The last full-sized Kmart in the US closed this week – yet another casualty of online buying habits proving to be an existential threat to department stores around the world.

But in Australia, the discount retailer that shares the same branding is bucking the global trend after engaging in a years-long transformation to shed its daggy image. The result? Supercharged profits for its owner.

Revenue at the Wesfarmers-owned Kmart Group jumped almost 5% last financial year to $11.1bn, even as cost-of-living pressures dampened the mood of many shoppers. Meanwhile, revenues have been sliding at rival Big W.

The Kmart transformation has accelerated post-pandemic, according to UBS analysts, with the retailer now drawing in equal numbers of low, middle and high-income customers, representing a break from the discount store’s battler-focused past.

Retail experts attribute the strong performance to its dominant home brand, Anko, which has transformed the chain into a product maker that differs from a traditional retailer’s reliance on selling other companies’ products.

It employs a strategy of mimicking popular items – such as shapewear product Skims – but at far cheaper prices. It has a large social media presence, appearing in influencer posts targeting lucrative niches including young adults and mothers.

“Suddenly, their range became more relevant and their products became more attractive,” says Brian Walker, the chief executive at consultancy Retail Doctor Group.

“They created a parallel social media marketplace that really made it cool and a bit chic to be at Kmart.”

While the affiliation between Kmart in Australia and the US has long passed – they formerly had a common shareholder – the stores traditionally targeted the same part of the market, picking up customers priced out of higher-end department stores.

Walker says that while Kmart has met the Amazon-led online threat head on, it will need to keep adapting as newer online outfits, such as Temu and Shein, also take market share from discount department stores.

“The big box retailer was all very predicated on the strategy that we didn’t have these big online players, these technology-first companies,” Walker says.

“The online players are starting to dominate that value sector, and that’s the heartland of the discount department store model.”

Shoppers can now get many of those same products from online-only retailers, which do not have brick-and-mortar costs, helping them undercut on price.

Pivot from the past

Revenue at Big W – Kmart’s main rival – has been up and down since the pandemic: rising in the 2021 financial year, falling in 2022, going up in 2023 and dropping again in 2024.

Big W’s owner, Woolworths Group, said in its recent annual report that the discount retailer had a “challenging year”, with value-conscious customers cross-shopping and trading down.

The modest results have reportedly sparked calls by First Sentier Investors for Woolworths to sell Big W, which the investment house believes is a drag on the profitable supermarket business.

First Sentier declined to comment further.

UBS analysts say Big W remains predominantly a retailer of branded products as opposed to Kmart – which has created enough scale through Anko to invest in its own range but still sell at attractive prices.

While Kmart’s performance has been strong, the other Wesfarmers-owned discount department store, Target, was generating lower year-on-year revenue before its operations started to get folded into Kmart.

Shoppers can now buy Anko products at Target, muddying the difference between the retailers. Wesfarmers’ department store division, called Kmart Group, includes the Kmart and Target businesses.

Revenue has also been falling sharply at online retailer Catch Group, also owned by Wesfarmers.

Robert Crawford, a professor of advertising at RMIT University, says Kmart has been able to “pivot” from the past, but shoppers are finding alternatives to Target.

“Kmart shifted itself strategically, a little bit into where Target was, but the problem was that Target then had nowhere to go and they were both owned by the same company,” Crawford says. “In effect, Kmart cannibalised Target.”

Kmart declined to answer questions.

The challenge discount retailers face is to keep enticing customers into their outlets, even though they were never designed to be destination stores. Unlike their upmarket peers, discount chains focus on suburban areas, as opposed to prime city locations.

“Discount department stores never sought to be magical sort of places,” Crawford says.

“The big department stores had escalators and personalised service. Discount department stores dispensed with all that. It was, look, come in, get the stuff and get out quickly.”

In an attempt to clear congestion at entrances and bring energy to the heart of a store, Kmart has trialled moving checkouts to the centre of their outlets, although the change has been met with mixed responses from customers.

Kmart has, however, carved out a successful digital strategy, challenging online-only stores in their natural environment by investing in influencer-led fads.

There are numerous social media posts of shoppers showing off their Kmart “dupes”, which are items designed to replicate more expensive brands.

Prof Billy Sung, from Curtin University’s school of management and marketing, says Kmart has generated the type of positive emotional reaction from shoppers that more prestigious stores and brands strive for.

“It’s not the luxury or the premium that is driving the hedonic value, it is about people feeling like they are getting a good deal,” Sung says.

“Kmart has branded itself to be a place where you can find the same product or similar product at a lower price than anywhere else.”

• This article was amended on 28 October 2024 to correct Robert Crawford’s field of expertise: he is a professor of advertising, not marketing, at RMIT University.