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Sunday, March 10, 2002

By Teresa F. Lindeman, Post-Gazette Staff Writer

At 11 a.m. Friday, one of the more anticipated press releases of the year zipped across the Internet and popped up on thousands of computers screens.

Kmart Corp., which filed for Chapter 11 bankruptcy protection earlier this year, was finally laying out just how many stores it plans to close -- naming names and offering body counts. In the end, only 284 of the huge retailer's 2,100 outlets got the ax.

But that's more stores, in bigger buildings, than many chains could ever dream of opening. In the company's first round of cuts, an estimated 22,000 jobs will be wiped out.

Which is why the struggles of this retail dinosaur -- er, giant -- have all sorts of people on high alert.

A favorite place

Western Pennsylvania was spared much of the initial cutting. Two locations in Cranberry Mall and in New Castle will close, leaving more than 20 stores embedded in the region.

Kmart has always liked us.

From the day the very first one opened here -- March 14, 1963, in Washington, Pa. -- we've offered fertile ground for the company founded by Sebastian Spering Kresge.

The original Kmart only opened a year earlier in Michigan. "Pennsylvania was one of the first states we jumped in," said company spokesman Stephen E. Pagnini.

The massive discount store quickly became an important place to shop and an important company business partner. "Kmart was considered a class A tenant," said Burt Flickinger III, a retail consultant at Reach Marketing in Westport, Conn.

	KMART CORP. HEADQUARTERS: Troy, Michigan STORES: 2,114* EMPLOYEES: 240,000* SALES: $25.3 billion** NET LOSS: $344 million** * Doesn't include planned closings. ** Nine months ended 10/31/01.

As it steadily added locations in prime shopping centers, the retailer also added jobs. An estimated 240,000 people are now on the payroll, with more than 3,000 in this market. The two local closings will trim several hundred.

Miles of shelves had to be filled, too. Kmart does business with so many companies that it took 70,000 pages in bankruptcy court to list everyone from the lenders who helped pay the bills to newspapers that run its advertisements to the trash haulers carrying away its waste.

At the time of the January filing, Kmart owed National City Bank $27 million and Mellon Bank another $15 million.

And it had become one of those places that's almost too big to be allowed to fail.

Place to sell stuff

Just walk the aisles of the company's McKnight Road store, up in McIntyre Square.

Sure, Martha Stewart's name is all over the curtains, but Galliker's Dairy in Johnstown keeps the refrigerated cases full of fresh milk. Out back, Waste Management of Pittsburgh has its name on the brown dumpsters.

Within a few days of Kmart's Chapter 11 filing, numerous public companies put out word they might be affected. Bike maker Huffy Corp., athletic apparel maker Russell Corp., computer game publisher Bam Entertainment Inc. and battery company Energizer Holdings Inc.

Kmart is such a big account that few are willing to jeopardize the account with small talk.

A display in the food section recently featured pretzels from Benzel's Pretzel Bakery in Altoona. When a receptionist at the company's headquarters was asked to find someone to discuss Kmart, she put the call on hold then returned to say firmly, "We would have no comment."

Disney subsidiary Buena Vista Home Video never did return calls about a $56 million bill that put it on the list of Kmart's top 50 creditors. The address listed in the court filing is in Canonsburg.

At Wall Firma Inc., a small company in Monongahela, owner Ken Codeluppi confirms that he sells masonry paint and concrete repair products into a few hundred Kmart stores.

He hopes that will continue.

While the retailer isn't Wall Firma's biggest account anymore -- that honor belongs to Lowe's home improvement centers -- Codeluppi actually wouldn't mind seeing his Sunny Dry line of products going into even more Kmarts.

Anticipation

Since January, real estate professionals had been anticipating the announcement of stores to be closed. Mystery lists were circulated -- and denied -- for almost as long.

By the time the official information was actually released, most people had already taken a hard look at their chances.

First City Co., on Liberty Avenue, manages five shopping centers anchored by Kmart stores, including McIntyre Square in Ross. As far back as January when the bankruptcy filing came, President Rick Contrella had already been running the numbers.

He was pretty upbeat. Sales had been strong and the locations are good.

That kind of optimism seemed justified based on Friday's list. But there's some debate over whether Kmart can continue to protect stores here as it works its way through the bankruptcy courts.

"It's going to be really tough going for Kmart," said Flickinger.

Wal-Mart also has come to respect the region's discount-loving shoppers. The world's largest retailer has begun building a distribution center near Steubenville, Ohio, that could support a whole raft of new stores.

Already, many Kmarts have been outpositioned by newer Wal-Marts, said Herky Pollock, an executive vice president with real estate firm CB Richard Ellis/Pittsburgh. He believes several smaller Kmart stores may be at risk.

No matter where the actual doors shut, he said, "The ripple effect of these closings will be tremendous."

Kmart's weakness has already changed things. Retail tenants smell blood, Pollock said. They'll start offering less in rent.

Landlords will find it harder to demand more. Bankruptcies have wiped out Montgomery Ward, crippled Ames and slowed down numerous other chains. "The creditworthy tenants are fast disappearing," said Jim Aiello, a partner in JRA Development Group, in the Strip District.

The obvious choices -- Wal-Mart and Target -- may need more space or be aiming for a different demographic. Target, for example, has indicated interest in only 100 of Kmart's 2,000-plus sites.

Without an anchor, a landlord can be hard pressed to draw enough traffic to support his other tenants.

"If Kmart turns the lights out on its side of the shopping center, a lot of times the shopping center has a hard time staying open," said Flickinger, who estimated Kmart often contributes as much as 25 percent of a center's total rent.

Faced with the prospect of waiting two or three years to fill the empty stores, landlords may make rent concessions to keep the Kmarts they have.

Regrets

Last year, Kmart officials announced they were taking all their grocery business and giving it to distributor Fleming Cos. The decision was going to save money and support Kmart's renewed commitment to building more supercenters.

"It was an inane decision," said Flickinger.

Fleming didn't operate a produce distribution center in this part of the country, so all those perishable goods had to be long-hauled from Indiana. Before making the switch, Kmart had used a SuperValu distribution center in Belle Vernon to do the job.

"Kmart sabotaged themselves," Flickinger said.

Hindsight is, of course, always clearest, but industry observers don't look too far to find examples of how the once-dominant general merchandiser tripped itself up.

Aiello, at JRA Development Group, worked on Kmart real estate projects as early as the 1970s. Now he does Wal-Mart deals.

In his opinion, Kmart got off track when it started diversifying into other concepts. At one point, the mass merchant owned Office Max, Sports Authority, Borders and Builders Square. Eventually, it sold them all.

But the costly diversions tied up capital that could have been used to build supercenters -- huge stores that sell groceries as well as food, a concept that has proved popular with pressed-for-time consumers. "We had identified numerous sites in Western Pennsylvania," Aiello said.

One of the more likely locations was along Route 30 in North Versailles. Wal-Mart built its first Allegheny County supercenter there in 1999.

Kmart's digression into books and hardware had another consequence as well. The company got stuck with a lot of rent payments, in many cases for buildings just sitting empty.

The Builders Square hardware stores were sold to an investment group that paired it with the Hechinger hardware chain. When that retail venture didn't work out, the lease payments on the empty stores reverted to Kmart.

That meant that at McIntyre Square, for example, Kmart was not only paying rent for its discount store but also had to foot the bill for empty space formerly home to a Builders Square.

One of the first things the retailer did after filing for bankruptcy was reject those leases.

The move could actually make it easier to fill such sites, said Contrella, at First City. Kmart hadn't been able to do long-term deals, and prospective tenants were often wary of signing short-term contracts.

Officials at Levin Furniture recently made a deal with Kmart to sublet an empty store in West Mifflin. The bankruptcy disrupted that process, but on Thursday the Mt. Pleasant chain signed a new contract with the building's owners.

Happy ending?

Many people are pulling for Kmart, but a lot of them aren't convinced it can turn things around.

For one thing, the retail market may be saturated. The other two big general merchandisers, Wal-Mart and Target, have carved out niches that don't leave a lot of room.

"Even if Kmart comes out of bankruptcy, staying out a second time is going to be tough," said Flickinger.

Aiello thinks the big K should take an entirely different tack this time. Dump most of the discount merchandise and turn itself into a grocer. It's got a lot of great real estate locations.

Besides, he said, it's about the only way to catch up with Wal-Mart.