Kmart, Wal-Mart Buy Back Online Stores in Changed Market

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Kmart Corp. yesterday completed its acquisition of shares in online retailer BlueLight.com LLC that it already did not own, taking an estimated $120 million charge for the restructuring and integration effort.


In a concurrent move, BlueLight.com said it will discontinue free Internet access for 7 million subscribers in favor of an all-paid model. It is the nation's No. 2 provider of free Internet access, behind the recently merged service of NetZero Inc. and Juno Online.


The decisions coincided with Kmart rival Wal-Mart Stores Inc.'s move last month to regain control of its online store. The Bentonville, AR, retailer will buy out Accel Partners' unspecified minority stake in Walmart.com, Brisbane, CA, for an undisclosed sum.


Both Kmart and Wal-Mart attributed their moves to market trends.


"Kmart feels the future of retail is in the bricks-and-clicks model and to better integrate the two, we think it's important to own 100 percent of BlueLight," said Stephen Pagnani, media relations manager at Kmart.


A senior Wal-Mart executive echoed that sentiment.


"Clearly, customers today want to shop and seek information through both online and offline channels," Lee Scott, president/CEO of Wal-Mart Stores, said in a statement. As a result, he said, the company's focus is on "tighter integration of our online program with our stores."


Scott said Wal-Mart sought to add more traditional retail store services online, and the "most practical way for us to address these opportunities is to do so from within one company."


The BlueLight.com purchase agreement calls for Kmart to offer Japan's Softbank Venture Capital and Martha Stewart Living Omnimedia Inc., New York, $15 million in cash and 6 million Kmart shares of common stock. Until the buyback, Kmart owned 60 percent of BlueLight.com, Softbank owned 27 percent, and Martha Stewart owned 13 percent.


The decision ends a two-year stand-alone run for the online retailer.


Besides being an e-commerce site, BlueLight.com also sought to drive traffic to Kmart stores through its ISP. Online access currently is offered for free or via paid subscription. Free access will cease Aug. 29. Subscribers will have the option of switching to an $8.95-a-month service.


Heidi Gibson, general manager at BlueLight.com's ISP and one of the co-founders of BlueLight.com, blamed industry forces for the new subscription model.


"One is, of course, the bottom fell out of the free Internet services market when the bottom fell out of the online advertising market, which is how it was really being supported," Gibson said.


Another reason was BlueLight.com's inability to make money despite low subscriber acquisition costs.


Kmart already has assumed BlueLight.com's marketing and merchandising functions. This was announced in the spring, when an operational revamp claimed the jobs of many BlueLight.com employees, including CEO Mark Goldstein.


For its part, following the Walmart.com buyout, Wal-Mart will closely integrate its online and offline programs in such areas as prescription drugs, gift registry and photography services. But technology, site development and merchandising will remain Walmart.com responsibilities.


Wal-Mart said no layoffs were planned as a result of the decision to incorporate Walmart.com as a separate business unit within the $191 billion retailer. The Walmart.com joint venture was announced in January 2000.


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