Blue-light burnout

What does Kmart’s bankruptcy filing mean for the local franchises?

STILL OPEN FOR BUSINESS<br>The Chico Big-K store sits across Pillsbury Road from the North Valley Mall, which in recent years has seen the exodus of almost all of its stores. The Kmart store’s future hinges on its profitability and lease status.

The Chico Big-K store sits across Pillsbury Road from the North Valley Mall, which in recent years has seen the exodus of almost all of its stores. The Kmart store’s future hinges on its profitability and lease status.

Photo By Tom Angel

Year of the discount:The first Kmart was built in 1962 in Garden City, Mich., evolving out of S.S Kresge Co.’s five-and-dime stores, which were launched in 1899 in Troy, Mich. But 1962 also saw Sam Walton open his first Wal-Mart in Bentonville, Ark., and Target Corp. open its first store in Minneapolis, Minn.

Workers at Kmart stores in Chico and Paradise began worrying about their jobs on Jan. 22.

That’s when the nation’s second-largest discount store chain, on the ropes for the past few years from battling head to head with Wal-Mart, its larger and ruthlessly efficient competitor, saw its wobbly knees finally fold.

In the end, even the resurrection last April 1, after a 10-year hiatus, of the store’s famed blue-light specials couldn’t save it from bankruptcy.

And, to add insult to injury, on the very day Kmart filed, it was announced that Wal-Mart’s 4,150-store global chain was to be named No. 1 on Fortune magazine’s list of the nation’s top 500 companies.

A number of factors contributed to the retailer’s demise, ranging from the above-mentioned competition to horrible December sales to problems caused by the massive collapse of Enron Corp. Kmart was self-insured against liabilities connected to workers’ compensation and the gun and liquor sales some of its stores offer. As back-up it purchased surety bonds in which a third party guarantees any potential obligation will be paid. Enron’s collapse led to losses in the surety-bond market, causing Kmart to have to turn to more-expensive back-up insurance, which further drained its cash flow.

The final blow came Jan. 21, when Fleming Cos. suspended wholesale grocery shipments to those stores that stocked food because Kmart failed to make its regular weekly payment. Filing for Chapter 11 means the corporation will reorganize and streamline operations. Industry analysts say as many as 700 of the 2,114 stores could be shuttered by the end of the year.

It’s too early to determine the fate of the stores in Chico and Paradise, and local inquiries were directed to company headquarters in Troy, Mich.

“In the coming weeks and months the company will evaluate the performance of every store and take into consideration the status of its lease,” said Julie Fracker, Kmart’s media relations spokesperson.

“By the end of the first quarter [April 30] we’ll know which stores are unprofitable or under performing, and they will be closed by the end of the year,” Fracker said.

Fracker said she could not comment on how many stores might end up closing.

Employees in the Chico store last week expressed confidence their employer would not be on the list. One worker who was busy stocking shelves said that though there had been no official word, sales at the Chico store seemed to be doing well. A cashier was even more positive.

“We have a warehouse with two years’ worth of back stock, and we have a few years left on our lease,” he said. “It’s funny, people keep asking, ‘When is Wal-Mart going to buy you out?’ I tell them that’s not going to happen.”

Chico’s Kmart, located at Cohasset and Pillsbury roads, was built in the early 1970s, soon after the completion of the North Valley Mall. Just over two years ago it became a Big K and began carrying new lines of merchandise, including Martha Stewart.

But, like other franchises across the country, the local Kmart started to see stiff competition from Wal-Mart a few years back, when that discount store behemoth moved to Forest Avenue south of 20th Street. Historically, Kmarts were built in urban areas, while Wal-Mart served more-rural regions.

Chico City Manager Tom Lando said the city cannot release specific sales tax records from individual businesses, which would give some indication as to how well the store has fared in recent years.

The building is owned by the Shanedling Ethel Trust of Dallas, Texas. Calls to the trust’s management, Burr Wolff, about the status of the store’s lease were referred to a Wendell Harvey. A message left with him had not been returned by press time.

There is also a Kmart-turned-Big K in Paradise. It’s the only store of its kind there, and for years it has served as almost a community center. Paradise Town Manager Chuck Rough said he’s been led to believe that Kmart will remain open based in its profit per square foot.

He said the store has remained one of the top 20 contributors in sales tax to the town “since time immemorial.” In recent years it has consistently contributed between $100,000 and $118,000 to city coffers.

Rough explained why he released that information, which was printed in the Enterprise-Record on Jan. 23. “We put that information out because we wanted to indicate that it would be a significant loss of revenue should it close,” Rough said.

He said that, besides the people of Paradise, the store also serves the 20,000 or so people who live in the upper Ridge areas of Magalia and Stirling City.

The Paradise store was built about 25 years ago, prior to the town’s incorporation in 1979. The building’s lease is held by New Plan Realty Trust Inc., which is based in New York City but has regional offices in Sacramento. Bill Munroe, the district property manager we contacted, said he’d been on the job for only three weeks and referred us to the New York offices, which did not return our calls by press time.

Munroe said the company is keeping an eye on the issue because Kmart is one of its major tenants in shopping centers across America.

Kmart’s marks the largest retail bankruptcy in U.S. history. With total pre-bankruptcy assets of $17 billion, it far exceeds the second-largest retail financial failing of the Federated Department Stores, which had assets of $7.9 billion when it filed Chapter 11 in 1990. Other notable retail bankruptcy include the 1997 filing by Montgomery Ward ($4.8 billion), Macy & Co. in 1992 ($4.8 billion), The Circle K Corp. ($2 billion) and 7-Eleven’s Southland Corp. ($3.4 billion), both in 1990.

In what could signal future trouble for Kmart, its contract with Martha Stewart Living Omnimedia, Inc., allows that company to end its dealings now that the store has filed for bankruptcy. That contract with the popular Stewart is exclusive and stacks thousands of products on the Kmart shelves.