DETROIT-Kmart Corp. says the the sale of its approximately 860 U.S. automotive service centers to Penske Corp. will help get it back to its roots as a merchandise discounter. The transaction also brings a major new player into the retail tire and vehicle repair business-one with a recognizable name and strong roots in the auto racing, trucking and new-car sales fields.
As announced Sept. 25, Kmart sold the inventory, equipment and other assets of its service centers for approximately $112 million to Penske. A new entity, Penske Auto Center Inc., has been formed to run the operation, which will be based in Troy, Mich., across a parking lot from Kmart's world headquarters.
The deal is expected to close on or before Nov. 1.
The Penske name also has been closely associated with Goodyear tires, especially in its racing endeavors, so it surprised few observers when Goodyear announced Oct. 9 it will become the exclusive tire supplier to the new Penske venture.
The change in suppliers will have the greatest impact on Michelin North America, which has had the lion's share of Kmart's tire business since the retailer severed ties to Kelly-Springfield Tire Co. about a year ago.
Eugene R. Culler, Goodyear's executive vice president of North American Tire operations, said Penske approached the tire maker about ``joining forces,'' and that the addition of Penske outlets bolsters Goodyear's distribution strategy that embraces a strong network of independent dealers and company-owned outlets supplemented by a selective list of mass merchandisers.
Anticipating the loss of business to Goodyear, a Michelin spokesman said Michelin had ``twice declined to lease or become the exclusive supplier to Kmart's auto service centers'' because Michelin is not in the retail business, and ``a key Michelin strategy is to not be in competition with our retailer independent customers.''
He said that 86 percent of Michelin's sales at Kmart consisted of the Uniroyal brand, 9 percent Michelin, and 5 percent BFGoodrich tires.
The Kmart-Penske deal actually emanated from a friendly phone call by transportation powerhouse Roger S. Penske Sr. to Floyd Hall, welcoming Kmart's relatively new chairman, president and CEO to the Motor City.
Mr. Penske, chairman and CEO of Penske Corp., called his business acquaintance with the offer: ``If there's any way we can be of service to Kmart, let me know.''
There was something.
Talks about Kmart spinning off its auto service centers to Penske began in July, Kmart spokeswoman Mary Lorencz said, and proceeded rather quickly.
As part of the acquisition, Kmart will sublease the auto centers' retail space to Penske, thus generating additional revenue.
During a three year transition period, Kmart also will provide administrative and information services support to Penske Auto Center, which will be chaired by the elder Penske's 36-year-old son, Roger S. Penske Jr.
Timothy E. Findlay, 48, who will be the new company's president, has had a 24-year career at Kmart, starting in its automotive services department in 1971. He has served as Kmart divisional vice president, sporting goods and automotive, since 1993.
The additional income from the service centers' sale should help boost Kmart's sagging bottom line. At the press conference announcing the deal, Kmart's Mr. Hall admitted that for at least the past year the retailer's automotive service business-which had 1994 revenues of $360 million-was losing between $13 million and $19 million annually.
As Kmart continues to reel from an onslaught of low-cost competitors like Walmart Stores Inc., it has been divesting its specialty retail chains, including OfficeMax Inc., Sports Authority Inc., Borders Group Inc., Pace warehouse stores, and PayLess drugs.
According to reports, the moves have raised more than $2 billion in the past year. Only Kmart's 171-store Builders Square division survives, though analysts say once that operation is shaped up, it, too, may be spun off.
The auto service centers will continue to operate at Kmart locations, but will become independent, with Penske assuming full responsibility for all business functions. Ms. Lorencz said that over the next three years, signage will gradually be changed to the Penske Auto Center banner. All customer warranties for work previously performed by Kmart will be honored by the new company.
Some 5,600 Kmart auto service personnel, including current management, will be offered employment with Penske Auto Center.
Mr. Penske said that since ``starting with our first (car) dealership in 1965, our organization has pursued excellence in automotive service for the customer. Our Penske Automotive Group dealerships have more than 200,000 service customers, and their Customer Satisfaction Index ratings are consistently among the industry leaders.
``I am very excited about the opportunity to now provide service to automotive customers nationwide as well.''
In a report published in Crain's Detroit Business, Mr. Penske said a ``laundry list'' of new services is being developed for the former Kmart auto centers, and his firm is ``very optimistic that together we're going to be able to grow this business fairly dramatically. . . . I would certainly be disappointed if, over the next three to four years, we couldn't double this business.''
He said he has no plans, as yet, to take the centers to sites other than Kmarts, which he called ``excellent locations.''
Kmart currently operates about 2,225 stores in the U.S., and 144 stores internationally. The company has 127 stores in Canada, some with auto service centers, but those will not change hands in the Penske transaction.
Penske Corp. is a privately held, diversified transportation services firm with annual revenues of $5 billion and operations at more than 700 facilities worldwide.
The Detroit-based company owns six new-car dealerships in Southern California, including Longo Toyota in El Monte, the nation's largest Toyota dealership by retail volume.
In 1988, Penske, a longtime financial backer of racing teams, bought a struggling General Motors Corp. division, renamed it Detroit Diesel Corp., and has since become one of the top producers of heavy-duty diesel engines.
Penske also operates Leaseway Transportation Corp. and Penske Truck Leasing Co., No. 2 nationwide behind Ryder Truck Rental.