KMART CEO ADMITS AD SPENDING CUT A 'MISTAKE'

Retailer's Quarterly Earnings Down Against Rivals

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SAN FRANCISCO (AdAge.com) -- Kmart's chief executive today told Wall Street that the retailer's advertising cutbacks have proved to be a mistake.

CEO Charles C. Conaway said Kmart made significant cuts in its Sunday newspaper inserts and other circulars that promoted sale items, dropping ad pages over the year from 7.5% in January to 50% in September and October.

'Drastic' cuts
The cuts,

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which he called "drastic," were made in part to allocate funds for advertising for TV and radio efforts for the BlueLight Special branding campaign and for the BlueLight Always campaign touting price rollbacks on everyday items.

As a result of the ad cuts and shift, Mr. Conaway said the number of customers on Sundays looking for promotional items dropped, while regular Kmart customers came in mid- to late week.

"There's no doubt we made a mistake by cutting too much advertising while the competition increased theirs," said Mr. Conaway.

Competitors up spending
Throughout the economic downturn, competitors such as Wal-Mart have indicated they would maintain advertising levels.

"Clearly, we've learned where the threshold of pain is in advertising," he said, adding that Kmart will reduce cuts in December to 20% and then perhaps move to 30% in January 2002.

Omnicom Group's TBWA/Chiat/Day, New York, is Kmart's agency of record for branding, while Interpublic Group of Cos.' Don Coleman Advertising, Southfield, Mich., is agency for the animated "bluelights" spotlight commercials. Kmart's holiday work was a joint effort between the shops and featured the lights on a Christmas tree.

Kmart fiscal year 2000 spent $373.5 million on advertising, according to Taylor Nelson Sofres' CMR. For January to August of this year, the retailers spent $198 million, down from $227.9 million for the same period last year.

Kmart reported a net loss of $224 million, or 45 cents per share, for the 13-week quarter ended Oct. 31, vs. a net loss of $67 million, or 14 cents per share, for the13-week period ended Oct. 25, 2000. The important retail measure of same-store sales -- that is, sales at stores open for more than one year -- decreased 1.5% in the third quarter of fiscal 2001.

Kmart's quarterly performance was sluggish compared to its two main discount competitors, Wal-Mart and Target, which are surging as consumers look for value merchandise.

On other topics, Mr. Conaway said employment at Bluelight.com had been cut to 63 employees while sales are up almost 50%.

Youth push
He also said the company is making a major push to court Generation Y, or the echo baby boom generation, first with its music promotions and then with a big upcoming push for Joe Boxer products.

Other new Kmart products will include new brands for the Hispanic market and a continuing push to increase food sales.

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