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Kmart Using Dollar Store Tactics to Take on Walmart, Target

Kmart is hitting back at its supercenter rivals -â€" full size in Walmart's (WMT) case and mini in Target's (TGT) â€"- by using something like a dollar store strategy, launching or relaunching store brands that provide everyday needs at a discount.

Kmart just announced the launch of Smart Sense, a new private label line that includes snacks and beverages, oral care, paper products, household cleaners and over-the-counter medications. The retailer is promising that the quality of the Smart Sense line is comparable to that of national name brands at a price that is, on average, 20 percent cheaper.

Although it's making the most fuss over Smart Sense, it's critical to understand the context of the launch to see Kmart's strategy. In addition to the Smart Sense, Kmart is relaunching other exclusive brands, which including Little Ones baby care products, Champion Breed pet care products, Image Essentials personal care products and VitaSmart vitamin products.

Recently Walmart and Target have focused private and exclusive label initiatives on fashion brands rather than food and everyday needs. In the meantime, dollar stores have been thriving by providing low-cost soft drinks, paper towels, snacks, dog food, in other works, just what Kmart is pushing with its private label initiatives. Kmart may have shut down most of its supercenters, but its stores still sell basic groceries and perishable items such as milk, deli meet and frozen dinners. And they are often in urban and densely populated old-line suburbs that have fewer major supermarket and supercenter operations than on average. Even Target, which has adding its P-Fresh mini-supercenter format stores in urban locations, avoids many of the lower income neighborhoods where Kmart operates.

Dollar stores thrive in crowded neighborhoods selling a smaller presentation of food and everyday needs than supermarkets and supercenters, in part because they only offer one or sometimes two prices in a product category versus the three or more at the big-box competition. When it comes to grocery and consumable goods consumers have to constantly replenish, dollar stores can provide a wide enough product range to serve many of their customers' core needs while saving them a trip further a field to a supercenter or supermarket.

Kmart has a bigger store but it's in a similar situation. It has looked at dollar store success and recognized that a bargain close to home is attractive enough to many shoppers that a trip to Walmart or Target may not be.

Kmart has had some success offering lower-income consumers plans that address their basic needs, the most conspicuous of which is its layaway program. Layaway proved popular enough that the retailer's parent company, Sears Holdings (SHLD), expanded the program to its namesake stores. And Kmart's loyalty card initiative provides points for every purchase, so the basic private-label discount comes with credit toward future purchases.

Adding the Smart Sense label and reemphasizing its sibling brands is another Kmart move to make existing customers look at is as a more attractive place to shop. As with its social network, which provides special coupons and other deals to loyalists, the retailer has moved to demonstrate to its customers that it will keep offering them fresh reasons to shop its stores. Given some recent, if mixed, gains in comparable store sales, those at locations open for at least a year, indications are that the retailer is enjoying a degree of success.

If its customers respond to bargains in food and everyday needs in anything like the way that they have to dollar store discounts on similar goods, Kmart could go from stabilizing its operations to actually, if even modestly, advancing its business. Positive momentum would represent a significant turn around for an enterprise that seemed to be sliding into irrelevance and perhaps even oblivion just a year and a half ago.