By Kate Southam

Stores with fraying carpet and shabby change rooms; staff worried about their futures; customers facing a daunting product range that confused them more than it inspired them to buy.

These were just some of the challenges for former McDonald’s Australia head Guy Russo when he became chief executive of the perennially underperforming Kmart chain in 2008.

Mr Russo had been enjoying semi-retirement in Hong Kong when he was asked to take the top job at the retailer.

Two years later, while not yet a market darling, Kmart has undergone a major structural overhaul, increased profits by 100 per cent this past financial year and is firmly back on the retail map.

"When I first arrived, the customer was not being looked after," Mr Russo says.

"Pricing was terrible – it was either too high or too low – and the stores were poorly invested in so they looked terrible.

"I was told the carpets had not been changed in 30 years. The change rooms were worn out.

"(Kmart store managers) were working with a business model that was broken. There were so many processes – and those processes were broken – but people in the stores knew where it was going wrong."

Kmart had long been a problem company. In the preceding decade, staff had worked under four different chief executives and Coles Myer had talked publicly of selling it off three times – before eventually being bought themselves by Wesfarmers.

"Kmart had not achieved growth in 10 years and profitability was zero," Russo says. "Wesfarmers didn’t know whether to divest it or keep it but in the end made the decision to keep it because of the huge opportunity to improve."

Mr Russo waited until he had been in the job for six months before handpicking an executive management team of three men and three women to ensure he had the right people to drive the changes needed.

A key strategic step was to slash Kmart’s product range from 100,000 lines to 40,000 and narrow its price positioning.

"Our customers spend an average of 20 minutes in the store shopping. But when I was watching them they were spending most of their time trying to sort out the difference between the many products in the same range.

"We were trying to be The Reject Shop as well as Harrods [an upmarket department store]. We had toasters priced up to $400. We had barbecues priced up to $1500 and clothes priced over $100. The only time we would sell them was when they were on sale at half price and then we made no money on them."

Instead, Kmart removed eight barbecues – leaving three priced from $80 to $200 – slashed the range of 30 different toasters and pushed its home brands harder.

Less is more

Mr Russo found the formula worked. Expensive designer jeans were replaced by items as low as $10. Sales went from hundreds of units annually for a single product line to millions.

"Our instincts told us that lowest prices every day at the quality our customers expect was the way to go," he says.

"If you want the latest jeans with studs and rips then go elsewhere. I am not trying to be the jeans specialist but I am trying to tap into a market where people want quality goods at affordable prices. No disrespect to the national brands but I want to provide products that mums and dads need."

Mr Russo also says Kmart does not follow the spot discounting offered by competitors.

"The ‘everything 40 per cent off this Saturday only’ approach means consumers in store on that particular day get a price they love while everyone who missed out hates those deals," he says.

"Why not offer the lowest possible price every day as well as the quality that customers expect?"

The results

The turnaround is starting to show real results. For the year to June 30, Kmart improved its position to make $4 billion in revenue and $196 million in earnings before interest and tax.

To compare, Kmart’s sister company Target made about $3.8 billion in revenue and about $381 million in earnings before interest in tax.

The success has not been without cost. More than 150 staff from the company’s head office admitted they couldn’t commit to the effort of a turnaround and left. And 20 per cent of the chain’s store managers have been replaced.

Mr Russo has also tried to broaden the world view of those store managers who have come through the transformation process.

At the time he was approached for the role Mr Russo had left McDonald’s after 33 years and was consulting to a small number of companies doing business with China.

While admitting to being a "happily retired guy in my late 40s" at the time, his main focus was as president of the Half the Sky Foundation, a charity that provides family-style nurturing care to children living in orphanages in China and with which he is still actively involved.

"I described (the Kmart staff) as orphans," he says about his arrival at the retailer. "They wanted to be successful but they had no parents, no direction, no leadership. There had been no one up the top committed to them."

In September this year he took 183 of his store managers to Beijing to give them a new way of looking at life.

They climbed the Great Wall met Mao’s Last Dancer author Li Cunxin and also Jenny Bowen, founder and CEO of the Half the Sky Foundation, who spoke about her work with orphans in China.

"I wanted to take them out of their comfort zone," Mr Russo says, adding that many of the managers had been with Kmart for 30 years.

"You get the most satisfied and engaged employees when the business rocks."

Kate Southam is the Editor of CareerOne.com.au and author of the Ask Kate column and the Cube Farmer blog about work matters.