Kmart’s Ad Cuts Hurt Business

By: Todd Shields

When Kmart became on Tuesday the largest U.S. retailer ever to file for bankruptcy protection, newspaper executives blanched at the sight of the turmoil afflicting such a large advertising buyer. At the same time, some used the event to point to the perils of cutting ad budgets.

Each week, Kmart distributes more than 70 million copies of a color insert that lists items on sale. Last year, Chairman and CEO Chuck Conaway decided to cut the 2,114-store chain’s heavy advertising costs. He slashed spending on the inserts, which had contributed to $171 million in newspaper ad spending in 2000, ranking Kmart No. 8 among the E&P/Competitive Media Reporting “Top 100 Brand Advertisers in Newspapers” for that year.

Results of Conaway’s experiment are in: Kmart sales fell in November, while those of rivals Wal-Mart and Target rose. “Planned reductions in advertising and promotional activity decreased customer traffic more significantly than we anticipated,” Conaway said Dec. 6. Earlier, he had touted a reduction of 30% in ad spending. “Clearly, we’ve learned where the threshold of pain is in advertising,” Conaway reportedly told analysts. With that, Kmart reversed course and restored some of the insert spending it had cut.

Kmart’s troubles coincide with the release of a study showing six in 10 adults turn to inserts regularly, according to the Newspaper Association of America. The study — conducted for NAA by MORI Research Inc., Minneapolis, and Tolley Research Inc., West Hartford, Conn. — also found that 49% of American adults had checked inserts in the past week.

Kmart’s stagger has captured the attention of large media firms. Tribune Co. President and Chief Operating Officer Dennis J. FitzSimons said Kmart spent $35 million last year on print advertising with Tribune, some of which stands unpaid. An E.W. Scripps Co. executive told analysts his company reaps $7 million to $8 million annually from Kmart advertising. And Knight Ridder Chairman and CEO Tony Ridder said the retailer’s troubles led his chain to report pro forma earnings slightly below earlier guidance, instead of slightly above as it expected until Kmart’s bankruptcy filing.

For its part, the Troy, Mich.-based retailer had little to say as its plans came under scrutiny of the U.S. Bankruptcy Court for the Northern District of Illinois. “We aren’t making any forward-looking statements aside from ‘It’s business as usual,'” Dave Karraker, Kmart’s director of marketing operations, told E&P. “We continue to operate. All the stores continue to be open.”

And, Karraker said, the weekly insert was going out to newspapers.

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