Chapter Seven: La-La Land - Finally Going National

It’s fair at this point to ask, how does a retailer that began as a chain in the Midwest become a major national player? Was there a Master Plan? Actually, the decision to go ‘national’ actually came about as more of a natural progression. As the number of new stores throughout the country multiplied each year, a certain inevitability entered into the process. So a better question might be, how could a company like this not go national? To maintain Kohl’s top-line growth, the business model calls for a significant amount of new stores each year to add-on to whatever ‘comp-store’ growth was achieved in the existing stores. The idea of ultimately going national, then, should be seen as the very logical result of faithfully sticking to the basic tenets of the company’s business model. 

Of course, this “natural” progression didn’t just happen on its own without any direction. To the contrary, a great deal of planning went into each step of the process. Our financial group, headed by CFO Arlene Meier, would propose an increasing number of new stores to be built and opened over a forward projection of several years. The company would then get down to work and set out to reach that target number of stores.

As a regular participant at real estate planning meetings up until my departure from Kohl’s in the Spring of 2000, I recall often reviewing expansion strategies which attempted to balance a blend of entries into new markets with a ‘backfill’ of stores in existing markets. Why the need for a blended approach? Primarily because stores in new markets usually cost significantly more than opening ones in existing markets. The pre-opening costs and overall first-year fixed expenses of stores in current markets were typically lower (for example, pre-opening costs on average about $500-550K per store compared to $550 to 600K in new markets). When you consider that from 1997-2002 the company had invested over $2.7 billion in new stores and remodels, one can appreciate the importance of managing capital. As a company, we were always looking for ways to ‘stretch’ our capital expenditures. It was yet another facet of low cost culture.

Another consideration for adoption of a ‘blended’ strategy was related to the management of these stores. For example, in an area where we already had a presence (existing markets), the Store Manager and Assistant Store Managers could readily be transferred from several stores in the area. In addition, stores opening in an existing market could rely on their nearby sister units to help if they needed reinforcements leading up to a grand opening date.

On the other hand, in a new market, the entire district had to be created from scratch, from the District Manager on down. Kohl’s policy for opening a store in a new market was to make sure that at least two of the four salaried executives at the new store had previous experience in the company. In practice, however, it was often a real challenge to make that happen.

Members of the real estate team would present various scenarios which would attempt to get the total amount of stores to be opened close to the financial goal, while maintaining a blend of both new and existing markets. Time after time, it involved making some tough decisions. Consideration would be given to perhaps open Atlanta in 2002, at the expense of Houston, also a new market.

A key trick to making this all work was ensuring that the opening of new markets dovetailed with the opening of new regional distribution centers. As I look back on this whole process, the timing of the building of “DC’s" was perhaps the single most important factor in determining the real estate strategy. For example, after a number of different sites for a distribution center were considered to cover the stores in the southwestern part of the country, the decision was made to build a 650,000 sq. ft. state-of-the-art distribution center. Built on a former Air Force base in San Bernadino, California, the new distribution center opened in 2002.

Another challenge in making the pieces of the puzzle fit was the occasional addition (not part of the three-year plan, by the way) of several stores as a result of an acquisition. While we usually saw such scenarios on the horizon, it was at times difficult to predict when a Caldor’s or Bradlee’s was going down for the count. So flexibility was the key. To use military parlance, we had to be ready to strike at “targets of opportunity.”

We saw California as a market ripe with potential. It seemed to us to be just begging for the introduction of Kohl’s stores. With a population greater than Canada, California was jam-packed with our target customer, with lots and lots of families with moms looking for brand names at a great price. A company with national ambitions would be crazy to pass up this lucrative market, and Kohl’s wasn’t about to let this opportunity slip through its fingers.

When the decision was made in 2000 that Kohl’s would tentatively enter the California market in 2003, a great deal of time and energy went in to making sure their foray into this new territory was a homerun. They hoped to match the success of their openings on the East Coast and in the South. In particular, the merchandising team researched the market extensively, better understanding demographics, climate and lifestyle, and worked hard to tailor assortments to meet the needs of a more casual, and more Asian and Hispanic, customer. The company took a wise precursor step and opened a couple of stores in 2001 in El Paso, Texas, to better understand the Hispanic customer, long before they opened on the West Coast. Adjustments to the merchandise assortments were implemented, with about 30% of the initial buys being market-specific to the warmer climate and more active lifestyle of the California shopper.

Going into 2003, Kohl’s operated 457 stores in 34 states and had sales of $9.1 billion. The addition of the California market came at an important time; needing to open an ever-increasing number of stores to keep the business model going, the company planned to open a total of 80 stores in 2003, including 10 in Phoenix and three in Las Vegas.

Of particular interest from a strategic standpoint is that going coast-to-coast presented to Kohl’s a new opportunity to use national channels of both print and broadcast media. In the weeks leading up to the Los Angeles opening, Kohl’s ads started showing up for the first time ever on cable television stations like TNT and CNBC. As Kevin Mansell pointed out during a conference call with analysts right before the California store openings, advertising nationally gave the company an opportunity to introduce customers to the Kohl’s retail concept in markets that they have not yet opened, providing some important brand recognition ahead of the company entering the market. “There are a number of benefits of going national, including the ability to ‘seed’ the Kohl’s brand in new markets prior to entry, secure better positioning inside television programs, achieve guaranteed ratings and to use 15 second TV commercials, which doubles our reach at the same cost.” The campaign quickly expanded, so that Kohl’s television commercials soon appeared on most of the top 20 prime-time shows, and print ads appeared in over 20 magazines, including O, InStyle, Seventeen, Child, RealSimple and Martha Stewart Living.

Mansell also took the opportunity of going coast-to-coast by promoting its underdeveloped bridal registry on national television, which started airing during the highly popular shows “American Idol” and “Survivor.” Those spots featured guys proposing to their girlfriends, in front of a national audience. To my understanding, all three women who were proposed to accepted!

Recognizing that they needed a partner who could better handle their transition from a regional advertiser to a national one, in July, 2000, Kohl’s surprised the advertising industry by dropping their agency of four years, J. Walter Thompson, of Detroit, in favor of New York City-based McCann-Erickson Worldwide Advertising. J. Walter Thompson’s most memorable campaign with Kohl’s – “That’s More Like It” – started in 1999 with over $93 million in broadcast and other media expenditures.

Playing off Larry Montgomery and Kevin Mansell’s desire to focus more on the convenience factor, McCann-Erickson opted for a softer approach, with fewer words per ad, and a bit less shouting out the ads. The firm dropped the “That’s more like it” tagline and has launched a campaign with a focus on family, on lifestyle, and a return to a spotlight on brands. The company also works with Casanova Pendrill Publicidad in Irvine, California, for advertising to the Hispanic audience, an ever-increasing percentage of the Kohl’s shopper. Some of the old-timers have criticized Kohl’s of late for being too ‘soft’ in their radio and television. But the jury is still out on the issue.

Finally, the stage was set. On a bright, sunny day in southern California on March 9, 2003, Kohl’s opened 28 stores at the same time and in doing so became a coast-to-coast retailer. The festivities drew the usual suspects for the ribbon-cuttings, with exuberant government officials extolling the virtues of the new retailer to the area and the 4,200 new jobs that came with them. Long lines of customers lined up early to take advantage of free giveaways for the first shoppers.

The response to the opening was, in a word, outstanding. Kohl’s immediately began to have a major impact on California retailing. In fact, as one economist based in Los Angeles put it, the arrival of Kohl’s was like “an armed invasion.” While the per-store pre-opening costs were the highest of any market Kohl’s had entered (over $13 million per store in this market, a company record), the sales trend quickly confirmed what Larry Montgomery and his senior management had predicted: the California market, despite some warnings that the region was “over-stored” and highly competitive, was indeed ready for the Kohl’s way of doing business. It was a major success from the outset.

The expansion into the West continued throughout 2003, with stores opening in the new markets of Phoenix, Tucson, Flagstaff and Las Vegas, to be followed in 2004 with stores opening for the first time in San Diego, Fresno and Sacramento, California.

While virtually every retailer who plays in Kohl’s space is negatively impacted when they come into town for the first time, the one company that felt the greatest impact was California-based Mervyn’s. When pressed to provide a prediction of the effect of the blanketing of 40 Kohl’s stores in their southern California, Arizona and Nevada strongholds, Mervyn’s conceded that the company expects sales to decline at many of its impacted stores for up to a year because of the new competition. In fact, in the years following Kohl’s entry into the marketplace, all competitors saw decreases in market share.

 Bill Kellogg, who traveled to California in the early days to ‘take notes’ on this upstart retailer, must have a genuine sense of satisfaction as, from retirement, he watched his company enter the California market, in Mervyn’s own backyard, taking Kohl’s truly national.