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Restoring Target to its former glory could well come at some cost to Kmart, its new chief, Guy Russo, admits. But he’s equally bullish about turning the business around and claims both retailers can co-exist – even if it does mean stores could switch.
Parent company, Wesfarmers, appointed Russo in February to jointly lead both Kmart and Target under a new department stores division. The unified approach is aimed at maximising and sharing opportunities where appropriate across the two brands, while maintaining and growing both brands.
Russo has spent the past eight years at the helm of Kmart around and is recognised for his success is transforming the fortunes of the brand.
Speaking at the ‘Fit for Business’ breakfast in Sydney organised by retail consulting specialists, The Retail Doctor Group, Russo said his initial approach to Target is one of listening first.
“I’m not saying how it should or could be, but yes, I want Target to be the greatest retailer in Australia alongside its brother, Kmart,” he told attendees. “I do love to win, and I’d like to look to have a $9 billion business running a 10 per cent EBIT that has tripled the customers coming into its stores. But it’s time to listen first, not what to do yet.
“Before I jump in and drive the Target car, I want to open the bonnet and work out what the last three CEOs did. It’s a 90-year old company, and I owe it to Target to study its history, and what other CEOs have done.”
Russo admitted questions hung over whether he can restore Target without hurting Kmart.
“There may not be a way,” he said. “But as the critics criticise this move or provide intelligence around why it may or may not work, it’s another piece to the puzzle. I haven’t figured that out either. I won’t debate if they are right or wrong, I welcome criticism.”
From first impressions, however, Russo said he’s as optimistic as he was at this point in Kmart’s turnaround strategy. He said step one is not whether they can both survive, but on creating better returns on the money Target is already making. He also noted Target’s existing $3.5bn turnaround and customer base.
“I do think they can survive together. It’s about commercials first, giving back a bit more to shareholders, then getting the dynamics right with the model,” he said.
“Target is a $3.5bn business, the last CEO [Stuart Machin] was only there for two-and-a-half years, and has got Target to the same point I had at Kmart in about the same timeframe. Sales have now stopped declining, and in retail, it takes two years to do a full correction. It tells me there is an opportunity.”
Russo flagged potential store closures as well as the possibility of switching Target and Kmart stores across their 500-store national footprint, drawing on his expertise in real estate and location from 33 years at McDonalds.
“We will look… to work out if there is anywhere we put one or two many Kmarts and Targets,” he said. “We’ll analyse that, and work out if we should close them. I’ll also look at if Target is better off as a Kmart and vice versa.”
While Retail Doctor Group founder and CEO, Brian Walker, believed delineation at a brand level could ensure Target and Kmart’s future growth, the make-up and shape of both store footprints could change dramatically.
“The game will be played on a location basis, and on a category level, relative to that local environment,” he predicted. “I expect the formats will change, we’ll see smaller formats, and see closures as well as net opens. I see the two existing, but quite differently to what we see today.”
Russo was also asked which of Australia’s five main department stores – David Jones, Myer, BigW, Target and Kmart – was at most at risk of rationalisation. Again, he flagged physical location as key.
“My wish would be that all 500 of our Kmart and Target stores stay, and with the right strategy for both businesses, we lift and add more customers to all of them,” he said. “Target stores were put there for a reason. We had 100 negative EBIT stores at Kmart. I didn’t close one of them.
“We have Kmart and Target in Chadstone, and both do very good volume. I just want to check Target is making money.”
The key steps Russo took to turn Kmart around
During his presentation, Russo talked through the eight-year journey he’s taken at Kmart as a CEO, looking at the commercial, strategic and brand changes he’s made to get there. Here are some highlights:
Find the equation to make money. “I wasn’t trying to work out how to lure more customers into Kmart, I thought if we can’t start to make money on $4bn in revenue, the owners wouldn’t tolerate us,” Russo told attendees.
As a result, in his first 12-month discovery phase, listening sessions in Kmart were very important. “You hear things from team members, and I don’t react immediately the minute I hear a comment,” Russo said. “Retail is like a huge domino play, and it doesn’t just encompass your footprint, it extends to Bangladesh, over the water, offsites and so on. Listening to all those component parts was an important step.”
Russo said he dug deep to find out where the money was going. “Commerciality was more important than working out who Kmart was trying to be,” he continued. “I put on two full-time commercial people in the first 30 days, and as all the listening feedback came in, we classified under which issues were money related or not.”
One big area of expense was Kmart’s 110 offsites, which housed $100m in old stock. Russo promptly sent an email telling teams to close the offsites and get rid of the stock as quickly as possible.
“We had five months’ worth of stock, and I told merchants to get of it all,” he said. “Removing that stock was a blood clot, so I gave team permission to get rid of it, then went upstream to find out why we’d ordered all this stock. It was a waste of capital. It was why our return on capital was sitting at 4-5 per cent, now it’s at 37 per cent.”
Re-evaluate staff levels: Another key component of improving Kmart’s EBIT ratio was removing excess staff. “It was incredibly hard to do when you’re supposed to be focused on people, customers and staff. We had 150 people removed out of the business,” Russo said. “All I could do is walk the building, think about people who left, and make sure I looked after the 700-800 people who were left behind.”
Redefine Kmart’s go-to-market and go for volume: By the end of the second year, Russo had moved into trying to find out what Kmart stood for. He got multiple answers, stretching from the Reject Shop to Harrods. Part of the problem was Kmart was selling a wide range of goods, from low-cost to high-end goods. And for the most part, high-end products were also selling when heavily discounted.
To deal with this, Russo said he looked at retailers he loved, that had double-digit EBITs, and studied their profits and go-to-market approach. These included overseas retailers such as Primark, Walmart, Ikea, H&M and Zara.
“What Ikea and Primark have in common was there’s not a lot of SKUs, and price was the killer – it was everyday low prices,” he said.
Russo’s answer was to cut down the number of products and brands at Kmart, and to focus on volume with one product, one supplier and getting the best price. The majority of goods in Kmart today are unbranded goods, with the exception of toys, health and beauty and food.
For example, with underpants, Kmart had many different brands as well as versions and colours, ranging from $8 to $15, and Kmart was dealing with 12 suppliers for one product type. Today, Kmart has moved to a limited range of underpants, in minimal colours, and focuses on volume. This has seen the retail go from selling 400,000 pairs to men, to more than 20 million pairs. It’s also the approach taken to jeans, and Kmart is now selling 9 million, compared to 200,000 to 300,000 previously.
Focus on quality and sourcing: From year four, Russo said he extended the focus on quality and sourcing to ensure a consistent and simpler approach to what Kmart stocked.
“For the purpose of language, I would say to staff, keep going to the bottom of the food chain and focus on everyday items,” he added. “I told staff to run a camera in the part of the home you’re buying for. Watch what the family touch all the time. We all touch the top drawer, no matter what nationality we are. So look at what’s in the top drawer and buy for that, don’t worry about that bottom drawer. And do it at the price of a Coca-Cola can, or a bottle of milk.”
Focus on basic customer service: For Russo, getting customer experience right has to start with the basics and loving the customer. “You need to smile at customers… ask if they need help,” he said. “We are a self-service business… I want it to be grab and go…just help people fill those baskets up.”
Have strong values: “Values are so important to all of us, to our customers and the community,” Russo said. “I created a supply chain that employs close to 40,000 people in three major countries. I now employ about 50,000 employees between target and Kmart, and I have a responsibility to all of them. It’s important to have integrity, do it right, be honest and speak up. It’s also OK to make mistakes – I won’t know every part of my business, and don’t have all the answers all the time.
“I simplify values as I do pricing… I talk about the values our parents taught us about. Be honest, tell us what you think… but most importantly, outside of being a good person, put in a full, hard day’s work. If you can do all that, I want you on my team.”