With all the news in recent years about corporate accounting scandals, the public has become well acquainted with the dynamic of corporate culture. It all begins at the highest level. Sure, when things go well the pubic turns conquering CEOs into superstars (Jack Welch, Bill Gates, etc.). But when things go bad, the fall from grace also starts at the top. As the old saying goes, the fish rots from the head down. The excesses of Enron, Worldcom, and Adelphia, for example, sadly illustrate how senior management ruined their companies. These top people defined corporate culture at every level, in how they set up working environments, in how they traveled and entertained, and how they spent the company’s money.
The term ‘corporate culture’ touches on many different facets of how a company is managed and how its employees approach their work. The overall attitude and perspective of the company and its employees helps form the picture. Yet perhaps the most defining aspect of corporate culture involves how senior management manages the company’s money: obtaining new business, attracting employees, retaining employees, and rewarding employees. And of course, how they spend money on themselves.
Before joining Kohl’s, I had experienced disparate corporate cultures. Not surprisingly, the differences were most striking when it came to how the company’s money was spent. For example, during the eight years I was with Macy’s, we spent money lavishly, and in retrospect, with little regard to how it affected the rest of the organization, much less how it impacted the bottom line. This was particularly evident in the years following the ill-fated management-led leveraged buyout in 1986, leading up to the bankruptcy filing in early 1992. Headed by Ed Finkelstein, R. H. Macy & Co. experienced enormous success in the 1970s and was considered to be one of the dominant traditional department stores in their trading market. Through the vision of Finkelstein, strategies were initiated that took merchandise presentation to a new level. For example, with Macy’s launch of The Cellar in the basement of the Herald Square store in downtown New York, Finkelstein took on uptown arch rival Bloomingdales. Customers at Herald Square were treated to dazzling visual displays in a series of enclaves offering the latest in housewares and food. Other improvements included the introduction of first-floor boutiques which frequently rotated the hot items or fashion trends of the season. A major renovation of the linens and domestics departments took place. Terms like ‘presentational theater’ and ‘pop and sizzle’ became mainstays of the corporate lingo. The company went to enormous lengths to create ‘spectacular’ selling environments, headed by an extremely talented Director of Visual Merchandising, Joe Cicio, who became renowned for playing to Ed’s large ego.
Similarly, the rest of the Macy’s stores were upgraded during the mid to late 1970s, with customers responding quite favorably, resulting in some of the best comparable store growth in the country during that period.
To be sure, during this time Macy’s put a major emphasis on attracting and retaining some of the best retail talent in the country. The company had a world-class executive development program. Going through the Macy’s executive training program out of college was like getting a retail version of a Harvard MBA. So people were well compensated at a relatively young age. And like most New-York based retailers at the time, along with the position came a lot of perks.
Somehow the idea of ‘pop and sizzle’ transcended the selling floor and came to include the pampering of executives. This ultimately proved to be disastrous for the company. Much of it was ego-driven, and this culture of ‘perks’ and privilege pervaded the organization; in fact, it personified the organization. The lavish lifestyle of the top corporate execs were emblematic, it was thought, of the company’s success. And Finkelstein spared no expense. At his urging, the ‘back of the house’ was upgraded: corporate offices were palatial, with access only by private elevator. Finkelstein would often have lunch outside his office on his private balcony. The place took on the feel of an upscale residence more than a place of business. And when the executives were on the road, they took their perks with them. Everyone traveled first class. The senior executives had limos with personal drivers. Joe Cicio refitted the company’s Gulfstream jet with improved interior decorations. Were these Hollywood superstars or hard working businessmen? The line became hopelessly blurred.
Time for some perspective. While rewarding your key executives appropriately in a highly successful company is in itself an important part of capitalism, living this ‘large’ and establishing this kind of ‘high-cost’ corporate culture creates all kinds of challenges when times call for a change. To make the assumption that the business situation will never change, that things will always remain rosy, is a gigantic miscalculation.
And indeed, the good times were about to end. Following the LBO in 1986, Finkelstein and his trusted advisors, notably Mark Handler and Mike Ulman, embarked upon a strategy that was headed for disaster. While we all stepped on the gas to drive volume, and generated impressive sales gains in the first couple of years, we did very little to pare down expense. We still lived large, flew first-class. I remember when the Macy’s entourage came to Los Angeles following our acquisition of Bullock’s. We all checked in at the Bel-Air Hotel and stayed there for weeks! When you’re living in paradise, you don’t want to leave. When any Bullock’s senior executive traveled to Atlanta for a meeting at Macy’s South headquarters, we all stayed at the Ritz-Carlton across the street of the Peachtree store and ‘corporate.’ When Ed and entourage would visit, they would fly in on their company-owned Gulfstream jet, and take a limo to the stores. What kind of message does that give to your employees, the vast majority of whom were making less than $9.00/hour? Perhaps more importantly, what kind of message is it sending to yourselves, the top executives? Is it going to put you in a mindset of keeping down costs?
Long story short, we never did get the expenses down to help pay down all that debt associated with the LBO, and the company filed for bankruptcy in 1992. All of us (myself included) who were part of this ill-fated leveraged buyout realized that we had screwed it up. But as I look back and see just how loose we were with expenses, it’s no wonder we ended up where we did. It was a great–but lost–opportunity and learning experience, and I have my worthless Macy’s Stock Certificate No. 5012 framed in my home office as a reminder of how important the fundamental components of a business model needs to be for a company to succeed.
In my next experience of fiscal corporate culture, I was exposed to a whole new world, where virtually every monetary issue was under scrutiny. After leaving Macy’s six months before they filed for bankruptcy, I took the family and headed off to Canada, and joined the Toronto-based Hudson’s Bay Company, the oldest retailer in North America. Hudson’s Bay was the parent company of The Bay, a group of traditional department stores, as well as the “Wal-Mart of Canada,” Zellers (before Wal-mart actually arrived in that country in 1994). At the time, Zeller’s could do no wrong, almost always displaying exceptional financial performances. The Bay, on the other hand, had troubles with making the business model work; in many respects the same kind of issues that plague the May’s and Federated’s today: tremendous margin pressure from the discounters, rising labor as well as fixed costs, and, most troubling, difficulty getting enough customers through the door.
From the first day I started as an Executive Vice President of The Bay, I saw that there was an incredible emphasis on expense management. There was an expectation in the corporate culture that all executives discussed expenses whenever and wherever they could. Unlike my experiences at merchandise-driven Macy’s, where a store visit would primarily entail a walk-through of the selling floor with the Store Manager and his management team and discussing sell-throughs of the merchandise, store visits at The Bay reflected a striking difference of corporate culture: they would start, and often end, in the manager’s office, where the Store Manager would review their expenses line by line, and make commitments to attain mutually agreed upon goals. It was rarely about the customer. It wasn’t about the shopping experience. But it was very, very much about making the profit projection, no matter what. It was definitely a 180 from Macy’s, but something told me that that this wasn’t exactly the right way to go either. Shifting from one extreme to the other was not the answer.
At Hudson’s Bay, our low cost culture was worn on our vests like a badge of honor. We flaunted it whenever we met with vendors, particularly with American manufacturers; HBC’s CEO, George Kosich, would go out of his way whenever the opportunity presented itself to highlight the difference between our tight control over expenses and the recklessness of his competitors south of the border.
At The Bay, which was suffering during this time with unfavorable dollar exchange rates (prompting a regular exodus of Canadian consumers to ‘cross the border’ and shop at the malls at Buffalo and a hundred other points in the United States), I would offer that never in the history of retailing was there as much focus and pressure to ‘make a month’, that is, make in-the-month decisions to adjust variable expenses, and create last-minute sales to ensure that you hit the statistical goals. While the idea of adjusting your game plan to accommodate changing business conditions is Business 101, the way we went about it was extremely short-sighted, creating all kinds of zigging and zagging. It never let up, and it was a heavy burden on the organization. The whole idea of ‘constant scrambling’ became part of the culture. Often one could look at the decisions that we hastily made and characterize them as penny-wise, pound-foolish. It was a very challenging business model to help manage and direct, much less be those poor guys in the stores at the receiving end of last-minute ‘about faces’ and changes to the promotional calendar, and the necessary re-do’s of floor and signing set-ups. I think a lot of department store retailing is like that today, and it isn’t a whole lot of fun.
So when I began to look at Kohl’s in 1993 as a new career opportunity, I felt that I had experienced both ends of the spectrum in a very real and concrete way. I knew the ups and downs of both approaches. I had lived through the good times and the bad, had seen the best and the worst. After I joined the company in 1994, I soon confirmed that Kohl’s has a corporate culture of frugality that arguably is one of the best-managed in the retail industry. Low cost culture started early in the company’s history, it was even-handed, played no favorites and pervaded the entire culture of the company. It was supported at the top: everyone flew coach, we all stayed at Budgetels, later Hampton Inn and Baymont, and there were strict per diems. The store district managers drove Honda Accords (Regional Managers drove Camry’s or something similar). While one might argue about the safety of these managers rushing from store to store, often in lousy weather conditions, in a small vehicle like a Honda, it was a regular reminder to all those who came in contact with that car that the company watched over its expenses. It’s a cliché to say a picture is worth a thousand words. But it’s true.
Corporate offices tells a lot about a company. At Kohl’s, for many years it was appropriate to describe them as Spartan: more recently ‘understated’ would be the right word. Still, the emphasis has steadily remained on keeping costs down and never going beyond what is reasonable when it comes to appearances. The first corporate offices in the 1980s were located in the basement of the Brookfield, Wisconsin store. As a former executive who worked there says, “It was really rough. There were no windows, everyone was really cramped, we shared phone lines and did whatever we could to save money. That was the beginning of low-cost culture.”
Even after eventually moving to larger quarters a few miles north in the late 1980s, visitors experienced no grand entrances, foyers or open spaces. The offices were built on the cheap. It was clean and safe. A few years later, as the company growth plans required yet another move, they purchased a large tract of land in the same area and built what is now the company’s corporate headquarters. Built in 1996 and subsequently having undergone some additional expansions, the Kohl’s headquarters is a handsome facility with large windows.
But go inside and you quickly pick up the low-cost culture embraced by everyone who works in the building. It’s interesting to note that no senior executive had a personal secretary. In fact, for years, Bill Kellogg, Jay Baker and John Herma – CEO, President and COO – all shared one secretary! And if a senior executive at corporate wanted better furniture, he was expected to pay for it himself. This was a company that went out of its way to reinforce the costs savings concept. This extended all the way to the top. At least until Bill Kellogg’s retirement, most people in the company did not ‘live large,’ despite the fact that they had financial riches beyond their wildest expectations. The top guys have lived in homes in Milwaukee that, we can safely say, will never be featured on MTV’s “Cribs.” Very nice, mind you, but not in the top tier of homes in the area.
Analysis of the Kohl’s business model reflects an emphasis on keeping expenses low and attempting to leverage the company’s growth by reducing selling, general and administrative expenses (S, G & A) as a percent to sales. In fact, as the largest variable expense, Kohl’s has managed to run some of the lowest selling costs in the industry. Let’s take a closer look.
Sales Associates – The number employed by Kohl’s at each store is small compared to competitors. The company is able to make this happen through a variety of means. The checkout stands are centralized, not scattered throughout the store, and there are not very many of them. And the sales associates who are manning the selling floor are expected to quickly come to the checkout stands to lend a hand if the lines get too long. Their jobs are to either ‘work’ the selling floor in setting up or taking down sales, filling in stock and keeping the fixtures sized and merchandise properly folded and presented or to check out customers courteously and efficiently. That is where the emphasis is – they are paid to “Smile and Say Hi” and keep performing their assigned tasks vs. the traditional department store expectation of “Acknowledge and Approach”(i.e., drop what you’re doing, walk up to the customer and engage them, even if that means accompanying them to the fitting rooms).
Buying line – This is another area where Kohl’s has effectively clamped the lid on costs. The company had just under 50 Buyers in 1995, and even by 2002, with so much expansion, there were only about 55 Buyers. An incredibly low number when you consider the volume they are handling. This is significantly fewer buyers than traditional department stores. And yet they have been trained in such a way that the company’s ability to purchase the products they want and need has not suffered.
Stores – Kohl’s is not weighted down, like so many of its competitors, by overmanagement. There are only four salaried execs in a Kohl’s store. These are the Store Manager, a combined Personnel /Operations Manager (commonly know as Pers/Ops), and two Assistant Store Managers (each running their respective areas, Apparel /Accessories, or AA, and (Children’s/Footwear/Home, or CFH).
Compare this to when I was the Store Manager of the Macy’s in the Dallas Galleria in 1988, illustrative of a larger traditional department store: me, the Store Manager, one Councillor (sort of a lead assistant store manager), 5 ASM’s (assistant store managers), 25 Department Managers, 7 Assistant Department Managers, Dock Supervisor, Loss Prevention Manager, Visual Manager—over 40 salaried executives! Yeah – 57 million in sales in the first year, but look at the expense at a rate to sales. Which of these scenarios actually results in a more profitable bottom line?
That’s the whole point. When you go down the spreadsheet and look at every variable expense, KSS had a laser beam focus on keeping things lean. And this allowed for much lower S, G & A vs. the traditional department stores. It was our competitive edge.
When you consider the high-growth mode the company has enjoyed over the years, one can appreciate how the adoption of a genuine low-cost culture has paid huge dividends. But it came with a lot of planning, intense dedication, and, make no mistake about it, a certain amount of sacrifice.