- Choice Hacking
- 🧠 The psychology behind the $1B failure of Kmart
🧠 The psychology behind the $1B failure of Kmart
Hi there - Jen here :)
One of my favorite things to do is to revisit marketing failures through the lens of psychology and behavioral science.
There’s so much we can learn from studying failure, and often we avoid it because it can feel morbid or uncomfortable.
But we’re in good company.
Business leaders like Bill Gates and legendary investor Warren Buffett describe themselves as being obsessed with studying failure, because it gives us much more valuable information than studying success.
So today, I’m examining one of biggest failures in retail history: Kmart.
You might think you know the story.
But contrary to popular belief, Kmart’s problems were way bigger than Walmart or even Amazon.
And actually, lots of them weren’t even Kmart’s fault.
Today I’m breaking down some of the sneaky business and psychology traps that Kmart fell into … and you could too.
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🧠 Why everyone loved Kmart… at first
To understand why Kmart failed, you need to understand why it succeeded.
Founded in 1962 - the same year as Target and Walmart - Kmart would eventually become the country’s leading discount retailer.
But its roots went much deeper.
Kmart started life as the SS Kresge Company - a variety store chain founded in 1897.
But by 1962, it became clear to the SS Kresge Company that American shopping behavior was changing - they’d have to change to keep up.
Car ownership started going way up in the 1950s.
Advances in road construction and auto tech meant that people could leave the city and move to a newly created concept - the suburb.
So to cater to this new customer, the SS Kresge Company decided to open a new kind of store - the discount retailer.
These would be larger stores with greater variety, in standalone locations with a big parking lot so people could drive up and buy clothes, toys, food, and electronics all in one place.
This new store concept was coined “Kmart” and it was an immediate hit.
🧠 3 Things That Made Kmart a Success
✅ Kmart served an underserved customer.
The American suburbs in the 60s were a hodgepodge of local stores.
But when a Kmart moved in people saved time, money and hassle doing most of their shopping in one place.
✅ Kmart expanded like crazy giving them economies of scale.
Kmart CEO Harry Cunningham knew a business opportunity when he saw one, opening Kmarts as fast as he could.
At one point, a new Kmart opened every single week.
Having so many stores meant they could start offering lower prices than competitors because they had the power to buy in bulk from manufacturers.
✅ Kmart appealed to everyone.
Basically anything you needed to buy could be found in Kmart at a lower price than variety stores or local competitors.
That’s why when the concept of discount retail was new Kmart dominated.
Even Sam Walton - the founder of Walmart - recognized how intimidating Kmart was to other brands.
He called Walmart “a flea fighting an elephant.”
Hard to believe today, but Kmart was the elephant and Walmart was the flea.
🧠 The Power of Focus
Close your eyes and imagine a Kmart shopper.
Who do you see?
If you had done this exercise with 10 Kmart executives in the 90s they would have come up with 10 different answers.
That’s because Kmart couldn’t figure out who it wanted to serve.
They were so focused on being known for low prices they couldn’t agree on WHO needed to know that they had low prices.
In the early days Kmart didn’t need a target customer because it was the only store of its kind.
But when competition is introduced into an industry - in this case discount retailing - it forces brands to split up the market to survive.
They each pick ideal group of people and focus their merchandising, marketing, and store experience on them.
The goal is that when a group like moms of young kids - for example - think “I need back to school clothes” the first place they think of is Kmart.
(We call this “mental availability” - how easily does a brand spring to mind when you need to buy something?)
Kmart eventually lost out to Walmart and Target because they both knew exactly who their customers were and what they wanted, while Kmart could never decide.
🧠 Overconfidence: How Market Leaders Die
The corporate culture of Kmart is a fascinating case study into the psychology of a market leader.
When you’re the elephant - to go back to Sam Walton’s metaphor - everyone else is a flea.
And you start forgetting what it took to become an elephant in the first place.
You get arrogant, you start thinking you’re smarter than everyone else and that you’ll never be beaten or be wrong.
Meanwhile, those fleas are hungry.
Kmart fell into a common psychological trap for brands who dominate an industry for a long time - they started getting overconfident.
Overconfidence is actually a cognitive bias - an error in thinking.
And it describes people’s tendency to be a little too optimistic about their abilities, intellect, and continued success.
It’s one of the most dangerous thinking traps any company or leader can fall into.
When people are overconfident, they get comfortable.
They stop thinking of themselves as being in a war with their competitors.
Which during the 80s and 90s when Kmart really fell off - was exactly what was happening in discount retail.
While Kmart was busy growing like crazy, Walmart had taken its time to perfect its business model, niche, and operations BEFORE opening more stores.
Walmart were early adopters of Barcodes and RFID technology - which made it easier to track inventory.
In 1987 they created the world’s largest private satellite network so they could communicate with each other and share data - that’s 8 years before the internet as we now know it existed.
And they were one of the first retailers to use computerized checkout systems.
All this tech made it much easier for Walmart to keep their shelves stocked, know what products their customers wanted, and get better prices from suppliers.
But Kmart could never manage to be nearly as efficient - mostly because they were overconfident that their way was the best way (only because they were the biggest retailers around.
But once Walmart perfected its approach, it started an aggressive expansion project, marching toward an arrogant Kmart with one thing on their mind:
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Read, Watch, Listen
[Read] Think you have what it takes to build a brand like Apple? Here’s the 1984 issue of Newsweek magazine where Apple took out all - yes, all - of the ads inside to launch and explain the Macintosh. [Read]
[Watch] “I Exposed Supercar Dealerships”: Check out car vlogger Mark McCann’s experience as he attempts to buy a Porsche GT3 RS supercar - and it’s not as easy as walking in and buying it. A wild (and disturbing) look inside high-end luxury customer experiences. [Watch now]
[Listen] This episode of the Futur podcast is one of the MOST VALUABLE pods I’ve listened to in a long while: “Designing a Top-Tier Workshop” [Check it out]
Until next time,