JOB 1 AT KMART IS BOOSTING PROFITS

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Only the gamblers remain in the quest for Kmart Corp.'s $175 million ad account.

The winner could end up a fast loser, or it could hit the jackpot by helping Kmart find the elusive identity that will distance the troubled retailer from its rivals.

That need grew even more urgent last week when Kmart reported its eighth straight quarter of disappointing earnings. Fourth-quarter earnings totaled $145 million for the three months ended Jan. 25, vs. a loss for the year-ago period of $1.19 billion, reflecting one-time charges of $521 million for the sale of operations and $862 million for restructuring. For the year, Kmart earned $296 million, compared with a year-ago loss of $974 million.

Despite making money for the year, Kmart remains under shareholder and Wall Street scrutiny since they had expected better numbers. And for agencies, it clouds the wisdom of pursuing Kmart's ad account.

"Kmart is a high risk/high reward account for agencies," said Brian Kardon, director at BraxtonAssociates, a Boston management consultancy.

If Kmart fails to turn itself around, the new agency's tenure could be short-lived. If Kmart does pull off the U-turn, it could cement a long-term, prosperous agency relationship.

Since the account went into review in November, its lure has diminished. Only three hopefuls and one incumbent remain.

The field consists of New York agencies Ally & Gargano and BBDO Worldwide, as well as Campbell Mithun Esty, Minneapolis. Incumbent Ross Roy Communications, Bloomfield Hills, Mich., isn't taking part in the review process but produced a new spring campaign that broke March 2. Kmart has never ruled out the possibility of Ross Roy keeping the account.

BBDO parent Omnicom Group is negotiating to buy Ross Roy, a move that would give BBDO an advantage in the review. However, if plans to acquire Ross Roy fall through, insiders close to the review say BBDO would take a hard look at dropping out to concentrate on absorbing $250 million worth of new Mars Inc. business.

Other interested parties like N.W. Ayer & Partners, Messner Vetere Berger McNamee Schmetterer/Euro RSCG and Ammirati & Puris/Lintas, all New York, dropped out after seeing the downside of taking on the No. 2 retailer.

Kmart has restructured upper management, and some agencies that have dropped out privately raised doubts about whether Kmart management has agreed on a turnaround strategy.

Kmart is feeling pressure not just to change its identity over the long term, but to generate better profits during the next quarter. Kmart says it wants a "strategic partner," not just an ad shop, to help the retailer define itself in the marketplace (AA, Jan. 16). So it will be looking for a fast boost from its agency. If it can't quickly appease analysts, Kmart might even feel compelled to fire the agency and start looking again.

The retailer's financial security shouldn't be a concern to agencies still involved in the review, say analysts and insiders.

"I don't see a threat of Kmart going bankrupt soon and not paying their agency bills," Mr. Kardon said. "They are financially sound." But Kmart "is asking too much of the agency," Mr. Kardon said. "Agencies are brilliant in developing creative that is [based] on strategy, and it is up to Kmart to assume that responsibility to develop the strategy."

Mr. Kardon believes the winning agency-rather than trying to boost Kmart's identity with image ads-will do promotionally driven work to lift profits.

Frederick Marx, president of Marx Layne & Co., a Farmington Hills, Mich., consultancy, believes Kmart is a big opportunity for agencies still in the running.

Agencies "are forgetting that fundamentally Kmart is a very solid piece of equipment," Mr. Marx said. "It is not a company that is all of a sudden going to disappear. Just look at Sears."

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