longest time, Kmart has been playing second fiddle to Walmart.
Walmart has developed best practices that are good for their business. There is the other side that would say that they are bad for other businesses from the way they have managed to reach economies of scale that has dwarfed their retail competition.
Kmart on the other has performed well, but it’s had its historic trend of ups and downs.
Having becoming a dominant player in the market by the late 70s, Walmart had saturated their market. This meant it was time for them to try something new. Their plan was to enter a new retail territory that could allow them to continue their domination within retail.
In the 80’s the founder of Walmart, Sam Walton, made a decision to go BIG. He decided to start a new extension of Walmart called 'Sam’s Club.'
Sam’s Club was an overnight sensation. Large families couldn't now live cheaply as a family of 4 by buying in bulk. Smaller families slashed their grocery budget drastically.
For restaurants, this was a game changer. For those small restaurants that didn’t have access to distribution centers now had discounts previously only available to large chains.
Kmart was struggling. They couldn’t compete with the staggering number of Walmart locations and the new Sam’s Club stores were going to crush them entirely.
Kmart decided to do something about it. They created their own big box store called ‘Pace Membership Warehouse.’
Unlike Sam’s Club that had millions of customers in their database, the Pace Membership Warehouse was created with one customer in mind. That customer was no other than the man himself, Sam Walton.
Pace was strategic with their execution of their warehouse stores. Wherever there was a Sam’s Club location, they would build a Pace Warehouse there as well. Their thinking was, why do all the market research when your competitor has already done it for you?
Pace came into the market by giving free memberships to employees of large companies. They sold their memberships drastically cheaper than Sam’s Club, and they even had events where non-club members could enter, shop, and experience the advantages of buying in bulk.
The sad truth was the Kmart wasn’t making any money with their Pace warehouse stores. The positive side of this was that Walmart was quickly losing market share to them.
Walmart didn’t want to continue this any longer. Sam Walton and the board of Walmart decided to buy Pace outright from Kmart with the condition that Kmart could not open another price club.
When the purchase was complete. Walmart had a problem on their hands. They were now stuck with several large buildings that were previously the Pace locations. Walmart couldn’t use them, and they couldn’t sell them either. The buildings were similar but they were not quite raw enough to be warehouses.
Walmart had just spent billions of dollars; their next 5-8 years investment budget on buildings they couldn’t use just to get rid of a competitor that was essentially not a viable threat.
With the demise of Pace, Kmart opened these:
BIG Kmart sold things that were already sold at Kmart and Walmart stores but they also added groceries to the mix.
BIG Kmart found the perfect niche between a low-cost department store and grocery stores. Other stores such as Fred Meyer had this model already but they were located at the Pacific Northwest at the time.
This model has since been replicated by Kroger (who bought Fred Meyer), Alberson’s, Safeway and even Walmart.
Walmart decided to turn the ‘Pace’ locations they purchased from Kmart into ‘Hypermart’ stores. These stores ultimately suffered because they were too big, they had poor corporate support, and all the money they needed was used to buy ‘Pace’ from Kmart.
Takeaway: Kmart made a brilliant move by doing this and it will likely never be repeated again. Kmart was strategic and beat Walmart at their own game. It’s unfortunate they continued making more mistakes after this and couldn't overtake Walmart. They had the window to be up there with Walmart but poor management, and corporate governance held them back from reaching their full potential.