Kohl’s Strategy for Success, 4 Things to Consider
Do you shop at department stores? Probably not as much as you used to. The reality is that over the years a slew of retailers have feasted on department stores as if they are an appetizing dish at lunch. At one time you or your parents may have gone to Kohl’s or JC Penney or Sears to shop for clothing on a Saturday afternoon. But its getting harder to justify that trip if you can pick up some “cheap chic” clothing at Target after you have finished shopping for your groceries. That’s the trouble facing department stores. They are squeezed in the middle by high end retailers at the top and by a plethora of retailers at the bottom like Walmart, Amazon and TJMaxx.
Kohl’s has felt the squeeze, losing 17% of its market share over the past decade. “It’s hard to be unique,” said John Fisher, a senior lecturer at Boston College’s Carroll School of Management. “I think Kohl’s is caught right now by death in the middle.” But Kohl’s, which is the largest department store in the United States, will not go down without a fight. If you are curious about Kohl’s strategy to stay relevant then consider these four elements of its strategy.
1. Leverage other retailers to lift sales. One of the oldest tricks in the retail sector is to partner with another retailer to drive foot traffic into your store. Kohl’s entered into a partnership with Sephora in 2020 that will see 850 small Sephora shops located within Kohl’s. That’s about 75% of Kohl’s 1,110 stores. This type of arrangement is a win win for both retailers as it gives Sephora more reach without having to make the same amount of capital investment necessary to open larger stores. For Kohl’s the initiative provides the opportunity for the retailer to attract younger customers.
Last year close to eight million people bought merchandise at a Sephora located in a Kohl’s. “In the fourth quarter, our total beauty sales increased 90%, and we achieved high-single-digits percent comparable beauty sales growth in the 200 Sephora shops that opened in 2021 and better than expected sales in the 400 shops opened in 2022.” Kohl’s goal is for Sephora at Kohl’s to become a $2 billion business.
Nearly 50% of the purchases that have included a product from Sephora at Kohl’s also included merchandise from Kohl’s. “I recently met with Sephora leadership,” said Kohl’s CEO Tom Kingsbury. “And what I can tell you is that, one, we both are pleased with the partnership we’ve built and what has been accomplished in such a short period; and two, we both see immense opportunities to continue to drive sales and profitability in the future.”
Sephora at Kohl’s is not the only partnership Kohl’s has on the go. Kohl’s has also leased out space in several of its stores to Planet Fitness and Aldi. Kohl’s also has a partnership with Amazon where customers can return Amazon purchases at Kohl’s locations for free. The partnership resulted in two million new customers visiting Kohl’s in the first year of the initiative. However, some argue that Kohl’s has too many partnerships. Kohl’s “has long relied on other retailers' (Amazon and Sephora) brand equity to drive traffic and sales, which isn't a path to sustainable growth," said Zak Stambor, senior analyst at Insider.
2. Open smaller stores. With 70% of Kohl’s sales coming from stores it continues to invest in this channel. The department store retailer is doing this by opening smaller stores in suburban areas. These stores, which are sometimes around 35,000 square feet will be about half the size of an average Kohl’s store which is typically around 80,000 square feet. The retailer is planning to open 100 stores in smaller markets over the next several years with the goal of those stores bringing in $500 million in revenue.
3. Discount less. Kohl’s like many department stores has fallen victim to too many promotions. This was especially evident in Kohl’s last quarter where its gross margin declined by 10.2%. “We know that our promotional strategy at times can be a disadvantage to Kohl’s when compared to our competitors’ price-focused strategies,” said Kingsbury. With that in mind Kohl’s is testing an everyday low pricing strategy. “We will test everyday value pricing with a small percentage of our product assortment, and if successful, grow it appropriately in subsequent years,” said Kingsbury. “We fully recognize the sensitivities around pricing with our customers and will approach this with great measure and flexibility.”
Everyday low pricing is not a new strategy. JC Penney tried it about ten years ago. But in the year it was introduced JC Penney’s sales fell by a whopping 25% and Ron Johnson, the CEO who introduced it ended up losing his job after the fallout. Once your customers get used to discounts it’s hard to get them in your doors without them.
Do you like this content? If you do subscribe to our retail trends newsletter to get the latest retail insights & trends delivered to your inbox
4. Become a lifestyle retailer. Kohl’s has also said its strategy involves “pivoting from a department store to a focused lifestyle concept.” One of the things Kohl’s has done to achieve this vision is to increase its assortment of activewear including selling more merchandise from Nike and Under Armour. But lifestyle is a tricky sector to be in since everyone is in it. From Lululemon to Athleta to Target to Amazon lifestyle clothing is everywhere. That makes it very difficult to standout. Lululemon has done well because it set the standard for what athletic wear could be. Lululemon’s clothing is also built on years of technical innovation that’s why it’s hard for other brand’s to match the feel and performance of its clothing.
Many of Kohl’s investors don’t believe becoming a lifestyle retailer or Kohl’s other key initiatives are enough to move dial. Jonathan Duskin CEO of Macellum, an activist investment firm which is Kohl’s third largest shareholder has called Kohl’s strategy: “a risky plan that relies on something that hasn’t happened at Kohl’s for a decade.” “And if they miss their sales line, there’s no margin for error. The results will be a lot worse than we’re anticipating.” “We see a company that’s lost its way,” said Duskin. Kohl’s “should be doing better than Macy’s, not worse,” said Duskin. And he was right Kohl’s revenues were down 7.1% last year to reach $17.2 billion. Kohl’s also had a net income loss of $19 million last year down from a positive net income of $938 million the prior year. Investors have also suggested that Kohl’s should spin off its eCommerce business or go private.