How Kmart is now more product maker than retailer

Switch from retailer to product maker

More than 1 billion Anko products are now sold each year, and the Kmart Group, which includes Target after a merger last July created a $10 billion discount conglomerate, delivered revenue of $6 billion and record earnings of $601 million for the first half of 2024, an increase of 26.5 per cent.

“The journey we’ve been on for many years is really moving from being a retailer to being a product company,� Bailey says.

“If you think about what we now do as a business, we spend as much time, if not more, on developing products from design, through to manufacturing and distribution, as we do retailing them in the store, which is almost like the final step in the process.

“That’s given us quite a different business model. We think the business model is unique globally because of the multicategory nature of our business and the fact Anko now represents about 80 per cent of the sales within the Kmart stores. So, it gives you a sense of how persuasive that brand is now and what a big role it plays.�

Anko is set to launch a new partnership with US toy giant Mattel in wooden toys across 1000 Walmart stores in the US, with Canada and Central America to follow. Anko is also trialling pet products with hypermarket (a big box store) Carrefour in France.

“This is under [Mattel’s] Fisher Price brand, and they’re taking our wooden toys we’ve been developing for the Anko brand and will licence them to sell globally,� he says. “The Carrefour trial is launching in pet accessories, pet toys, pet beds, leashes, toys and so on.�

At Wesfarmers’ strategy day in Sydney this month, Bailey was talking up potential for much more growth, keeping him in the mix to eventually succeed Wesfarmers’ CEO, Rob Scott.

His presentation shows the potential upside: Kmart only has 7 per cent of Australia’s $45 billion apparel market, 8 per cent of the $34 billion beauty market, and 10 per cent of the $34 billion home and living market.

Robots and 3D design

“Analysts want to know, ‘how fast are you going to grow and how much money will you make?’� he laughs.

“We’ve now got to turn a great start into a growing business that generates value for shareholders. So, it feels like we are at step one or step two of a much longer process, but the quality of what we do still flows through to the Kmart stores.�

Bailey also points to Kmart’s 3D apparel design and the increasing use of technology and data in its product design.

The new product design and manufacturing software system, “means we can capture way more data than we ever could, for every single product that we sell�.

“When we get the data, we can run algorithms to say ‘what were the attributes that made that product successful?’ Which can feed the next evolution of the product,� Bailey tells BOSS.

“We’ve then got analytics, machine learning using our own data. We can do range and markdown optimisation, and in the stores we have Tory the robot, who goes around overnight and scans all the apparel and gives us a location, so effectively a daily stocktake.

“In the past, the team members had to walk the floor, guess what was missing and try and find it out the back.�

Kmart also seems to have benefited from its, “low prices for life� slogan. In the past six months, it dropped prices on about 1300 items at a time when consumers’ budgets have been under major pressure.

Post pandemic winners and losers

“A lot of retailers actually did very well during COVID-19. We went through a period where almost everyone was a winner. Then we’ve come out of COVID-19 and into this inflationary cycle and higher interest rates, and gone back to value being really important. We’ve gone back to winners and losers.�

Bailey says despite the merger between Kmart and Target – which includes 270 large format stores and 50 small K-hubs in Australia and 120 Target stores – it still makes sense to keep the two brands, but with one business strategy.

“We’ve had a few ups and downs with Target over the last decade or so. Here’s our thinking; customers, when they are in Kmart stores, they are so confident about our prices they really don’t check. It’s very freeing, customers love it. So, we don’t want to go above certain price points.

“If you take women’s dresses, for example, $35 or $40 is the most we want to go for. But that means there are certain products we can’t do, certain fabrics and styles it makes sense to do [at a] $79 price point. So, the two brands mean we can keep Kmart really pure, but use Target to tap into the next segment of the market.�

The 57-year-old, based in Noosa with his wife and daughter (his older daughter lives in Melbourne), says despite the increasing reliance on automation and technology, Kmart is still very much a people business.

Bailey says most of the 50,000 staff members believe in the mission, are very team-oriented, and have a motto of never being satisfied.

“We take products that are out of reach for most people and make them affordable,� he says. “Most of us come from very ordinary backgrounds, we understand what it’s like not to have much money, so we buy into the mission and how important it is.�

Bailey says they work hard on hiring staff with the right cultural fit. “Things like low ego and a genuine desire to put the business first. It’s one of the reasons we love to promote from within.�

The staff are also young - 10,000 team members are under the age of 20 - which presents another challenge and opportunity. “We would be one of the two biggest hirers of juniors in Australia, along with McDonald’s. I’m very proud of that.�

Bailey hailed from a working-class family in north-east London and moved to Manchester to study engineering. His first job in accounting, which he found “desperately boring�.

He worked for the Royal Mail, a private equity firm in healthcare in London, and a technology start-up which sent him to Australia on secondment in the mid-1990s. In 2002, he entered retail by joining Officeworks as the chief financial officer and became the Kmart CFO at 40.

And despite the appeal of living in Noosa, Bailey also has a base in Melbourne and travels most weeks.

“My job is seeing people across our organisation, so that’s all across Australia, New Zealand and across the world. We’ve got 1000 people in Asia, we’ve now got people in the UK and North America,� he says.

“I wouldn’t say this is for everyone because it’s a lot of travel. I reckon I maybe do a week-and-a-half [a year] outside of holidays when I’m not travelling.�