Getting the Brands: Thank You Sir, May I Have Another? (part of Chapter 3)

“Middle America loves brands.” – Jay BakerJay Baker knew from the beginning that acquiring well-known, national brands would be perhaps the most important component of the new Kohl’s hybrid retail concept. And the most challenging. Key resources emerging during this time—Levi’s, Docker’s, Nike, Krups, Warner’s, Reebok, Champion—were viewed by Baker and his merchandise team as ‘must-haves’ if Kohl’s was ever to establish a reputation as being a department store with brands.It was an amazing struggle at the start. Back then, these resources were the exclusive domain of the major national traditional department stores. Creating some degree of exclusivity provided them distinction in the marketplace. They were not interested in letting some small upstart retailer in the Midwest upset the retail world order.Time and time again, during trips to New York during various ‘market weeks’ (where buyers from all over the country descend on the city for a week of meetings, looking at the new season’s lines, placing orders and developing relationships), Jay Baker would go into a vendor showroom and plead the case for them to carry their merchandise at Kohl’s. He would point out that the company was quickly growing. He would make it clear that Kohl’s wasn’t a low end discounter trying to have the best of both worlds. This company was truly different, and these manufacturers had everything to gain and nothing to lose by jumping on board. They could be part of the future rather than become mired in the past. Kohl’s was changing the world of retail, and they could be a part of it. It all sounded well and good. However, though the vendors would be cordial during the initial visits, invariably they would then diplomatically decline the opportunity.But Jay Baker was not discouraged, and his incredible persistence eventually paid off, and Kohl’s began to acquire an impressive array of major national brands. The story behind Kohl’s finally obtaining the Dockers line of khaki pants and other men’s sportswear is legendary in the company. Kohl’s had an exploding business in denim pants with Levi’s (owned by Levi-Strauss) when Jay Baker first approached them about carrying the Docker’s line in the stores. He’d go in, knock on the door of Levi’s senior management, be told no, pick himself up by the bootstraps, and try again the next time he could. It was a constant battle that continued for two years. Finally, Levi’s relented and set up Docker’s shops in nine Kohl’s stores in Columbus, Ohio. After a one year test, the company slowly rolled out the other markets where Kohl’s had stores: first Chicago, then Milwaukee, and finally at all of the stores. Business mushroomed in the Men’s department, and a year later, Docker’s for Women was added to the ladies apparel assortments. And within a matter of a few years, Kohl’s became one of the largest accounts of Levi-Strauss’ in the world. Baker’s persistence won the day. Of course, it became more and more difficult for the vendors to say no to a company that had blossomed into the fastest growing retailer in the country! In between his visits, say, a gap of six months, Kohl’s would have grown by $50 million and added 10 stores. You turn down a company like that at your own peril.There is another famous story in Kohl’s folklore that vividly illustrates the kinds of obstacles that stood in the way of the company’s early efforts to win over the major manufacturers. In those days there were two different retailers owned by the Milwaukee-based Kohl’s family: the first, Kohl’s Food Stores, was a grocery store. The other was Kohl’s Department Stores. These were two separate companies, each operated by a different brother.At some point the management of the department store had the bright idea to provide customers with the same kind of metal shopping carts commonly found in grocery stores. It was thought this would make things more convenient. Remember, back then the stores were somewhat like Wal-Mart, a real mix of softgoods (like apparel) and hardgoods (including towels, small electronics, etc.). Customers in Milwaukee just loved the carts, particularly the older folks who often used them for support as they walked through the store and shopped.As Kohl’s expanded into other states, and the Kohl’s model started to roll out, there was always an ongoing debate about the aesthetics of the carts: yes, they were a convenience, but they really were an eyesore, and gave the wrong message to the kind of new customer we were trying to attract with the new store layouts, improved fixturing, nicer assortments, etc. There was a lot of discussion among senior management on the issue.One group in particular had a very strong objection to these shiny metal shopping carts: the national brands! Our competitors understood the problem all too well – and exploited it to their advantage. Time after time Buyers from our local competitor, The Boston Store, would take their vendors out in their cars when they were visiting Milwaukee. They would always be sure to take a little side trip to the parking lot of our Brookfield store (at the time also the home of Kohl’s corporate offices, in the basement). They’d stand in front of the store, where customers were coming in and out with their carts, and say, “Why would you ever want to sell to these guys? They operate like a grocery store. You wouldn’t want this for the image of your brand, would you?!”The strategy worked. Every time. The top brass from national brands, when introduced to this ‘discount’ image, were quickly convinced that Kohl’s was not an appropriate new channel of distribution. It made things particularly difficult for Jay Baker, who was relentless in his pursuit of these brands. This wasn’t just an embarrassment. It was losing the company money.Well, here’s how we helped Jay and his senior merchants get the goods: soon after I joined the company in May, 1994, we assembled a small group in the corporate offices to explore ways that we could do away with the metal carts, but design some kind of ‘cart’ that would still serve the needs of the customer, particularly the loyal Milwaukee shopper, and at the same time win over the vendors whose brands we so desperately wanted. We retained the services of a design firm and began to review sketches of ‘conveyors of merchandise’ that looked more updated than the old metal carts. It was like reinventing the wheel. But it worked…after some trial and error. They were to be built with thicker tubing painted black, with larger black rubber wheels. Somewhere along the design process we hit upon an epiphany: why not build this more like a children’s stroller, with a bag to hold merchandise right behind it? Boy, it quickly made sense. The hip-looking stroller would have immediate appeal to our target customer, Mom. But we wouldn’t lose our existing customers either. The ‘stroller cart,’ as it came to be called, would hopefully still appease our very local and vocal Milwaukee customer.Most importantly, in terms of our quest for new vendors, we could present the stroller cart as a great way to meet the needs of our primary customer, a mom shopping with a child. And, oh by the way, there’s this little bag behind the child’s seat that can house merchandise she may select before going to the front of the store and checking out. It was one of those rare win-win situations. Or at least we thought.There were some drawbacks too. Our ad hoc committee had the design firm build a few prototypes, and we tested them in a couple of Milwaukee branch stores, with mixed results. The older customer, who really had no need for the ‘stroller’ part of the stroller cart, complained that there was not enough room to house merchandise like the former cart. There were also some issues regarding the ‘stability’ of the prototypes; since many of these older customers relied on the carts for support (a store-provided version of a walker, if you will). We tried to address these concerns. For example, future styles of the stroller cart increased their stability. Still, we realized that it is impossible to fully please all of the people all of the time. Especially with older people, sometimes change itself is the problem, as the older we get the more resistant we are to change.But most of our target customers (again, moms with kids), generally loved the carts! They viewed it as a major convenience to their shopping experience. And in the new markets where this new concept for shopping in a department store was introduced for the first time, we received kudos for how ‘hip’ the stroller carts looked. I think Mom liked tooling around the store with her kid in one.Needless to say, Jay Baker and his senior merchants seized on the opportunity provided by the replacement of the old metal shopping carts with these sleek, black stroller carts and approached vendors who had been reluctant to sell to Kohl’s because of the “image problem” caused by the old carts. No longer could this be viewed as “something you’d see in a grocery store.” To the contrary, Jay put a positive spin on it (long before anyone was using the word “spin”). He would say, something to the effect “look at how we listened to the needs of our primary customer and developed this novel, patent-pending stroller cart.” I would say the same thing when accompanying visiting stock analysts on store tours who had not been impressed with how the old shopping carts negatively defined the Kohl’s business model. Now I could point to the new stroller cart as yet one more example of how we were creating convenience for our valued customer.Apparently, our success with the strollers caught the attention of our competitors. There’s no compliment stronger than imitation. In subsequent years, other retailers basically copied Kohl’s with the stroller cart concept: Mervyns first picked up on it, followed by Sears, which has used them in many of their markets throughout the country. (note: we were given the opportunity to obtain the exclusive rights to the design of the original stroller cart, but we declined to do so; it is my understanding that the design firm, seizing on their big score with Kohl’s, smartly went on and pitched these other companies).Success capitalized on success and, on the heels of Jay’s triumph with Levi’s and the Dockers line, other vendors followed and began to work with Kohl’s. At the same time we had solved the shopping cart problem, and taken away a weapon our competitors could use against us. Sure, they could still try to pick on the fact that all of our registers were at the front of the stores, there were no attendants at the dressing rooms, etc. But the customers didn’t seem to be complaining, and in the final analysis that was what truly counted.In the mid-1990s, our major vendors were primarily in the denim and housewares categories. At that point, the company was slowly moving ‘upstream’ and attempting to more aggressively attract the traditional department store customer. We needed to learn more about these customers’ habits. Market surveys discovered the following: many of the traditional department stores’ shoppers (predominantly women) would come in, buy all her kids’ clothing, go to the back of the store and buy, say, a Krups coffee maker for the family, and then, perhaps, go to the Men’s department to purchase a sweater for her husband. All fine and good, but with one glaring problem. She wouldn’t do much shopping for herself. She would often only shop for herself in the sports apparel section (for example, Nike warm-up suits), her athletic shoes and maybe a bra and some hosiery in the lingerie department. Yet this typical customer did not shop in the front apparel areas of the store. We hungrily eyed the potential for opportunity. But how?First, it’s important to understand what were the old ways of doing things. Part of the strategy had always been to approach a major branded resource with a significant national presence with the larger traditional department store groups and begin to negotiate with them to carry their line in our stores. With several hundred new stores to be added to a manufacturer’s distribution list at a time when business has been challenging, it is often very difficult to pass up entirely. In other words, Kohl’s was expanding so rapidly the vendors simply could not afford to ignore us. Vendors such as Liz Claiborne would create a new line exclusively for Kohl’s (and possibly a couple of other similar ‘tier’ retailers, like Mervyn’s in California), and hang a tag and other marketing materials that has a tagline “by Liz Claiborne” after the name of the line.Branded labels at Kohl’s were brought to a new stage of development with the arrival of Rick Leto from Macy’s. A veteran merchant, with extensive experience on both coasts and points in between, Rick convinced Liz Claiborne to sell to Kohl’s and aggressively upgraded corporate casual and built up inventories in key departments, like dresses. This was right around the time when “dress down Fridays” were becoming popular and Rick had his finger right on the pulse of it. It was a high-growth period for the company, and Rick led the charge with his merchants to “buy with conviction.”When asked to comment on the ongoing strategy to slowly trade up the customer, Larry Montgomery replied: “Mom has been shopping for the kids and dad and for the home at Kohl’s for a number of years. Now, she’s buying a lot more for herself while she’s there.” Clearly, he had tapped into something big that we could capitalize on. And the best part was that we were doing it at the expense of the larger, traditional department stores who had spent many years and many millions building up what they thought was an impregnable barrier of exclusivity. They soon came to realize that the retail world was dramatically changing, and would never go back to the old ways. In recent years, Kohl’s has added Columbia in outerwear and apparel, OshKosh B’Gosh in children’s and Nine & Co., a Nine West line, in women’s shoes. I can just imagine the various shades of purple some of the top guns at the big chains must have turned when they finally understood – too late – what was happening.The story of OshKosh B’Gosh is an interesting one. Based in Oshkosh, Wisconsin (the same state as Kohl’s corporate headquarters), the children’s manufacturer had been an earlier resource in Kohl’s merchandise assortments. In fact, in the early 1990s it was the dominant branded vendor in the kid’s department and was prominently displayed throughout. However, around 1997, senior management at OshKosh, which had been under serious pressure from the traditional department stores complaining about the aggressive promotional strategies of the upstart regional Kohl’s chain, decided to knuckle under and pull out of Kohl’s in the summer of 1998. I suppose the clothing manufacturer thought there was a certain logic to their strategy. They would abandon their fastest-growing client in hopes that they would be able to ‘trade up’ their spot in the marketplace, fortify their position with the major national traditional department stores, and improve their financial performance.The news, needless to say, was not well received by Jay Baker and the General Merchandise Manager of Children’s, Kevin Mansell. There were several meetings with the senior management of OshKosh, but ultimately, the manufacturer was firm in their decision, and they did indeed pull the plug on us.Baker, Mansell and the rest of the children’s buying team did not panic, and prepared for the significant loss of volume by adding another branded vendor to the mix, Carters, in addition to dramatically improving sport apparel assortments and private label programs. The gang figured it out, and we managed that first year not to lose much business in the kid’s department, a real tribute to the organization.Things did not go so well with OshKosh. Expecting that relations with the traditional department store groups would improve and result in larger purchase orders and incremental business, they discovered in the late 1990s that their strategy was flawed, and sales flattened and profits deteriorated. As a result, OshKosh stock plummeted, reaching a ten-year low. They had badly miscalculated the way things would play out. In leaving Kohl’s they had walked away from a huge amount of volume. They thought they could make up for that lost volume with the traditional department stores, but that never materialized in the numbers they had hoped for.In the end, tail between their legs, OshKosh came back to Kohl’s and re-introduced their product line in 2002. Sales began rising again, and OshKosh stock rebounded. No doubt, the key merchants at Kohl’s hoped other vendors, like Ralph Lauren, Tommy Hilfiger and Nautica, were taking notes. And I’m sure they were.In the past ten years, the ‘build-up’ of brands added increasing credibility to the Kohl’s value equation. Look at the following additions to the Kohl’s assortments by major national vendors over the years (and the year each vendor was introduced, to the best of my knowledge) and one can see how Kohl’s increasingly has become a threat to the traditional department stores:Adidas(1993)Airwalk(1997)Arrow(2001)Axcess by Liz Claiborne(2002)Bali(1998)Bugle Boy(1994)Buster Brown(1994)Calphalon(2000)Carters(1996)Champion(1995)Columbia Sportswear(2000)Counterparts(1995)Dockers(1996- national)Fieldcrest Cannon(1997)Fila(1995)Gloria Vanderbilt(1996)Haggar(1994)Healthtex(1996)Jantzen(2002)Jockey(1996)KitchenAid(1997)Krups(1995)Lee(1993)Levi’s(1992)Lily of France(1999)Maidenform(1995)Mickey & Co.(1996)Mudd(1998)Nike(1993)Nine & Co. by Nine West(2001)Norton McNaughton(1998)Olga(1996)Oshkosh(re-introduced 2002)Pfaltzgraff(1997)Reebok(1994)Russell(1998)Sag Harbor(1995)Savanne(2002)Skechers(1997)Speedo(1996)Sperry(1997)Springmaid(1997)Starter(1997)T-Fal(1996)Union Bay(1995)Vanity Fair(1997)Vans(1997)Villager by Liz Claiborne(1996)Warner’s(1995)Winnie the Pooh(1996)By the early 2000’s, an impressive 80% of merchandise sold at Kohl’s Department Stores were national brands. As a result, Kohl’s was able to fiercely compete with the major traditional department stores, while managing to maintain a much lower cost structure.