Narrow, Deep & In-Stock Assortments (part of Chapter 3)

As the Kohl’s business model evolved and became more fine-tuned, senior management grew increasingly familiar with the shopping habits of their expanding customer base. Some of the strongest sales, which customers were buying in large quantities, were in areas of promoted apparel basics such as socks, hosiery, khaki pants, underwear and tee shirts. Not surprisingly, the mantra around the buying office became “develop ‘commodity’ businesses.” This line of thinking was particularly apparent in the roll-out of major programs of denim jeans in the ladies, men’s and eventually kid’s departments.While there had always been an emphasis on maintaining narrow and deep assortments in the stores, the challenge to be in-stock in the sizes and colors that were advertised, not to mention simply expected by the consumer, proved to be a gargantuan task, especially since the company was growing at the rate of 30% a year.There has been so much improvement in this area that Kohl’s is today considered to have some of the best in-stock positions on an ongoing basis of any national retailer. But it wasn’t always like that.Around 1994, when I joined the company, the stores were constantly complaining about out-of-stocks merchandise. Weekly conference calls allowed the Regional and District Managers in the field to call headquarters and discuss what we liked to call “opportunities” (aka, things that the company was screwing up!)Larry Montgomery, as the Director of Stores, started to hear the growing chorus of complaints about our in-stock positions on supposed “Never Out” programs (such as white athletic socks or basic tee shirts or Levi 550’s). He realized that he had to take on the merchants, headed by a very stubborn Jay Baker, who often felt that his merchants could do no wrong. Us store guys were forever doing individual store counts, actual hand-counted inventories, so we could drive home the point that we were disappointing the customer. Some stores voiced their dissatisfaction too loudly to be ignored. A great example would be Jim Tingelstad, Regional Manager of the Chicago area stores. Curmudgeon that he was, Jim was relentless in his criticisms, correctly arguing that the stores needed appropriate inventory to cover sales events or simply day-in, day-out inventory levels of key items. Over time, using extraordinarily effective navigational skills, Larry won over Bill, who helped apply some pressure on Jay and the merchants to take stronger in-stock positions. In fact, Bill would refer to advertising something on sale and then not having it in stock “like inviting someone into your house and not offering him a seat.”While I remember going through a period of yin and yang between the stores and the merchants (i.e, Larry vs. Jay), eventually they made progress in correcting the problem of out-of-stocks. New planning and allocation systems were implemented to help Kohl’s buyers put the right items in the right quantities in the right stores at the right time. But what’s important to remember here is that these vital improvements would never have been implemented if the upper management had ignored or brushed off what they were hearing from their people at the store level. Instead, after some wrangling, they worked together to find an appropriate solution. There was a lesson to be learned there that could be applied to many other areas of the business.Today, Kohl’s in-stock position is a major selling point for shoppers. Customers at Kohl’s can go to the store with confidence that the item they saw in the ad will be there in the size and color they need. Says Larry Montgomery in an interview, “Our in-stock position is always in the 90% range, and we always have a great price. And because we are selling national brands, our target customer is the exact same customer as at the traditional department stores.”Kohl’s planning and allocation strategy is an excellent example of adapting to change to accommodate growth. When I joined the company back in 1994 we had 85 stores. It was a fairly simple matter back then to “cookie cut” the orders. Not too many surprises. But with our rapid expansion outside of our Midwestern base and deep into the South, that all changed. I oversaw the opening of three stores in Charlotte, North Carolina in 1997. There were seasonal variations and other regional factors to take into account, and we initiated a ‘Southern Strategy’ for our stores warmer climates than back in the upper Midwest, where the event called ‘Spring’ occurs only once every few years. Planning and allocation became increasingly important. In response to the need, in 1997-1998 Kohl’s embarked on a major expansion of its merchandising group and formed a separate planning and allocation division. As the Kohl’s expansion became essentially ‘national’ in 2005, the key concept of “always in stock” took on increased urgency.Another important aspect of the business model related to the merchandise involves inventory levels as a means to drive the top line. When times get tough for a retailer, there is often a natural inclination to get cautious, pull back inventory, and cancel purchase orders. It’s one of the reasons that off-price discounters like Ross Stores and TJ Maxx generally perform so well during recessions, they’re like scavengers at the docks of manufacturers ready to buy excess inventory. In other words, they’ve set themselves up to make opportunities out of what others consider to be a bleak situation.Kohl’s takes the same viewpoint and sees tough times as a great chance to gain market share. They take the position that pulling back on inventory is ultimately self-defeating. It becomes a self-fulfilling prophesy, with sales falling even further as a result. Rather, the merchants at Kohl’s will load up on basic items, fashion ‘basics’ and gift items. It’s sort of like that old Boy Scouts’ motto: Be Prepared. Then, when some unexpected downturn hits, instead of being caught with its pants down, the company is in a position not only to ride out the bad period, but quite possibly make some gains.This was certainly the case post 9/11 in 2001. Kohl’s increased inventories significantly to the tune of mid-teen increases comp store vs. LY (last year), and ran high single digits to low-double digits in all departments during the fourth quarter. And this was during a holiday season that was extremely challenging for most everyone else. Looking back on the strategy, Larry Montgomery said, “We got very aggressive in delivering brands, value and convenience to customers who maybe didn’t want to go to a mall because of everything that was going on. It played right into our niche. We took huge market share as a result.”Larry’s approach has always been clear to the organization. The key to his message, interestingly enough, is its very simplicity: “We have never been shy about building inventories. You can’t sell what you don’t have.”