Think fast, think small: How Kohl's rode the omnichannel wave
For the retailer, a smaller store footprint was the first logical step to cost reduction.
The "retail renaissance" is upon us if the headlines are to be believed, and several players who generated major worries that brick and mortar may never recover just five years ago are making triumphant comebacks. One such player is suburban big box retailer Kohl’s.
Kohl’s has made some significant changes to its operation in order to ride the very changeable wave that is the integration of e-commerce and brick and mortar retail, the most celebrated of which is a program to accept Amazon returns in some Kohl’s stores (even without packaging).
"We really only have one objective here, which is the key priority we have as a company is to drive traffic," Kevin Mansell, Kohl’s former CEO said on a March earnings call with investors before his departure.
But what the 91-year-old chain can do with that traffic once it’s in the door is where the rubber meets the road, as Mansell admitted.
"We're more focused on it being a great customer experience and making sure that the customer is happy when they do arrive in a Kohl's store because that gives us the best opportunity to convert them into a sale," he said.
How has the store answered the age-old question of how to turn traffic into sales? The answer is in its inventory management strategy.
Earlier this year, the company laid out a plan to change its purchasing and inventory management in order to get customers what they want faster and help them find it easier. The first step was to build a smaller box.
Smaller is better
Kohl’s did not to move to a smaller store footprint to access high-priced, urban real estate markets. The reasoning was much simpler than that.
Smaller stores, fewer fixtures and less inventory mean less cost. Plus, some of the company’s existing real estate was able to be divided and built out as rental property with high-profile partners in some cases, such as German grocery chain Aldi. The average size of a Kohl’s store before the downsizing initiative was 80,000 square feet, and these new stores now are around 35,000 square feet.
Current CEO Michelle Gass told investors on a Q1 2018 earnings call that "rightsizing" existing stores allowed the company to remove more than 100 fixtures per store, which reduced overhead, maintenance and refresh costs going forward. Today the chain has 500 of what it calls "standard to small" stores.
"Our standard to small initiative continues to drive lower inventory levels and higher profitability," said CFO Bruce Besanko on an August earnings call.
Reducing store size has not necessarily affected sales, but it has boosted gross margin slightly. As Gass explained in May, with less inventory, fewer items end up reduced on the clearance rack.
Despite a trend toward inventory reduction in the overall retail sector, "strategically reduced customer choice" is a less common goal. But, Kohl’s celebrated less inventory and less choice as a victory.
"Our inventory per store decreased 8%, our tenth consecutive quarter of inventory reductions. Our inventory is turning faster, our clearance levels continue to be well managed, and our aged inventory is decreasing. The inventory initiatives have also contributed to our already strong cash position," said Besanko. And there’s more pairing down to go: "We’re in the first half of the ballgame ... on inventory."
Localize to economize
Decreasing inventory has buoyed margins without pushing down sales, but what is driving the company's four consecutive quarter of comp sales growth? Kohl’s execs said it is tailoring the assortment in each store to the local area — a theme heard on several earnings calls of successful retailers this summer.
"Localization has allowed us to have the right product in the right store at the right time," said Besanko.
In attempting to get the right products in the right stores, Kohl’s has leaned on learnings from its digital business. The chain uses its stores as a major part of its fulfillment of online orders with an eye on reducing shipping time — which means online orders, when partitioned geographically, can inform in-store assortment. (Here, tech investments in a more unified backend come into play.) Mansell said in a 2017 statement that 95% of the store assortment was localized by store.
Plus, with 80% of Americans living within 15 miles of a Kohl’s according to the company, the stores can offer just the most popular items in that area in stock while buy online pick up in store option can do the rest.
In the age of Instagram, where trends sometimes last a matter of weeks, knowing what consumers want and getting it to the store while its still relevant can be a real challenge.
A few years back, Kohl’s decided fast-fashion needed to get faster. In 2014, they named an effort to get product to the sales floor in eight weeks — a far cry from the usual 16 — the "Greatness Agenda."
Led by then chief of merchandising and now CEO Michelle Gass, the company used virtually every tactic in the book to speed up delivery times, including ordering small test runs that can be produced quickly to gauge customer reaction, moving some sourcing to the Americas to cut down on transport time, and ordering large amounts of fabrics in advance and designing product to use it (called “platforming’), Bloomberg reports.
According to Mansell, the work is paying off. "Our speed brands reached 40% of total receipts for the year, with a future target to achieve 60% of total receipts," he said in March.
Kohl’s is not out of the woods yet. Though its second-quarter earnings exceeded both internal and external expectations, the company's stock still fell the day of the announcement. Some analysts suggest investors simply need to see more hard evidence that all these initiatives will lead to lasting effects.
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