Chapter Five - Staying Off, Then Getting on the Radar Screen

What was once a small regional niche department store chain soon started to grow into new areas on its way to becoming a national powerhouse. In the mid-1990’s, Kohl’s expanded into over ten other states, almost all of them markets that were close to existing markets. By ‘back-filling’ in existing and opening contiguous markets, the company could leverage all kinds of expenses, to include distribution, advertising and storeline regional management. Pre-opening costs were effectively lower, allow the new stores to reach profitability quickly.

Our major new market entries in the 1990’s included:

1995—Kansas City, Cleveland, Omaha

1996—Charlotte, Wichita, Louisville, Toledo

1997 – Washington, D.C., Baltimore, Philadelphia, Pittsburgh

1999—Denver, St. Louis

As a bit of an aside, allow me to recall a couple ‘cocktail party’ stories and try to connect the dots.

When I was in Los Angeles as the Director of Stores of Bullock’s, every time I went to a party and someone found out I was in retailing, I would then hear all about the incredible service they got at Nordstrom’s. I never received kudos for being part of what I thought was a pretty damn good department store. It would drive me crazy!

Similarly, when I was a senior executive with Kohl’s, people’s reactions were pretty much the same when they found out what I did for a living. Except where we were opening in new markets. One of my most fondest memories of working at Kohl’s was the incredible reception we had when we entered a new market. I mean, the customer loved us. We worked hard to earn their shopping dollars, but there’s nothing like positive word of mouth to help establish yourself in a new market. There, that’s my digression.

With all of the explosive expansion in the 1990’s, Kohl’s garnished incredible customer loyalty throughout the United States. I’ve never seen anything like it except when Nordtrom’s initially came to a town, and people were blown away by the levels of customer service. Kohl’s created enormous goodwill in those early years.

In all publicly traded companies, the senior management has to decide how they want to portray their company to the outside world. There are many different audiences to address. Two of the most important are the investors and the customers. The investors’ analysis obviously has a significant effect on the company’s stock, which, in turn, directly influences the financial success of the employees. It’s an understatement to say this also serves to build up or tear down corporate morale.

But the company always has to also keep in mind their largest audience, the one by which they ultimately sink or swim: the customers. How do they do this? By becoming high profile “superstars,” always grabbing every opportunity to bask in the spotlight? Absolutely not! While that seems to be the preferred route to success for a lot of companies, Kohl’s chose the direct opposite approach. In fact, Kohl’s corporate culture calls for maintaining a low profile for its executives, throughout the entire organization and at all levels. The emphasis is on the team. And as the old cliché rightly points out, there’s no “I” in team.

Bill Kellogg decided early that he wanted the numbers to speak for the company. Successful performance numbers in such a competitive industry would say more than a room full of highly paid PR spinners. A quiet-spoken, reserved person, it just wasn’t his style to grand-stand or be a showboat. He surrounded himself with like minded individuals. And with the rest of his management team, following the leveraged buyout in 1986 and six years later in 1994 after the IPO, Bill wanted the company to keep a low profile. Even though the company was fast becoming too big to be ignored. Why this almost obsessive need to keep such a low profile is open to question. Maybe it had something to do with the company’s Midwestern, Germanic roots. Whatever the reasons, Bill had a visceral reaction when something or someone at Kohl’s got too ‘public.’

For example, I remember in 1996, Jay Baker’s wife Patty, who was outgoing and along with Jay would show up in the society columns, created a stir when she bought Jackie Kennedy’s piano for $150,000 at a Sotheby’s auction. The corporate and store phones lit up like Christmas trees the next morning, as nationwide coverage naturally referred to her as the wife of the President of Kohl’s Department Stores. Yikes! And to make the event even more public, Patty was interviewed on “Larry King Live” and was featured in People magazine. So much for the low profile.

For a guy like Bill Kellogg, this was the LAST thing he wanted to see. He always looked at things from the perspective of the hourly sales associate, making $8.00 an hour, and how they would react to this sort of thing. You could tell by his demeanor the morning after the auction that he was not pleased; while Bill doesn’t rant, his silence speaks volumes about his feelings toward something. I’m sure he must have been fuming at this highly publicized show of opulence. You’d be lucky to afford piano lessons when you’re making $8.00 and hour…and you couldn’t even get in the door at Sotheby’s.

In a rare interview in the late 1990s, Kellogg clearly touched on his keen intent to keep the company, and the leaders of the company, off the radar screen. “The only thing that would put a damper on us,” the CEO said, “is if our heads get too big.” He certainly wasn’t going to let that happen to himself. And he was determined not to let the others get bitten by that perennial corporate bug known as bigshot-itis.

I recognized this avoidance of the limelight right from the beginning of my tenure with the company, and tried to maintain a low profile (keep in mind, I was a former Macy’s alum, and everyone who worked at Macy’s has a huge head; it’s a time-honored tradition!) For years, I always described Kohl’s to friends and associates as the NML of retailing (NorthWestern Mutual Life, also located in Milwaukee, has for years marketed their company as The Quiet Company).

Kohl’s goes out of its way to keep egos in check. The company has a bias against showboats or peacocks, the antithesis of many New York-based retailers, where strutting your stuff as publicly as possible is the way to make it to the top. New guys who joined the company with a “New York edge” would find themselves in a bit of a pickle.

I was always fascinated by the contrast between Kohl’s ‘quiet’ corporate persona and the much flashier style of most everyone else in retailing. Of all industries, retail was boisterous with lots of merchants with big egos elbowing for the limelight. There were established institutions like Women’s Wear Daily, Home Furnishings Daily, etc. that played into all this. And most retailers became experts at sucking up so that they could get even more attention than they probably deserved.

To be sure, if you wanted to stay out of the picture, and kept your corporate nose clean, you could easily accomplish this. And that’s the tack we took for a long time, while we happily watched everyone battle it out in seeking approval from Wall Street. In so many ways, it worked to our advantage. While sometimes we felt a bit ignored by Wall Street, we knew eventually that the model would rise to the top and be appropriately recognized and rewarded. Patience can indeed be a virtue.

This applied even to our ‘positioning’ in the local communities where we conducted business. Companies like Target and Wal-Mart did much during this time to position themselves in the community as caring, giving, etc. Target, as part of their corporate mandate, directs 5% of their profits to charity. Kohl’s took the opposite approach. No news was good news. Maybe we weren’t getting the positive press of the big contributors like Target, then again we weren’t getting negative press either so the corporate thinking was to keep things as they were and not rock the boat. In fact, though this may come as a surprise to some, Kohl’s contributed virtually nothing to charity until around 1998. While it was difficult to quantify, it was clear that much goodwill was being generated by our competition from their charitable contributions to their local, regional and national markets. Internally among many in the management ranks, there was a growing movement for the company to be more philanthropic, and these early programs finally evolved into the now well-publicized Kohl’s Cares For Kids program.

The Kohl’s Kids Who Care ™ volunteer recognition program is part of the company’s Kohl’s Cares for Kids program which raises funds for children’s hospitals, features fundraising gift cards for local schools and non-profit youth groups, and provides an employee volunteer program to encourage volunteerism to benefit local non-profit organizations.

In addition, in Kohl’s hometown of Milwaukee, the company became more involved in supported local charitable initiatives. As the politicians say, it’s always a good idea to shore up your base. In 1998, over 1,100 Kohl’s Associates made up one of the largest single city teams in the United States for that year’s Juvenile Diabetes Fund Walk, which now continues as a major Kohl’s-sponsored event. And support for The Penfield Hospital in Milwaukee, a past favorite of Bill Kellogg’s, was substantial, with Larry Montgomery joining as a Board Member.

Kohl’s has also maintained a low profile in politics. While companies such as Target, The Limited, Sears, J.C. Penney’s, Dillard’s, Sak’s and Wal-Mart spend hundreds of thousands of dollars every year on lobbying efforts, primarily in Washington, D.C., Kohl’s has spent almost no money over the past decade paying lobbyists to further their interests. But it doesn’t seem like not having a half dozen politicians in our hip pocket has hurt us any. The company is doing just fine without them. As I said before, the numbers don’t lie.

Heck, we rarely joined the local Chamber of Commerce where a store was opening. True low cost culture. We wanted Store Managers focused on offering our customers a great shopping experience, and not running off to some Chamber meeting getting involved in things thought to be a distraction.

By the late 1990s, “staying off the radar screen” was getting to be damn near impossible. Our own success, ironically, was pushing us center stage whether we liked it or not. In recognition of Kohl’s strong performance, the company was added to the Standard & Poor’s 500 Index in 1998. When the announcement was made, the stock took off like a rocket, because all of a sudden every index fund tracking the S & P had to own KSS, so they had to purchase shares. Everyone was beginning to notice us now. Remaining in the shadows, stealthily watching our competitors making all the mistakes, was no longer an option.

In addition to developing an experienced management team to accommodate further growth, Kohl’s also laid the groundwork for both technology and distribution infrastructure. An emerging, state-of-the-art supply chain model began to show genuine results in linking merchandising, planning and allocation, buying, logistics, distribution and point-of-sale to maximize the value passed on to customers. Around that same time, Kohl’s expanded its distribution center in Winchester, Virginia, and began construction on the fourth facility in Blue Springs, Missouri, to prepare for the planned store openings in the western states.

As part of the “stay below the radar screen” culture at Kohl’s, management was expected to keep a low profile with the press. We were rarely quoted. Even Bill, Jay, John and Larry stayed low.

For me, there was an exception when I participated in Kohl’s entry into the Washington, D.C. market, in the spring of 1997. The business writer at the time for The Washington Post, Margaret Pressler, had met me a month earlier at one of our recently-opened stores in Charlotte, North Carolina. After a couple of hours checking out a retail concept she had never seen before, lo and behold, Margaret figured it out, and subsequently wrote a very nice, long article. Still, us store management guys always lived in fear that the local reporter in a market where we were about to open some stores would misquote us or completely botch explaining our business model. That reinforced our belief that the best way to deal with reporters was to avoid them whenever possible.

The lay low strategy also applied to relationships with Wall Street. In retrospect, the strategy played a major role in our success. It helped define our corporate culture, create enormous credibility over time, and perhaps most importantly, allowed us to gain a toehold in the backyards of the competition before they knew what really hit them. Again, I think that in this aspect of our strategy, it was stealth that helped give us the advantage.

To be sure, the Kohl’s concept was slow to be understood by Wall Street. As the corporate-based ‘stores’ guy with responsibility that included the Wisconsin stores, I was often the chauffeur who took the entourage from Wall Street out to a local Kohl’s store for a tour. They’d fly in to Milwaukee’s Mitchell Field, have vans pick them up (at first they used limos but it was so out of character for stretch limos to put up in front of our headquarters that they were asked to switch to less ostentatious travel in future visits). When I first started this assignment (around 1996) until around 1998 or so, many of the analysts who came for the visit were walking into a Kohl’s store for the first time. I was shocked: many of these analysts, I soon learned, were young and green and didn’t know diddly about retailing! They were controlling hundreds of millions of dollars of funds for their firms and yet really didn’t have the perspective to fully appreciate what the Kohl’s model was all about. Of course, almost all of them eventually figured it out, but it took a very long time for many brokerage houses to recognize the upside of making an investment in KSS.

At the end of the day, while others were constantly out muscling one another for the spotlight, the top executives at Kohl’s let the numbers speak for themselves. In particular, the key finance person at Kohl’s for over a decade, Chief Operating Officer Arlene Meier, did an outstanding job providing Wall Street with a straightforward ‘just the facts’ style that analysts eat up. And, of course, it hasn’t hurt that Kohl’s always made the quarter throughout the 1990’s. That creates credibility in a hurry. We didn’t hype, we didn’t message, we just stayed the course and consistently reiterated the Kohl’s mantra about providing value and convenience to the customer. Occasionally Jay might crow a bit in a feature article in Women’s Wear Daily, but all in all, it was an extremely low profile group.

Admittedly, with the retirement of the three original founders of modern-day Kohl’s – Bill Kellogg, Jay Baker and John Herma – the opportunity arose for the new leaders, Larry Montgomery and Kevin Mansell, to change the tenor and tone of the relationship with Wall Street and the press. While some Wall Street analysts have now privately spoken of Larry’s ‘cockiness’ and bravado, which is in such stark contrast to the soft-spoken Bill Kellogg, Kevin’s low-key, matter-of-fact style is very much the original recipe. Larry and Kevin work well off each other, and the soothing effect of long-timer Arlene Meier(who has since retired) ensured that shareholders meetings and conference calls with analysts are smooth, professional and without high levels of testosterone.


—radar operator to his superior at Pearl Harbor, December, 1940(?), upon seeing major blips on his radar screen of what turned out to be Japanese aircraft


–radar operator’s superior

While Wall Street was slow to embrace the true upside potential of this Midwest niche retailer trying to wedge itself between a Target and a Macy’s, virtually all of the future national competitors barely noticed us at all until it was too late. This is a very interesting side story that played an enormous role in the success of Kohl’s. Namely, where the heck were the major competitors at the time like Federated, May, Sears, Penney’s in developing counter strategies to what should have been a clear and present danger? Their lack of insight into an up and coming threat is, in hindsight, astounding. They could have taken steps to cut down the upstart in its tracks. Perhaps their own success and arrogance got in the way. Giants are of course big but they are also clumsy. And sometimes blind.

When the counterattack eventually came, it was a classic case of too little too late. Some companies, like Montgomery Ward, under the leadership of Roger Goddu and with the financial backing of GE Capital, hired away two key merchants from Kohl’s, Lou Caporale and Tom Austin, and tried to copy Kohl’s in the late 1990s. They remodeled stores in creating a ‘racetrack’ selling floor and consolidated registers to make shopping more convenient; if you squinted a bit as you walked through one of their newly furbished stores, you just might think you were in a Kohl’s. But when you got your eyes in focus, it became readily apparent that Wards had a little problem: they had no national brands!! It was a disaster in the making, and sure enough, Wards was never able to attract enough customers and they went bankrupt in 1999.

Sears dabbled with the Kohl’s business model, too, but only later, beginning around 2000. I recall several instances in the late 1990s where we were interviewing key Sears storeline executives (one of Sears top guys, Steve Byers, subsequently joined the company in 1999 and made a significant contribution). When you are opening 35-40 stores a year, we were constantly on the interview trail. If you worked in the stores group at Kohl’s you almost always worked Saturdays. For me, that was the day to interview some of the top store managers, district managers, and regional managers from our competition, people whom we’d fly into Milwaukee. In addition to determining if the individual had the potential of succeeding in our environment, those interviews were also a great way to pick their brains and try to glean a bit about the competition’s strategy. I enjoyed the hundreds and hundreds of interviews over the years immensely. At times I felt like I was doing counter-intelligence work for the CIA!

During this time when you asked the Sears guys, “Well, what does top management think about us?” I was struck by how the two top guys at the time, Arthur Martinez and Robert Mettler, seemed to be so dismissive about us being a competitive threat. I mean, here we were opening stores by the boatload constantly in their market and taking huge market share from them. They were 90 miles away and completely asleep at the switch. We had stores in their backyard since the MainStreet acquisition in 1988; it wasn’t like we started the company in Alaska! You’ve heard the expression, “hide in plain sight.” Well, this was the most blatant example of that phenomenon I’d ever seen.

But during this time Sears was the classic dinosaur, and had created a business model that was appreciated by Wall Street less for their ability to sell merchandise at high gross margins cost-efficiently than for their huge credit card operation and the profit that was generated from all those folks in middle America who bought their refrigerator and happily put in our their Sears credit card. I mean, the company’s focus was on their credit card operations more than it was on the merchandise! Proceeds from credit operations was the only reason the company was remaining profitable.

To further illustrate the difference in corporate business models, it is interesting to note that when Kohl’s brought their credit card in-house in 1995, it was never intended to be used as an additional profit center. To the contrary, Bill Kellogg, and later Larry Montgomery, stated that the primary mission of developing proprietary credit in the company was to get more customers in the door, establish greater customer loyalty, and gain market share. While Sears, prior to all their accounting scandals in their credit operations, was extolling the virtues of their credit cards as a profit center, Kohl’s has quietly and methodically raised proprietary credit as a percent to sales in excess of 35%, creating a profit that is less than 5% of the total company’s profit! Credit operations were used as a component of the fuel mixture to drive the top-revenue engine).

Rather than be offended by the big guy’s indifference toward us, we were quite happy that they were ignoring us. It was a great lesson for a small but fast-growing niche company to take huge market share in almost total silence. For several pivotal years, the major department stores seemed unwilling to acknowledge the impact we had when we entered one of their markets for the first time, in taking away market share. They were burying their heads in the sand. A foolish strategy, of course, and all the more remarkable as it was repeated time and time again in one market after another throughout the country.

Later, around late 1999, recognizing perhaps that they could no longer keep the false appearance of ‘looking’ like a retailer but actually, based on their business model, be a bank in disguise, Sear’s Martinez reversed his course and started to publicly proclaim Kohl’s as Enemy No. 1. They dabbled a bit, and copied the Kohl’s ‘stroller’ concept and started to consolidate their check-out registers. But, once again, it was really too late. Sears didn’t have the national brands. Private label, with the exception of dresses, kids and a couple of other categories, were weak. As it turned out, Martinez was out at Sears later that year, and about six months after the publication of his autobiography in 2001 Sears was back in pea soup.

Bob Mettler, who like Martinez had earlier jumped ship and ended up going to Macy’s West, where he was eventually promoted to CEO, no doubt felt the effect, yet again, when dozens of new Kohl’s stores opened in California. Mettler took Kohl’s more seriously the second time around.

Look, hindsight is 20/20, but that’s no excuse for how these wallowing giants allowed themselves to be so disastrously blind-sided. Any of these companies could have turned their companies around during this critical window of opportunity (say, from 1998-2001) had their CEO told their team: “Look guys, what we’re doing worked great in the 1970s and 1980s. It doesn’t work now. We need to make dramatic changes. Wherever we can, we need to copy the Kohl’s business model. We need to do it quickly.”

If you explore this a little more, one needs to understand that for the most part, national retailers are run by merchants with huge egos. Not financial guys, but merchants who always think they can always ‘merchandise’ themselves out of a jam. Or in the case of Sears, an ‘operator’ who thought that operational efficiency was going to save the day. So in a way it was the combination of us staying off the radar screen and the big guys just not getting it.

In a future section, we’ll discuss the more recent competitive threats from the national department stores facing Kohl’s. It can certainly now be argued that they are tweaking their own business models to more closely resemble the resounding winner.

The first major article on Kohl’s in USA TODAY was on October 14, 1999.
Titled “Thriving Kohl’s turns up pressure on competitors,” the article began with the proclamation: “Kohl’s Department Store is rapidly expanding beyond its Midwestern roots and snatching market share from national retailers in the process.”

That article marked a significant turning point. The company had finally hit the national media radar screen, and in a big way. The table was set for dozens of other articles in magazines, periodicals and newspapers across the country. Almost all of these stories began with basically the same banner: “Upstart ‘hybrid’ regional player takes on the national big boys.”

As far as we were all concerned, Kohl’s had begun to be recognized as a discount powerhouse that would alter the nation’s retail landscape. That was indeed good news. But in a way it was a mixed blessing. Hitting the big time also denoted a loss of innocence. Getting on the radar screen not only meant you were nationally prominent. It also placed you squarely in the gunsights of the big boys.

While this recognition certainly did not happen overnight, if you worked at Kohl’s during this time you could not help but feel a transformation taking place. We no longer had a ‘stealth’ capability as we expanded into so many states. By the time I left Kohl’s in 2000, we were effectively out in the open, with a lot less cover than we had enjoyed for so many years before.