The End Result - The All-Important Profit Spread (final part of Chapter 3)

Kohl’s would run initial mark-ups basically the same as traditional department stores. And we’d keep expenses, or SG & A, relatively low. The result was an extraordinary opportunity that allowed you to get much more aggressive on the promotional side in selling branded product. You could run a much higher mark down percentage and sell virtually all your goods off-price (i.e., on sale). Yes, Kohl’s ran a lower gross margin vs. a Macy’s, but because their SGA was so low they had a profit ‘spread’ that has allowed the company to come in and take huge market share.

Like any retailer allowed to promote national branded product, Kohl’s was able to leverage all the ‘good will’ and brand equity created by traditional department stores spending all their time and energies propping up the Liz Claibornes of the world. The traditional guys like Macy’s built shops, had special events, and in many other ways supported the expensive business model associated with brand equity. It costs tremendous amounts of money to run ‘image’ ads in the Sunday New York Times Magazine and on billboards.

When I was an Executive Vice President at Hudson’s Bay Company in Toronto, I remember sitting down with the folks at Liz Claiborne and reviewing our goals and objectives for the upcoming year. One of the major objectives was selling at least 34% of Liz at regular price for the business model to work for us. Basically, that’s the kind of regular price-to-sale-price ratio department stores need to make it work for them.

So what’s happened is that America’s traditional department stores spin their wheels establishing and building brand ‘equity’ for dozens of vendors, only to have Kohl’s blast away incessantly in selling the same or similar styles of merchandise on sale. Even better, this approach is virtually recession-proof (i.e., the traditional dept. store customer would trade ‘down’ to us when times got tough).

In an overcrowded retail environment, Bill Kellogg and his management team carved out, and over the years fine-tuned, an exceptional niche that directly corresponded to today’s consumers’ focus on brands, value and convenience. Offering family-oriented branded apparel, accessories and home furnishings with a strong value orientation, the Kohl’s business model has succeeded in attracting customers from both department and discount stores, thus protecting the chain’s revenue to some degree from economy-driven shifts in consumer spending patterns. Is that a terrific business plan or what?