Hi-Lo (part of Chapter 3)

If getting the national brands was the most important component in the Kohl’s business model, frequently offering those brands on sale was the second most important component.From the outset, Kohl’s management recognized that because it was able to operate its stores at a much lower expense rate than their traditional department store competitors, they were in a position to aggressively promote and advertise to attract customers to the store and establish a loyal customer base. With a heavy emphasis on promotions, and offering constant discounts, Kohl’s was able to slowly but steadily steal away customers from competitors and increase market share.This was accomplished by blitzing the market with regular advertising, with the cornerstone being a weekly circular in the Sunday papers. The advertising message was simple and straightforward: show the brand, show the value – the rest was pretty secondary.Kohl’s quickly recognized that the customer was drawn to these promotions, and very much appreciated their perceived savings. Women in our focus groups told us time and time again that they ‘loved’ the sales that Kohl’s always had. They could never get enough of it. When asked are we on sale too often, the answer was invariably a resounding: “NO, keep ‘em coming”!For years the number one vehicle for driving business has been the Sunday newspaper insert. By 2002, over 20 million households were receiving the weekly Kohl’s insert in their Sunday newspaper. But analysis showed that newspaper circulation was declining or staying flat at best, and that the company had stores in markets where large portions of the population was not getting heavily exposed to the Kohl’s message. This was particularly true in faster growing markets, such as Dallas. As a result, Kohl’s advertising, which represents about 3.6% of sales, quickly adapted to changing conditions, Kohl’s adjusted their advertising accordingly. There was been a transition from print to electronic media – radio during drive time to work and television during the evenings and weekends.Once the customers arrived in the store, they were inundated with signs on nearly every fixture proclaiming “40% Off,” with a price comparative always shown between the regular price and the sale price of the featured item. It was saturation advertising at its best. And the evidence poured in that the strategy was working.Indeed, this ‘Hi-Lo’ strategy has been a critical part of the success of Kohl’s in conveying the value proposition to the customer. From the beginning, there was never a doubt that Bill Kellogg and his team felt very strongly about this promotional tool: the Kohl’s business model strongly embraced the idea that the customer truly derived a genuine value when they visually saw the difference between the regular price and the discounted price they were getting. We had an aversion to the notion of EDLP, or everyday low pricing. Sears had tried it in the 1980s, only to abandon the strategy after sales plummeted and market surveys revealed that their core customer thought they no longer were getting the same kind of deals. The only time EDLP works, in my mind, is when the truly lowest price retailer can put a stake in the ground and claim that they always will have the lowest prices. Only one guy can do that, and their name is Wal-Mart.A lot is said about how you can no longer ‘fool the customer’ when it comes to placing a price on an item. This may be true, but I am unbending in telling you that Hi-Lo pricing strategies work. The customer perceives that there is real deal in front of her, and that she’s saving money. For Kohl’s, it was simply a matter of aggressively highlighting Hi-Lo wherever they touched the customer: in the stores, in advertisements, wherever they could.During the roll-out of Kohl’s nationally, the traditional department store guys really chafed at their Hi-Lo pricing strategies. After years and years of building up the national brands and establishing ‘regular price’ credibility, here comes this hot-shot retailer who has a lower cost structure that enables them to constantly promote these same goods at significant savings for shoppers. The traditional department store guys spend millions of dollars positioning and creating incredible brand equity for these resources, and have to sell about 35% of these goods at regular price to make it work, then Kohl’s come in and carries these same products, almost constantly ‘off-price,’ or on sale. Before you know it, the traditional stores’ customers are complaining that they don’t sell their goods on sale enough. She starts shopping more often at Kohl’s and less often at her old hunting grounds. No wonder the traditional guys were getting so frustrated!As we will see in a future chapter, in the past several years the issue of ‘pricing’ has become an issue for consumer watchdog groups and governmental agencies. Kohl’s has felt the heat, and has backed off on having such a high percentage of goods on sale at any particular point in time. But make no mistake, Hi-Lo has been a huge reason behind the huge growth gains of Kohl’s in the 1990’s, and continues to be a major part of their value proposition to the customer.