Kmart Canada is re-examining all aspects of its business in an effort to hold onto its turf in Canada’s hottest retail sector – discount department stores.

The most recent cost-cutting move was to bring advertising in-house, effective Feb. 1.

After 14 years with Ross Roy (now Ian Roberts Ross Roy of Toronto), creative and media aspects of the account will be handled in-house, with a loss of billing to the agency of about $8 million annually.

Don Beaumont, president and chief executive officer of Kmart Canada, says the move was made because even more of the chain’s 1995 advertising budget, about 85%, has been allocated to its flyer program.

Much of the production will be farmed out, but extra creative expertise will be hired for the in-house department.

The Canadian operation made its announcement when its u.s. parent put its US$175 million account into review.

The business has been with Ross Roy Communications of Bloomfield Hills, Mich. for the past 26 years.

Ross Roy has declined to take part in the review.

The competitiveness of the marketplace has forced Canadian retailers such as Kmart to become more value-conscious over the past three years, and that situation intensified this past summer with Wal-Mart’s entry into Canada.

Wal-Mart has not only been the catalyst behind lower prices and declining margins, but the company has also given Kmart and Zellers, a division of The Hudson Bay Company, the impetus to examine ways of bringing costs down.

Zellers moved its advertising account in-house this past May.

Although Zellers is the largest Canadian chain, with 286 stores, Kmart, with 129, and Wal-Mart, with 125, have the advantage of synergies with u.s.-based parent companies to help streamline operations.

Beaumont says the synergies between the Canadian company and Kmart, of Troy, Mich., are primarily in the area of information sharing, but that real estate, store planning, maintenance and lease administration were recently made North American functions.

The three major discount department store chains are not only going head-to-head on price, but are also jockeying to establish their particular place in the market.

Susan O’Dell, president of Service Dimensions, a retail and service industry consultancy in Mississauga, Ont., says the companies’ advertising campaigns indicate where each of the three envision their niche.

Zellers is positioning itself as truly Canadian, down to including a little Maple Leaf flag in its advertising.

The company is pitching the value-added proposition offered by its Club Z loyalty program and it is also promoting itself as a low-cost retailer with its tagline, ‘The lowest price is the law.’

O’Dell says Wal-Mart has brought its folksy image to Canada. It is supplementing its low price message with friendly service and the slogan, ‘our people are what make the difference.’

She says the discount chains will continue to cut costs as they form different kinds of supplier relationships (McDonald’s Restaurants of Canada outlets in Wal-Mart stores, for example), make better use of their information systems and continue to shift decision-making to their employees.

Beaumont says Kmart is putting its emphasis on fashion, including home fashions, and particularly children’s wear.

The company will still offer household goods as door-openers, but will carry only a limited selection of products in areas such as auto accessories and home improvements.

Beaumont says Kmart is also going head-to-head in the price area, which did not necessarily happen when Wal-Mart first entered the market but is in full swing now.

Kmart’s themeline is ‘The lowest price is a Kmart price.’

Kmart began girding for battle in 1991 with a five-year plan to redesign, or rebuild, and upgrade all of its 129 stores to between 94,000 to 110,000 square feet.

Kmart also plans to open standalone stores in power centres, and may, later, bring to Canada the Super Centre concept, which combines a supermarket with a department store.

Kmart’s renewal process included other changes such as greeters, also a fixture at Wal-Mart, and a strong new emphasis on service with its Customer Care program.

While working closely with u.s. parent companies has advantages, Kmart and Wal-Mart are at the mercy of whatever decisions are made by the corporate entities.

For Kmart, this year’s road to renewal has not been a smooth one.

While rebuilding and expanding in Canada, Czechoslovakia, Mexico and Singapore earlier this year, Kmart was also in discussions about selling stakes in its specialty retail businesses, which include Florida-based Sports Authority, Waldenbooks, OfficeMax and Builders Square.

This past September, Kmart in the u.s. announced it would close 110 of its 2,350 stores, cut management by 10% and lay off 5,250 employees.

Beaumont says he sees the parent company’s moves as a message that it is committed to ensuring the viability and health of the core business.