Kmart MD talks Target merger, shrinkage, and adapting to customer behaviour

With customers continuing to seek more value as cost-of-living pressures bite, Wesfarmers’ Kmart Group is set to benefit from shifting consumer demand, and an increasingly strong value proposition. 

This is the message put forward by Wesfarmers’ CEO Rob Scott, and Kmart Group managing director Ian Bailey, to investors last week.

The group, which is made up of discount department store brands Kmart and Target, as well as online marketplace Catch, delivered record earnings during FY23 – a 52 per cent increase on the previous year, to $769 million.

According to Scott, the result reflected a combination of customers’ changing demands, as well as the group’s solid pricing strategies.

“As anticipated, we have seen a continued strong response from customers to Kmart’s lowest price positioning,” Scott said. 

“Target [also] continued to trade well across its apparel range, but with more challenging results in toys and home, highlighting the opportunity for the division to leverage the strengths of Kmart.”

Two brands, one model

The business announced in July that it would be merging the two department stores’ backends, with the anticipation of increasing efficiencies across the group. 

And, moving forward, the two brands won’t just  be sharing operational strategies, with Kmart’s discount Anko brand soon to be distributed  across Target stores. 

“Approximately 25 per cent of the Target range will be Anko,” Bailey said. 

He added that 75 per cent of Target’s range – across apparel, soft home and toy products – will be unique to the brand. 

Bailey also noted that the work the business is doing to bring the two businesses in line will generate additional costs, but will ultimately be cost positive and lead to a boost in efficiency by FY25. 

“If you’re looking at this over a time period, the greater benefits [will come] in FY25-26,” Bailey said. 

“We’re confident that we can continue to hit the lowest price in the market, and make good margins which are appropriate for our shareholder returns. We feel that we have enough levers at our disposal to be able to continue to do that.”

Labour, leases, and clearance stock

So, what are those levers?

According to Bailey, the Kmart Group business has three main costs which it can reliably predict: labour, leases, and clearance stock. 

The first two are relatively stable, Bailey said, with Kmart having worked hard to improve the productivity of its staff, as well as the flexibility of its landlords: with rent tied to store revenue across a number of Kmart sites. 

The third is harder to predict. Bailey noted that for a business like Kmart, which buys a majority of its product upfront, it’s incredibly important to be able to quickly respond to consumer behaviour and minimise the impact of dead stock.

“Ensuring that we’ve got good internal quantification and are adapting very quickly to changes in customer behaviour really helps us buy the right amount of inventory at the right time,” Bailey said. 

“We’ve also put a lot of work in to reduce the lead times of our products coming out of our supplier in Asia. [It]  means we can adapt more quickly, and have better intel from our demand, which means we have less risk of over quantification.”

Target of theft?

While value for money is undoubtedly a large focus for retailers moving forward, stamping out shrinkage is another. Just last week, both Coles and Woolworths talked through rising levels of theft, as customers opt to take products rather than pay increased prices.

Both supermarkets also explained that organised crime syndicates are becoming  more sophisticated, and are hitting harder. 

Bailey, however, noted that while Kmart Group also saw shrinkage increase year-over-year it is “still well within the normal range”. 

He noted that the brands inventory loss tends to crystallise in the second half, when it counts stock, but at this stage it hasn’t identified abnormal results.

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