Kmart's closing of newer stores raises questions

Some wondering why Kmart spent millions on remodeling

Posted: Friday, January 17, 2003

DETROIT - Two years ago, Kmart refurbished its store in Utica, Mich., added a full-service grocery and went to a 24-hour operation.

Now Kmart Corp. wants to lay off 37,000 employees and close 326 stores around the country - including the Utica store -and Utica Mayor Jacqueline Noonan can't understand why. Noonan says Kmart poured thousands of dollars into the remodeling, and the supercenter bustles with shoppers.

"I would have to see the numbers to be convinced that it was a store that did not do well. I believe it was a store that did well," Noonan said Wednesday. "I've called headquarters to find out to whom I can complain."

Shoppers and city leaders said they were puzzled by some of Kmart's decisions - while some newer and bigger stores are closing, older, dingy stores stay open.

Kmart officials say the decision to close a store was based on more than just sales and profits and the number of shoppers.

Spokeswoman Lori McTavish said the decision to close a store was based on factors such as the competitive environment, distance from distribution centers, the location and number of other Kmart stores in the market and financial performance.

Anonymous letter-writers who claim to be Kmart employees said the company was forced to close about half the supercenters, get out of entire markets and abandon stores in which it made large investments because of "corrupt" and unethical real estate transactions. Tuesday the discounter said it will close 60 of 117 supercenters. It will pull out of Alaska and several big markets in Texas.

In a letter to Rep. Billy Tauzin, R-La., about the store closings, the letter writers say they are the people who tipped off the Securities and Exchange Commission to accounting irregularities at Kmart. Since that first letter, the SEC, FBI and Tauzin, chairman of the House Energy and Commerce Committee, have begun probing Kmart's collapse.

In their Jan. 9 letter to Tauzin, the group says Kmart was forced to close some newer, premier properties in metro Detroit and around the country. The chain is left with a portfolio "weighted by aging stores and properties that will require either substantial investments or replacement in just a few years."

Rents and leases, labor problems, shoplifting and the competition were considered as the company looked at every store among the remaining 1,829 and settled on the 326 to close, according to officials and real estate experts.

Real estate experts say some of Kmart's newer stores probably wound up on the list because of high rents - while older stores with leases negotiated years ago cost the company less. And the newer stores need more volume to make the numbers work.

"Regardless of whether a store has been open two, three or four years, if they've had weak sales and high rents, they're going to want to walk away from those," said Russell Barnett, a vice president at Grubb & Ellis, a global real estate company.

Whatever the reasoning, Utica officials said they were disappointed about Kmart's decision. Noonan says she hopes Kmart can come out of bankruptcy and survive, but she's not convinced it made the right store-closing choices.

"I hope their plan works," she said. "But on the other hand, this was not an evenhanded move. I'm very concerned as to the basis for these decisions."

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