Chapter Four - Tweaking the Brands

By around 1995, having defined the key components of the business model, Bill Kellogg and his senior management team was positioned to take the show on the road. Their model was being increasingly accepted in their home base of Wisconsin and in certain Midwestern cities, and they knew that was only the beginning. When you have something that works this well, it would make zero business sense not to capitalize on it to the max.

But every now and then the model would be tweaked a bit. Perhaps most evident of this ‘re-jiggering’ has been in the adjustments to merchandise assortments, particularly in terms of eliminating existing categories of goods or adding new ones. These adjustments actually fit right into the business model, because it was designed to include room for flexibility. After all, even the framers of the Constitution saw fit to make a provision for amending it.

As Kohl’s entered new markets and new stores sprang up, the size of the selling floor square footage of a prototype was often discussed. Frequently these conversations became fairly animated. On the one side, as I recall, was Bill Kellogg, who espoused a “smaller box” position of 82,000 total square feet. Most of the stores in the early 1990s were built to that specification, and had enjoyed impressive sales per square foot productivity. But the counter-argument, usually headed by the merchants, was the belief that with all the success the company was enjoying, existing stores were already getting tight because of all the merchandise being bought for them to keep up with the sales trend. The group lobbied for a larger pad for prototype stores to the tune of a minimum of 86,000 square feet.

The yin and yang of deciding what the correct size was when we built new stores dragged on. One side: low cost culture, conservative. The other side: slightly aggressive. What made it such a tough issue was that that there were good arguments on both sides.

Of course, as these discussions progressed we would begin to evaluate the productivity of every department on the selling floor to help us draw some reasonable conclusions. It seemed as if everybody had their own case to make. The merchants representing the missy apparel departments would contend that hey, their typical dollar per square foot productivity was $50.00 higher than the store average (at the time, around $265/sq. ft.). “And, oh by the way,” certain “productive” merchants would say, “look over at this department, they’re way behind the average. Take something out of their hide!”

I can tell you from a lot of experience that these square foot evaluations at Kohl’s were tame when compared to the battles that raged inside many other retailers, particularly Macy’s. In these other companies, especially since every store was different in terms of total size, layout, etc., it was an ongoing exercise for the merchants at corporate to constantly hound the CEO about making square footage adjustments at say, the Macy’s at Herald Square in New York City or the Bullock’s store in South Coast Plaza (since changed to a Macy’s as well). It was a major part of what executives did: the former CEO of Macy’s East, Hal Kahn, is famous for visits to branch stores which focus almost solely on floor moves and selling productivity.

At Kohl’s, it was an important topic but not something we got to hung up over. The key was to build stores that were similar in size and layout so we could rapidly ‘cookie-cut’. Keeping things simple was a tremendous advantage over the traditional department stores. And it was an advantage that we intended to keep.

Eventually the prototype store was increased from 82,000 square feet to 86,000, with most of the space going to the missy apparel departments (which now accounts for over 31% of the total Kohl’s revenue). During this process, however, sales per square foot productivity of certain departments would occasionally be challenged. Because of our rapid growth, stores were often tight, and, facing pressure from Bill Kellogg about increasing the prototype size too much, Jay Baker took some major steps to ‘free up’ space for other faster growing and, not surprisingly, more profitable, departments.

From 1995 to 2000, several major departments were eliminated when it was quite evident that they were generating lower gross margins. This allowed for the expansion of either existing higher margin departments or, as we have seen more recently, the launching of new categories of goods.

For example, in 1995, Kohl’s decided to eliminate the entire electronics department, with the exception of clocks, which moved over to housewares. The ax didn’t fall overnight. For a couple of years, the electronics business had been flat, and the gross margins were terrible. We simply didn’t want to compete with the up and coming Best Buys and other big boxes starting to enter our markets. This wholesale elimination of a department, complete with glass caselines, registers (yes, back then not all registers were ‘ganged’ up at the front of the store like they are now), was a major expense and took a great deal of planning. The winner of most of the space formerly occupied by electronics: sport apparel, which jumped the aisle where it had typically been located with athletic shoes, allowing for an expansion of shoes as well.

Even though we walked away from over $75 million of electronics business, we replaced it with much more profitable Nike, Reebok and eventually Champion fleece and other sport apparel and became recognized as having the best assortments in this category in our marketplace. It was a great example of taking a short term hit for a long term gain.

In 1996 and 1997, Jay Baker and the merchants made a similar move to get the company out of three other lower gross margin businesses: lamps, window treatments and ‘knockdown’ furniture (the stuff made with particle board that you can now buy at a Home Depot). In addition to the fact that these businesses did not generate the same kind of higher gross margins that were being generated by almost all the other departments in the store, Jay Baker also realized that we did not have the space to make strong merchandise ‘statements’ to our customer. Why be in the business if you couldn’t present enough styles to convey to the customer that you’re a ‘destination’ business? In other words, we wanted to position ourselves so that we were dominant enough in a particular market that shoppers would get in their cars and come to our store to find specific products.

The stores loved the idea of getting out of the furniture business: sales of the larger pieces usually required a “carryout,” a stockperson who’d be paged by a sales associate to go to the back and bring out a box and meet the customer in the front. All fine and well, but in Kohl’s low-cost culture mode, only occasionally was a guy specifically scheduled for the task, so someone often had to be pulled from another duty. Even on its best days, it was not a particularly efficient process!

As always, of course, if we eliminated one sector we could devote more space to others. With new square footage available, stores expanded their “soft home,” namely in housewares and domestics, two departments that produce excellent gross margins. Categories such as placemats, candles, towels and sheets were expanded in subsequent years with major new fixture capitalization projects. Walk into a Kohl’s store today and you’ll see very powerful merchandise presentations in these areas, created in part thanks to the decision years ago to free up space by getting out of less productive and less profitable businesses.

In addition to the continual addition of new brands to the Kohl’s merchandise assortment, occasionally new categories would be added. For example, in 1999, framed art was added to the Housewares department and became a very profitable and fast-growing business.

Meanwhile, the strategy in our health and beauty area was to primarily stock fashion ‘impulse items’ rather than planned needs. In traditional department stores, the cosmetics department has tremendous breadth in assortment, carrying thousands and thousands of sku’s in primarily three categories: fragrances, color (i.e., things to put on your face other than skincare, like mascara, eyeliner, bases, lipsticks, etc.) and treatment, like skincare and soaps.

Kohl’s recognized early that the department store model with separate caseline islands of Estee Lauder, Lancome, Clinique and a dozen other major players was incredibly labor intensive. Moreover, you couldn’t promote Estee Lauder every week during the featured company sale event. I suppose it would also be fair to say that these guys would never sell to Kohl’s with this kind of model, so it was kind of a moot point.

Instead, the strategy was to focus on self-service merchandise (now there’s a concept that fits in well with low cost culture). This quickly gravitated to health and beauty aids. Before the launch of Bath & Body Works in 1990, personal care was often seen as a routine event, with soap meant to get the body clean and lotion used for healing rough hands and chapped skin. Bath & Body Works turned all that upside down. They turned the process of cleaning into a pampering experience, with an emphasis on softening and scenting. They took fruit and floral scented personal care products to a new level, offering a wide range of products, from shower gels and novelty candles to scented soaps, lotions, skin care creams and similar items. Women loved this idea. They flocked to it, and demanded more. We were more than ready to meet their needs and reap the benefits.

We were quite fortunate to have the expertise of Nancy Wargin in this area. She was a veteran buyer who came to us from the Milwaukee based The Boston Store. I knew her from my days at Gimbel’s. She was aggressive with a New York edge. She was the one who really picked up on Kohl’s new approach to health and beauty, and basically copied the BBW strategy. It was so successful that it soon became part of the new prototype store model that we were rapidly seeding throughout the country.

The health and beauty merchandise was often set up on skirted tables and on t-walls in the Accessories Department. The products are displayed this way for very deliberate, well thought out reasons. The Kohl’s shopper really doesn’t come to the store to fulfill her cosmetic needs; rather, during her visit around the racetrack she is greeted with attractively packaged products that catch her attention. For example, a pencil case shaped like a sneaker with cosmetics inside, or an aroma therapy candle. Gimmicky? Perhaps. But it works. And the customers love it, which is what really matters.

Today, while the entire department by 2002 was heavily geared toward the Body Source private label, Kohl’s began testing an expansion into more national brands, such as The Healing Brand, Neutrogena and Coty. Later, under the stewardship of head merchant Rick Leto, Estee Lauder established a strategic partnership with Kohl’s, with Ashley Judd as their spokesperson.

As far back as the early 90s, Kohl’s was in the fragrance business, but in a very small way. And the merchandise was gray market, meaning we obtained it from off price discounters, the only such category of merchandise in the store that I was aware of. It later morphed into a fairly strong business centered around fragrance gift sets, particularly during the key shopping periods for that category: Valentine’s Day, Mother’s Day and Christmas. More recently, the company is testing merchandising more individual bottle designer fragrances.

Another area of merchandise with an interesting history at Kohl’s is toys. At one point we were seriously thinking of giving it up. With the exception of a couple of classifications, like plush animals, the gross margins were low, and it was near-impossible for us to compete with Toys ‘R Us or Wal-Mart. Plans were initiated to evaluate how a Kohl’s store layout would look without a toy department.

And then, during the critical post-Thanksgiving weekend in 1996, we experienced a ‘whoopin’ from the competition that made us reconsider our gameplan.

The day after Thanksgiving has always been considered the kick-off to the Christmas selling season. Most people consider that day to be the biggest volume day of the year for a retailer like Kohl’s. Actually, it’s more like the 10th biggest volume day. But when you add up the volume for the entire weekend following Thanksgiving, it’s a big deal. And you don’t want to get out-hustled or out-promoted by the competition.

As you’d expect, a great deal of energy and preparation would always go into the planning of sales and promotions for the Thanksgiving Weekend. But it would always seem that our competition, particularly at the time Wal-Mart and Target (keep in mind that back then our competition was both the discounter and the traditional department store), would come out with guns blazing: they set up ‘early bird specials’ and packed their stores with steeply-discounted deals in electronics and toys. Hundreds of boxes of televisions for $59.99 would be stacked down main aisles. Target would lure hundreds of people to wait in line at 5:00 a.m. with the offering of ‘goodie bags’ for the first 500 customers (actually, most of the stuff in the bags were promotional samples given to them by their vendors, like toothpaste, microwavable popcorn, all gratis to Target). The turnouts to these discounters was incredible, and they got out of the gate like a rocket for this very important kick-off weekend to the holiday season.

We all saw it first-hand that cold November morning. I remember being with a couple of the merchants from corporate that day, who agreed to meet me at Target at 6:00 a.m. so we could check out the competition. The fishing frenzy we say that morning was an eye-opener. After visiting the rest of the competition, and of course, a number of our stores in the area as well, we headed back to corporate to report on our findings.

We weren’t the only ones to see how the competition had out-promoted us. Jay Baker, ever the competitor, was getting ribbed by other store guys and presumably Bill Kellogg about the need for us to get more aggressive during times like these. One thing for sure: Jay never would never allow the competition to take market share away from us. He quickly reassembled his team and began to re-strategize for the Next Time.

Long story short: fast forward one year. Thanksgiving, 1997: we had some incredible door busters to get people to come to our store first instead of the competition. Our blowout promotion? Entire stock of Barbie – 50% Off!! It was a madhouse. Kohl’s had the best day after Thanksgiving in years.

The toy department was here to stay. While there is an obvious ebb and flow to inventory levels of the toy department, with an emphasis on higher margin plush and educational toys, Kohl’s now uses toys to attract customers during major promotional periods to draw traffic away from the competition and into their stores.

In recent years, as Kohl’s has ever so methodically traded more ‘upstream’, Kevin Mansell has encouraged his buying organization to be increasingly attentive to the customers’ desire for freshness in the stores and more updated fashions in the merchandise mix. A good example comes from the men’s department where Kohl’s created a knock-off of the highly successful Tommy Bahama line, coming up with a private label brand of very casual, almost Hawaiian style shirts called Panama Jack in the spring of 2003.

In addition, while there are no longer major wholesale ‘eliminations’ of categories of merchandise like the mid-1990s (electronics, lamps), the company is still on the lookout for any groups of products that seem to be faltering or under-performing.

Mansell, when addressing shareholders at the annual meeting in 2003, said, “Another element of bringing freshness and excitement to our stores is our program of continually evolving our fixture presentation packages. Our efforts have increased capacity on the floor, enhanced visual presentation and improved shopability.”

His words pretty much sum up the current Kohl’s philosophy when it comes to merchandise. And the adaptability that he makes reference to will undoubtedly continue to be the most vital element of their overall strategy.