Kmart Has Newspapers Feeling Blue

By: Jennifer Saba The subject of Martha Stewart and her business partnership with Kmart has gained national attention, but beyond any falloff in sales of kitchen utensils and bedding, Kmart confronts a less glamorous problem that is just as important in scope ? and is not such "a good thing."

The Troy, Mich.-based retailer has been beset with one setback after another since filing for Chapter 11 in January 2002, and newspapers ? which Kmart strongly depends on for advertising ? have now been drawn into the mess. It's led to a conflict the newspaper industry has not experienced before, according to John Kimball, senior vice president and chief marketing officer of the Newspaper Association of America (NAA).

When the retailer filed for bankruptcy protection, it put together a "critical vendor list." This allows the company filing to continue transacting with key vendors. "It's not unusual for any debtor in large bankruptcies to ask for and receive permission to pay what it deems critical vendors," says Robert Greenbaum, a partner with the Saul Ewing law firm in Philadelphia.

Kmart put 2,330 suppliers, including 1,070 newspapers, on the favored list. The bankruptcy court approved it, allowing Kmart to pay those vendors prepetition debts (i.e., debts prior to when the company filed) to the tune of some $300 million. But not all companies were pleased ? particularly those that didn't make the cut. One of them, Capital Factors, challenged Kmart's critical vendor list in a lawsuit.

The case worked its way up to the U.S. Court of Appeals, which ruled in February of 2004 that the list was drafted in error, because Kmart never adequately proved that the vendors were critical to doing business.

Based on the decision, Kmart found itself in the awkward position of having to sue those critical vendors it paid prepetition money to, including newspapers, to get part of the money back. Kmart put a settlement on the table for newspapers (once extending the deadline, to late April) that involves upwards of $30 million at stake. Under this plan, newspapers that were paid less than $250,000 can make a repayment of 70%. Those that were paid over $250,000 can pay back 80%. According to Barack Ferrazzano Kirschbaum Perlman & Nagelberg, the firm representing Kmart, 30 papers have taken the settlement, with more in the works.

Of course, the payback effect on newspapers depends on size and the amount owed. Dawn Hertz, general counsel to the Michigan Press Association, says that she knows of claims from newspapers as low as $2,600 and as high as $1 million. "Now the newspapers are going to have to sit down and figure out what is going to happen," she says. That means they can either pay the piper or mount a defense, challenging the court findings. As it stands now, most papers are trying to figure which path to take.

Some papers saw this coming. According to an April report issued by Merrill Lynch, Knight Ridder, Lee Enterprises and Pulitzer Inc. booked estimated revisions between $1.5 and $4 million in reserves, due to the Kmart flap.

Pulitzer is still in negotiations with the retailer. "Kmart is a very important vendor to us and is present in St. Louis and Tucson [Ariz.] and a number of our other markets," says Alan Silverglat, senior vice president and CFO of Pulitzer. "What's important to us is that we do what we can to retain as normal relationship as possible with Kmart and continue to support their business. We made other concessions to Kmart in exchange for the payment so we don't feel that any refund is due."

And the outcome is still up in the air. What is a given, however, is that newspapers and retailers are "critical" to each other. "For the most part, retail customers and the readers of newspapers are one and the same person," Kimball says. "That's why it's so important for us that these partnerships remain strong. We spend a lot of time worrying about it."

Owen Shapiro, vice president of Leo J. Shapiro and Associates, a retail consultancy in Chicago, points out: "Circulars are still very viable and there's still a lot of value for retailers. Kmart cannot forego print advertising. They are going to have to make good with the newspapers because they are the third-place player [in their field], and they are the ones that need that circular advertising."

And newspapers need Kmart. According to TNS Media Intelligence/CMR, Kmart spent $88.5 million in newspaper advertising in 2003, placing them 43rd in terms of overall spending. Kimball says that Kmart runs somewhere north of 50 million inserts a week and for some papers, Kmart runs them twice a week. "They are a huge advertiser," Kimball says.