Source: Kohl’s
Will Kohl’s gain from other retailers’ pain?
If these were normal times and you were just looking at the numbers, you wouldn’t think Kohl’s is in a great place right now. Now, however, is anything but what used to pass for normal, so CEO Michelle Gass’ assertion that the chain is “really set up to capture what will be billions of dollars of market share opportunity in the future” deserves some consideration.
First, here are the numbers. Kohl’s reported that sales fell 23 percent during the second quarter and that its back-to-school sales were “soft” as it reopened all of its stores across the country. This follows a first-quarter sales decline of 43.2 percent.
The retailer did see margin improvement in the latest quarter at 33.1 percent from the first quarter (17.3 percent) where it turned to heavy discounting to move merchandise.
Ms. Gass pointed to the chain’s digital growth, omnichannel capabilities, a loyalty program with 30 million members, brands and a disciplined approach to inventory and expenses as the foundation it will build upon. She said that Kohl’s has managed to maintain positive cash flow and put itself in a position to benefit from the large numbers of competitive retailers that have gone into bankruptcy or are likely to find themselves looking for Chapter 11 protection in the near future.
On the merchandise front, Ms. Gass said that “changing consumer behaviors” will benefit her company’s business. “Kohl’s is a known destination for casual apparel and we have a large and growing digital business, supported by our stores through our expansive omnichannel capabilities.” Digital sales were up 58 percent for the retailer during the quarter, with half of all volume connected to in-store or curbside pickup.
She said that Kohl’s continues to acquire new customers during the pandemic and is positioned to make marketing investments where rivals are shuttering stores.
With the back-to-school season not shaping up as hoped, the chain is turning its attention to driving Christmas season sales. Kohl’s, like others, is moving up its promotional calendar to October.
Ms. Gass expects Kohl’s to see further digital growth during the holidays and said the “putting even greater focus and resources on our supply chain to ensure that we are positioned to drive overall productivity and manage cost of shipping as effectively as possible. While our work on this front has always been important, its priority has been elevated.”
Discussion Questions
DISCUSSION QUESTIONS: Do you agree with Michelle Gass that Kohl’s is in a good position to benefit from the changing consumer trends and bankruptcies that have affected retail during the pandemic? What elements of Kohl’s business do you see as its greatest strengths and vulnerabilities?
Poll
BrainTrust
Perry Kramer
Managing Partner, Retail Consulting Partners
Dick Seesel
Principal, Retailing In Focus LLC
I agree with Michelle Gass’s assessment. Kohl’s is a solid operator and with the demise of so many other direct/indirect competitors, I do believe that there is an opportunity for Kohl’s to pick up share and serve new customers who may not have or infrequently shopped Kohl’s in the past. Kohl’s has a great portfolio of brands, an extensive store footprint of off-mall locations and the financial wherewithal to invest in marketing and services to attract shoppers.
Macy’s made exactly the same assertion a couple of months ago, and therein lies the problem – not everyone can benefit from the spoils of failed retailers. That said, I think Kohl’s is in with a better chance as there is more of an overlap between its locations and shoppers and those of retailers going into bankruptcy. However the real question is, why couldn’t Kohl’s grab more of this spend when the retailers were still trading? And the answer is that it is not as good at providing what shoppers want as it should be. That’s the issue Kohl’s needs to deal with if they want to win spend – from both trading and defunct retailers. Ultimately these soundbites are easy to say, they’re much harder to deliver on.
Yes, I agree with Michelle Gass about Kohl’s future success. 1.) Kohl’s has an excellent reputation with its customers. 2.) They have a tremendous presence both with store count and online. 3.) They are known for great prices and customers always love a bargain. 4.) They positioned themselves in the right place financially before the pandemic, and whereas so many other retailers have been forced to file for bankruptcy, Kohl’s has not. This is a tremendous benefit for Kohl’s because many retailers who have filed will most likely not survive, and even those that do will be focusing on their financial turnaround while Kohl’s can focus on growing their company. Digital will grow for Kohl’s as it is increasing for all businesses, but customers will still flock to their stores and take advantage of Kohl’s Cash, a great program that keeps the customers happy.
I agree that Kohl’s is a very disciplined operation, and its mostly off-mall locations should benefit as shoppers avoid indoor malls for the near-term future. (Full disclosure: I worked for Kohl’s from 1982 to 2006.) But there isn’t much evidence so far that they are gaining share at other department stores’ expense. The slow pace of store reopening helps explain the soft Q2 numbers, but the back-to-school forecast is not reassuring.
Target just reported record Q2 results, and the contrast couldn’t be more stark. Target had the advantage of keeping its stores open, not only to sell groceries and household essentials but also apparel and soft home — when competitors like Kohl’s were closed. There was already some evidence in 2019 that Target is gaining apparel share at Kohl’s expense, and that trend may be continuing during the crucial BTS season.
Kohl’s has a good head start with their mostly off-mall locations and their relationship with Amazon (although it could be argued that they haven’t properly leveraged that relationship the way it was originally envisioned).
Looking at content, they have a lot of shared brands and a roster of private labels that are good but not great. I can’t think of the stand-out compelling reason to shops Kohl’s versus the competition and they don’t have much of a moat. And their lack of groceries puts them at an immediate disadvantage to Target and Walmart when it comes to efficiency minded shoppers. Yes, lots of market share up for grabs — with lots of intense competition. Kohl’s will get some portion of it, but I don’t see them getting a disproportionate share.
First, some of these billions of dollars aren’t coming back. Second, unless Kohl’s moves quickly to push their partnership with Aldi to offer grocery to their customers within their box, it’s not them that are going to take share – it’s Walmart and Target that will pick up sales from the liquidated companies. “One-stop shop” is the future play here for survival.
Fun fact: The Kohl family owned the dominant grocery chain in Milwaukee for decades, and started the department stores in 1962 as a side-by-side operation under one common roof. (Eventually the food stores were sold off and then closed.) You’re right that the one-stop stores are today’s winners, especially if they have robust e-commerce and curbside BOPIS options.
Kohl’s has positioned itself well for the long run. They took a leading approach when they partnered with Amazon for returns and have a good real estate model not being tied to a lot of malls. Their large loyalty base is a strong asset. A major key to future success will be leveraging their stronger than average cash position to find ways to leverage the large loyalty base to differentiate themselves from the remaining market. They will need to continue to experiment, learn, and lead like they did with the Amazon returns to expand their differentiation from the Targets of the world. Another key asset is their larger than average store square footage that can be adapted to better support an omnichannel supply chain-centric approach.
Kohl’s has some good basic building blocks to rely on for future success, but it depends on your definition of success. Will they survive? Yes. Will they thrive and soak in the benefits of failed retailers? Not so much. Target is much better positioned to do that, and their Q2 numbers compared to Kohl’s prove that out. Target even showed a modest increase in apparel sales. Even back to school isn’t going to boost Kohl’s as much as Target, Walmart, or Amazon.
Kohl’s does have some advantages to draw upon: their Amazon returns processing could still give them a needed lift in in-store traffic if they can give those customers a reason to convert to a Kohl’s purchase. They also benefit from being off-mall as Target and Walmart do and consumers are showing they want to get in and out on their shopping trips, not linger at the mall. Lastly, and perhaps most important, they need to better leverage their partnering with Aldi to benefit from consumer grocery shopping trips. Unfortunately, Kohl’s merchandise mix is still not enough to get shoppers in the door.
Of course Kohl’s will pick up market share; with the bankruptcies and closings in the category, everyone in that category remaining probably will. However Kohl’s took a bump when they re-opened their stores — their selections were down, stores looked rather lean in inventories, and I heard many customers lightly complaining. I think they get a pass on that and will not lose many customers, but gain customers when they fill the stores and the Kohl’s Cash comes back into play. I’d put my money on them.
Unless Kohl’s starts moving faster on things like BOPIS and delivery, they could be lunch for the likes of the big three (Walmart, Amazon and Target) rather than eating others.
Good is not great. Kohl’s is in a decent position largely due to its financial situation, customer base and brands within its assortments. Will it capture share from others’ declines? Perhaps but I expect that Kohl’s will under-index against retailers with better digital commerce operations and from smart brands prioritizing digital DTC rather than indirect wholesale such as through Kohl’s. Retail stores are an expensive way to fulfill online orders, and longer-term it’s hard to see Kohl’s as a performance leader given its footprint and the structural shifts from physical retail.
Kohl’s has proven to be resilient and is well-positioned to capture some trips that would have otherwise favored the now liquidated operations (as others have stated, Target and Walmart will likely gain a disproportionate share). That said, however, Kohl’s must think beyond survival tactics to longer-term strategic initiatives.
Online needs to be further bolstered (especially accompanied by curbside pick-up), assortments should be further honed as “solution-oriented” centers, and additional collaborations must be pursued (the Amazon relationship is a good example).
We like to see retailers in our Wisconsin backyard do BIG things. Kohl’s has a great foundation from which to build as it aligns itself with the proper strategic partners that can help move the needle.
Yes and no: yes, Kohl’s stands to benefit from competitors closing shop; but of course so does every other retailer that does the same (stays open). So the real question is “are they uniquely positioned?” I’ve never found them to be a particularly “exciting” retailer, and performance over recent years has been flat.
OTOH, some factors, like a large proportion of standalone stores, seem like a benefit. I’ll upgrade my viewpoint: yes and maybe.
Kohl’s suffered more than other “essential” retail giants which puts it on the back foot for the entirety of 2020. The digital sales more than doubled during the pandemic and that is where its future strength will come from as they target new consumers across the wide offering. The retail space is changing with bankruptcies, but it will depend on whether or not Kohl’s has the cash to buy out failing spaces while their own prices drop.