Retail Insights, Robin’s Blog

Is Kohl’s Flatlining?

RR Kohls FlatlineBrilliant Strategists Blindsided?

Since 2012, it would appear that Kohl’s might be flatlining (which is drastically dire especially in medical terms). Revenues grew a meager two percent from $18.8 billion in 2012 to slightly over $19 billion in 2013, and sales hovered around that number over the next two years, ending at about $19.2 billion in 2015.  Over the same four-year period, gross margin dropped from 38.20 percent to 36.40 percent, operating margin from 11.50 percent to 8.90 percent, net margin from 6.21 percent to 4.56 percent and net income from a little over $1 billion to $867 million.

What’s going on?  Didn’t the guys running the business see this coming? And if they did, shouldn’t they have begun addressing the reasons for skidding into such trouble much earlier than what we heard from Kohl’s CEO, Kevin Mansell in the latter part of 2014?

For a little background, I wrote several articles about Kohl’s at the turn of this chaotic century. I declared that Kohl’s leaders were brilliant strategists, which Kevin Mansell later said to me in his inimitable humble style,  “…Robin, we don’t know what the word strategy means out here. What we did was just plain common sense.”

Well, guess what, often using just plain common sense (particularly the Midwestern variety) is brilliant. And the common sense strategy for Kohl’s, beginning in the early 1990s, was indeed, brilliant. So brilliant that they experienced two decades of explosive growth from a little over $1 billion in sales in 1992 with 79 stores, continuing with hardly a hiccup through the recession of the late 90s, and then rolling over a speed bump in 2004, and on into 2012 racking up sales of $18.8 billion across 1150 stores.

The Brilliant Strategy
However, even while Kohl’s revenues doubled between 2002 and 2012 (largely due to new store openings), from about $9 billion and 457 stores to $18.8 billion and 1150 stores, there was some big disruptive stuff going on outside of Kohl’s four walls that I believe may have blindsided its brilliant strategists. Stuff like the Internet leapfrogging the key strength of Kohl’s 20-year brilliant strategy: the huge competitive advantage of “convenience for its core consumer.” And stuff like 100% national store penetration.

Kohl’s brilliant strategy and whole value proposition was focused on, and organized around, one consumer target. They may sell products to all genders and ages, but their primary target and strategic focus was on the 35- to 55-year-old working mom with kids who lived in the suburbs and who did not have the time to travel to, and shop through, the malls. So what did the just common sense brilliant strategists do? They identified the neighborhoods where the moms resided and placed Kohl’s freestanding stores almost literally across the street from where they lived.

And Kohl’s did not stop with convenient store locations. They holistically engineered the entire shopping experience around saving time for the time-starved working mom. The footprint averaged about 86,000 square feet on one floor, with wide aisles, central check-out, shopping carts for ease of traversing the store and huge parking lots for quick-in and quick-out.

Call it common sense or brilliant strategy — who cares? During those meteoric growth years, they were hijacking sales from every mall near them. At one point Kevin Mansell said, “Kohl’s intercepts that working mom on her way to the mall,” thus physically stealing a potential customer from every store in the mall. And of course, one of those stores would be JC Penney, who one analyst said lost around $10 billion to Kohl’s over its blistering growth period.

Kohl’s also rounded out their strategy by offering moms the right products and assortments, at the right prices, with a wide range of great national brands as well as powerful exclusive and private brands. Kohl’s mission statement is “to be the leading family-focused, value-oriented, specialty department store offering quality exclusive and national brand merchandise to the customer in an environment that is convenient, friendly and exciting.”

However, it was the “convenient” part of the equation that would turn out to be their lethal competitive advantage. And it’s what I exemplified in my co-authored book: The New Rules of Retail, as “preemptive distribution:” Kohl’s was a poster child.

So what happened on the way to delighting the time-starved working mom, creating double-digit growth and reaching for the holy grail?

Blindsided or Delayed Reaction

The first thing that happened was Kohl’s national penetration with geographical store coverage of the entire U.S. market. Mr. Mansell must have anticipated the timing of about when this would be accomplished, following which new store openings as a major growth driver would dry up.

But the second thing that happened, which he may very well not have anticipated, neither its impact nor its speed, was the game-changing disruption of e-commerce. And please digest this. For Kohl’s, this did and still does, strike right at the heart of their lethal competitive advantage: convenience.

Think about it. What Kohl’s was to JC Penney and the malls, the Internet and smartphones are to Kohl’s.

And of course, it’s exacerbated by the fact that the older cohort of millennials at age 35, the working moms Kohl’s is seeking, are the moms who have smartphones growing out of their ears who can scan 1000 frocks on their iPads in 10 minutes. So Kohl’s loses the convenience and quick and easy shopping trip by these millennial moms, plus they are also losing many of them to the fast fashion players. In addition to the moms, according to Prosper Insights & Analytics, female millennials, ages 18-34, preference for Kohl’s has declined 22 percent year-over-year, as of February, 2016.

So delayed reaction or being blindsided doesn’t really matter. How do Mr. Mansell and his relatively new team, of hopefully, brilliant, just common sense strategists keep Kohl’s from flatlining into death?

Kohl’s “Greatness Agenda”

Ignoring the fact that the “greatness agenda” has a certain ring of similarity to another slogan sewn into baseball caps, and the fact that Mr. Mansell was quoted as saying, “We have a renewed sense of what’s going to make Kohl’s great again,” I do believe the CEO’s campaign has some real substance. Let’s take his counter-attack to regain Kohl’s as a leader in being convenient, quick and easy for the working mom, as well as the millennials in general. In my opinion, the two lynchpins of this new attack start with ramping up their omnichannel efforts, which they had arguably been lagging in against their peers (with the exception of JC Penney). Specifically, they must aggressively perfect Kohl’s ability to allow consumers to shop online and pick up in the stores. Chalk up one for convenience.

Secondly, they are pursuing, but not nearly as fast as I would advise, the opening of seven new, smaller store formats as a test. Come on guys! This was your brilliance 25 years ago when you began the “in your neighborhood” winning strategy. Not only does such a strategy make it even more convenient for shoppers online to pick up in stores, it also plays into how millennials like to shop today, with more intimacy, better service, hunting through smaller boutiques for special, exclusive stuff. Accelerate this initiative Mr. Mansell, and chalk up number two for convenience.
Along with right-sizing, the smaller neighborhood store initiative, and ramping up its omnichannel strategy, Kohl’s has some other initiatives on its greatness agenda. One is rolling out new beauty shops within the stores. Penney’s experience with Sephora has yielded $600 per square foot a year, compared to Kohl’s miserable productivity in the beauty space over the past many years. Beauty is a go-to physical destination for women who cannot sample or apply beauty online.

Kohl’s is launching a new loyalty program to personalize offers for all of its customers, not just Kohl’s cardholders.

And I guess they could not resist the temptation to get into the outlet store race, planning to open 12 outlet stores featuring Kohl’s Fila sportswear brand. They are also bringing in new national brands like Carter’s kids wear, Nike, Izod, Puma and others.

It’s important to note here that having emphasized what I consider a winning priority being a preemptive distribution strategy, it is absolutely essential that Kohl’s get its private, exclusive and national brand strategy right, perfect its marketing and spiff up and modernize its stores. These are just the price of entry. Hopefully with the new team, Kohl’s is on top of it.

All Said, Go Back To Your Preemptive Distribution “Brilliance”

Kohl’s was the original preemptor back in the 90s and even though they may have been blindsided and have gotten themselves into this flatlining pickle, if they prioritize and accelerate their preemptive distribution brilliance combining the new tools of technology and the Internet with physical stores. Kohl’s can then make Kohl’s great again.

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