Less is more, Kohl’s executives are finding, as the department-store chain continues to shrink its locations and whittle down the items in its stores.
Smaller stores, less inventory and newly formed partnerships with Amazon and Under Armour have helped the company turn around its business in recent months. On Thursday, Kohl’s reported the largest increase in quarterly sales since 2001. Now the retailer is teaming up with discount grocer Aldi to test groceries at up to 10 of its department stores. Soon, some customers will be able to pick up milk and eggs along with their cargo shorts and yoga pants.
The goal, executives say: to get more people into their stores.
“The key priority we have as a company is to drive traffic,” Kevin Mansell, the chief executive of Kohl’s said in a Thursday earnings call. “We’re focused on traffic-driving retailers: Groceries, supermarket chains, they drive a lot of traffic. We’re finally on a path where we’re getting more [shoppers].”
Sales at Kohl’s stores open at least a year rose 6.3 percent during the most recent quarter, the company said Thursday, while profits increased 38 percent.
The bump in sales comes as retailers across the country experiment with ways to reinvent their brick-and-mortar locations. Some, like Target, Macy’s and Nordstrom, are distilling inventory into smaller, more-focused locations. Others, like Apple and Best Buy, are adding communal spaces, demonstration areas and workshops in hopes of getting shoppers to linger.
Selling groceries has also become a popular tactic. The country’s largest retailers, including Walmart, Target and Amazon, are investing heavily in their grocery businesses as a way to persuade shoppers to stop by on a weekly basis. (Amazon founder and chief executive Jeffrey P. Bezos owns The Washington Post.)
“Groceries are one of the few things that most people buy routinely, which is why Amazon, Walmart and Target have been making big moves in this space,” said Stephanie Waters, global retail industry principal for SAP Hybris.
“But,” she added, “selling groceries is also very hard. It takes a lot of investment and expertise, and profit margins are very slim.”
The Kohl’s Aldi tie-up, though, could be promising for both retailers, she said. The arrangement allows Kohl’s to gain additional foot traffic without having to figure out how to operate a grocery business. And for Aldi, renting space within Kohl’s stores is likely to be less costly than building stand-alone locations. The partnership would also help familiarize mainstream America with the German grocery chain, which is planning to rapidly expand in the United States, opening 900 stores by 2022.
“We’ve seen so many different business models throughout retail, but this is the first time I’ve seen a department store look to groceries,” Waters said. “Everyone’s trying to get a share of the food dollar these days.”
Analysts say Kohl’s has been particularly innovative in repurposing its stores. The company’s stores are primarily located in strip malls and stand-alone shopping centers, making it convenient for customers to quickly run in and out. Analysts say that approach has also given the retailer a leg up against competitors like Macy’s and Sears, which are often located in sprawling shopping malls on the outskirts of town.
But small-format stores don’t always mean higher sales. Best Buy announced this week that it is closing all 257 of its smaller stand-alone stores specializing in mobile phones and other gear after a 10-year run.
“Why are we closing these stores? We began opening these stores more than a decade ago before the iPhone was even launched,” Best Buy chief executive Hubert Joly said on a Thursday morning call with analysts. “Fast-forward to 2018, and the mobile phone business has matured, margins have compressed, and the cost of operations in our stand-alone stores is higher than in our big-box stores.”
Instead, Best Buy will continue to focus on creating stores within its stores, including Samsung Experience Shops and Dyson demonstration areas, where customers can try out new products and get personalized advice.
Kohl’s, meanwhile, is also expanding its partnerships with well-known brands like Nike and Skechers, and offering exclusive lines from celebrities including skateboarder Tony Hawk and designer Vera Wang. Nearly half of the company’s sales come from its private-label brands, executives said.
Last year, the Menomonee Falls, Wis.-based retailer began accepting Amazon.com returns at its stores. It also began opening Amazon shops within some Kohl’s locations and says it plans to add more this year.
“Some of the more radical steps, such as allowing Amazon returns in some stores and the introduction of Amazon shop-in-shops paid dividends,” Neil Saunders, managing director of GlobalData Retail, wrote in a note to clients. “This kind of thinking also shows that Kohl’s understands the need to give customers reasons to visit stores and is not afraid to experiment to achieve this.”