Kmart’s massive mistake sees profits plummet to lowest in 5 years

There’s a worrying trend happening at Kmart and it’s not good news. Does this mean the beginning of the end for Australia’s beloved bargain retailer?

Is Kmart fading? The super popular discount department store has just revealed its full finances for the last 12 months, and there’s a worrying development.

Kmart profit is down sharply to its lowest level in five years. Kmart used to be the golden child of Australian retail. Everyone loved it and it made heaps of money.

But now, as the next graph shows, profit has slipped.

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Kmart had the lowest profits in five years.

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The latest results made me concerned about Kmart. I was especially concerned because profit probably should have gone up.

Kmart’s fall happened at a time other retailers were rising. JB Hi-Fi increased its profit by 32 per cent. The supermarkets were killing it. Even The Reject Shop did really well, turning last year’s losses into a welcome profit.

Kmart is famous for selling wildly popular homewares, many of which become Instagram famous. During the pandemic lockdown, sales of homewares went through the roof as the next graph, from Commonwealth Bank, shows. Spending on household items was up as much as 50-70 per cent compared to the year before in various states.

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During lockdown Aussies went on a spending spree for household furnishings. Picture: Supplied.

Kmart should have been perfectly positioned to turn the pandemic into the biggest sales event of its life. Instead they grew annual sales by a pitiful 5 per cent.

That’s because the shelves at Kmart were almost bare during May and June.

THE BIG BLUNDER

On Thursday, when they revealed their financial results, Kmart’s boss explained he had made a terrible blunder. Instead of stocking up for the pandemic, Kmart chose to delay orders from its suppliers.

“With many retailers around the world suffering excessive inventory … Kmart adjusted demand forecasts down in anticipation of similar outcomes. In New Zealand this proved to be accurate,” said Kmart boss Ian Bailey.

However, in Australia it was a big whoopsie. By June, when people were shopping like their lives depended on it, Kmart looked like a hurricane had gone through. That cost Kmart a lot of sales it could have won.

“May … was extraordinary. They shopped with a vengeance in that period and they cleaned our shelves out,” Mr Bailey admitted.

The problem of having too much stock for retailers is if they don’t sell them. They then need to put things on sale to get rid of them. Not only do they make less money on those items, but the clearance racks drag down the vibe of the whole store.

“Too much inventory is a difficult problem for us to manage and it lasts for a long time,” Mr Bailey explained.

But the other side matters too. If people find everything is sold out, they get frustrated.

Kmart claims to have put in big orders with its suppliers and sorted out their mistakes. They claim to have stuff back on the shelves.

But my online shopping shows plenty of things not available from my local Kmart store. Others are saying the same. (And how annoying is it when they don’t tell you it’s not available until the checkout!)

Bored lockdown shoppers were left disappointed after finding the shelves of Kmart all but empty. Picture: Bianca De Marchi/NCA NewsWire

Next year you should find Kmart fully stocked with many things. But not everything will have boxes and boxes out the back. Kmart has decided to buy less of highly seasonal stuff like winter coats. Things that sell all year round they will stock up on.

“More hoodies, less coats” explained Ian Bailey. “Very little risk of markdown in that product (hoodies) because it doesn’t go out of date.”

So if you want one of those seasonal things, it might be smart to either swoop in fast or look elsewhere.

CAN KMART SURVIVE THE RECESSION?

Kmart says it is not worried about JobKeeper and JobSeeker payments starting to revert. People might stop shopping, they reckon, but Kmart won’t notice. The reason? Kmart is the cheap option. While some people will stop shopping at Kmart when they lose income, other people will start shopping there.

“(If) we do go into a period of less stimulus and a tougher economic environment we think the flight to value is going to be significant. And Kmart’s price position is exceptionally good,” Mr Bailey said.

Flight to value refers to people fleeing away from more expensive retailers and coming to value (i.e. cheap) retailers like Kmart.

WHAT ABOUT TARGET?

Kmart is owned by the big conglomerate Wesfarmers, which own Bunnings too. And Officeworks. And also (cough) Target. Yes, Target. The bad kid of the bunch. While Bunnings and Officeworks soared following amid the biggest spending spree in Australian history, Target managed to lose more sales. Sales shrank by 0.8 per cent last year. The company also wrote down the value of Target by a lazy $525 million.

The plan for Wesfarmers is to try to make Target smaller. They’re turning Targets into Kmarts when the landlords allow it. They’ve agreed to change 24 of them. “That number is going to continue to rise,” the company said.

There will be a lot more Kmarts in the world in a few years. Which will be good news for Kmart fans. So long as they remember to stock the shelves.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.