Sunday, February 23, 2003

Kmart's fallout hits suppliers, workers

Small businesses pinched by closures

By Karen Dybis
The Detroit News

TROY, Mich. - The fallout from 600 store vacancies and more than 70,000 lost jobs stemming from Kmart Corp.'s massive bankruptcy will have far-reaching effects nationwide.

The full economic impact of the retailer's reorganization has yet to be calculated, but economists and analysts say the ripples will hit consumers, suppliers and small-business owners the hardest.

Kmart's problems have been well-documented as the retail icon attempts to reorganize after more than a year operating under Chapter 11 bankruptcy protection. But the company's economic wounds go deeper into the fabric of the national economy.

For example, thousands of vendors depend on Kmart as an outlet for their merchandise. Without Kmart as a customer, their businesses are in jeopardy.

In addition, stores in Kmart-anchored strip centers could close from a slowdown in customer traffic. Laid-off Kmart workers will struggle to find employment. And further job cuts could occur as companies doing business with the retailer evaluate how Kmart's downsizing affects their bottom lines.

Even if Kmart emerges successfully, the company's bankruptcy has diminished what was a great retail moniker, and scandals involving former managers have lessened its regard, said Patrick L. Anderson, principal at Anderson Economic Group, a Lansing, Mich., economic and public-policy consulting firm.

Kmart's suppliers are feeling the pinch. The first hit came in January 2002, when Kmart sought Chapter 11 protection. Billions of dollars in debts have gone unpaid since then, and Kmart's proposed reorganization plan offers most vendors 40 percent or less in repayments of their bills.

Last month, Kmart announced a new round of store closures and began going-out-of-business sales at 317 stores. For this round, the company is anticipating 35,000 layoffs nationwide. Last year, the company laid off 22,000 people and closed nearly 300 stores.

The closures will leave Kmart with about 1,500 stores.

"Consumers in smaller rural areas or urban markets will suffer because Kmart was their primary retail outlet, giving them good selection at good prices," Anderson said.

With fewer stores as customers, Kmart's partners and landlords are hurting. Some have adjusted their business plans in anticipation of Kmart's store reductions.

One of the first partners to go after the first round of closures was Penske Auto Centers. Owner Roger Penske moved fast to shut his remaining auto care and oil change stations at Kmart stores, putting more than 4,000 employees out of work in April.

Little Caesar Enterprises Inc. in Detroit has not said how much it stands to lose, but Kmart owed Little Caesar more than $5 million before the bankruptcy. The restaurant franchise also has lost revenue from nearly 200 pizza stations in defunct Kmart stores.

While others that once depended on Kmart have been forced to diversify, the move has actually improved their business.

Handleman Co., Kmart's music vendor, expects it will lose between $40 million and $50 million in sales this year because of Kmart's decision to downsize. However, Handleman also has been boosting its supply agreements with Wal-Mart Stores Inc. of Bentonville, Ark., hoping to spread some of the risk.

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Kmart's fallout hits suppliers, workers