Kohl’s small store format, Nov. 2018 – Photo: Kohl’s
Will smaller, more localized stores work for Kohl’s?
Kohl’s, at its Investor Day earlier this month, said it plans over the next four years to open 100 small-format stores, at about 35,000 square feet versus the company average of 80,000.
The rollout follows a test conducted by the chain in recent years.
“The smaller-format store gives us greater real estate flexibility and the opportunity to go into markets and neighborhoods that couldn’t support a full size Kohl’s,” said Michelle Gass, CEO, during the presentation.
Ms. Gass said localized assortments, informed by data science, help support a curated experience in the smaller spaces.
“We’ve created a new test store in the Seattle area,” she said. “In that region, the store reflects local customer preferences, such as a greater emphasis on outdoor apparel. In the South, that same size store would carry more warm weather product, such as year-round swim sandals and lighter weight apparel.”
Paul Gaffney, chief technology and supply chain officer, said Kohl’s has historically built assortments based on climate and brand performance.
“Hyper-localization” taps data science to also consider local lifestyle differences, localized demographics and the effect of local competition and economic differences, including the types of jobs locals are working during the day. Mr. Gaffney said, “Those things impact customer preferences in some ways that are more compelling than climate and volume.”
Ms. Gass said the stores will still resemble “Kohl’s in terms of the core DNA of the brand, but they’re all going to look and feel differently because they are going to be developed based on what the local market competitive and consumer dynamics are in that given market.”
Major chains in recent years have pushed toward smaller store formats with Target particularly finding success in urban markets.
Macy’s has opened five smaller Market by Macy’s and Bloomie’s off-mall locations in spaces as small as 20,000 square feet to encouraging responses.
Jeff Gennette, Macy’s CEO, said on a February fourth-quarter earnings call, “We found that these stores are more productive to run and staff and stock with inventory. This new format is also bringing in new customers who are engaging with our curated under-40 brands and products.”
- Kohl’s Provides Key Updates on Strategic Growth Initiatives and Financial Plan at Investor Day – Kohl’s
- Kohl’s Investor Day 2022 – Kohl’s
- Kohl’s announces plans to open 100 small-format stores, grow Sephora business to $2 billion – Milwaukee Business Times
- Macy’s, Inc. (M) CEO Jeff Gennette on Q4 2021 Results – Earnings Call Transcript – Seeking Alpha
- Target thinks small to succeed big time – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Do you see a hyper-localized approach to merchandising as key to Kohl’s success with smaller-format stores? What other factors are important?
Poll
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DeAnn Campbell
Head of Retail Insights, AAG Consulting Group
Brian Delp
CEO, New Sega Home
Hyper-locational and small store formats are not new ideas, but they are good ideas, if executed well. There’s no question that access to data and tools to analyze it have improved retailers’ ability to identify micro trends and refine merchandise assortments. Smaller store sizes, as rightly pointed out, provide flexibility and enable Kohl’s to put stores in markets that aren’t possible with large format stores. The small store/hyper-localized strategy is sound, but ultimately the outcomes will come down to how well they execute. The proof will be in the results.
Exactly, and I think convenience needs to be the central focus of the store. A smaller format is by definition going to have streamlined options and isn’t designed for long shopping trips. Basic staples should be the core of the assortment, while also infusing some of Kohl’s customer-centric programs like drop-off returns and online pickup.
Small format retail is the new black – every retailer needs one in their repertoire to round out access to the customer. Bringing physical retail deeper into neighborhoods is an enormously effective way to bridge the gap between online and offline customer journeys, improve shopper convenience and minimize the risk of returns. And being viewed as part of the community is a great way to earn consumer trust and repeat business.
This is a good initiative that gives Kohl’s flexibility. The key thing isn’t so much the reduced footprint, it’s tailoring assortments to local demand. This helps to boost sales and reduces markdowns. It also aids in deciding what parts of the offer to leave out of smaller stores – which, when done without data, is extremely difficult. All that said, success will come down to the look and feel of the stores and, on this front, Kohl’s has a lot of work to do – in both existing and new shops. Data can help make decisions, but it needs to go hand in hand with a commitment to superior experience and execution.
Agreed – this initiative comes down to a truly localized assortment. In my experience, stores are often positioned that way but all feel the same when you walk in. If they are able to execute on local, more personalized options, it could be more of a success.
The logic of smaller hyper-localized stores is unassailable. But the idea is ancient. Department stores used to employ unit buying as a core strength. That gave way to centralized buying long ago. Now hyper-localizing is the “new” answer? Of course the data exists. It’s been sitting there all along. Saying that Boston and Miami should have different assortments in November is a statement of the blindingly obvious. Stores of all sizes could have and should have been localized a long time ago. Sure, smaller makes sense. The jury is sequestered in a locked room on whether or not retailers can actually demonstrate the ability to localize.
Hyper-localized stores are clearly the way to go—no more snow shovels for sale in Florida. Opening these smaller formats is a necessity in today’s market. To compete with Walmart at scale, you need to be within 10 miles of 90 percent of the population. And Walmart is stepping up its clothing and “fashion” game, too. The challenge for Kohl’s is that they need to move to more urban settings but must deal with the red tape and nightmare of local zoning rules and footprints that don’t match their cookie-cutter suburban approach.
Kohl’s was never going to get real estate with its normal footprint. Cutting square footage to less than half means major changes to the sales floor and the back room. This also changes processes big time. Product must arrive floor-ready, back rooms are tiny if they exist at all, and more frequent deliveries from more distribution centers are required. This is the right move for Kohl’s to take advantage of the reach urban locations will bring to the chain.
The big takeaway is that multi-format retail is here to stay, with small formats being part of the mix. Leaning into the small side makes a lot of sense for Kohl’s since locating stores in underserved areas (as in, not close to a mall) has been Kohl’s secret sauce from the beginning. Harnessing good data to localize smaller formats and tucking them into neighborhoods is the next logical move for Kohl’s.
This reminds me more of Stage Stores model over Target city stores. Stage Stores’ strategy was to be the small-town department store and focused on locations in rural areas. This sounds like it is going to be a merchandising, MOQ, and logistics struggle to maintain that level of hyper-localization. Some of the key things making Kohl’s standout are its brands and partnerships. I think it will be interesting to see how they still represent that in a small format as launching Sephora already took a significant cut into other areas like home.
Whether Kohl’s plans to enter more urban markets, or looks for smaller markets that can only support this new format, remains to be seen — but it’s an important weapon in the company’s arsenal. The challenge for Kohl’s (as with any retailer who tries to adapt a large-format store to a much smaller footprint) will be assortment planning. Kohl’s has always been known for a proliferation of brands and categories, so it will take a lot of self-discipline to follow the lead of data science when editing the merchandise choices.
Hyper-localized assortments paired with smaller footprints is typically a winning formula, and there’s no reason to think otherwise for these smaller Kohl’s stores. In addition to Kohl’s initial data science work (which I applaud), I’d advise Mr. Gaffney to leverage outside data sources that they’ve never before considered. The more data elements and sources that can be infused into the algorithms will uncover new insights they can feed back into the localized decisioning process.
This idea isn’t new and has already been initiated by others. Some attempts have worked and some haven’t. Kohl’s is behind the game.
Small formats gives the retailer flexibility that the larger formats do not. Flexibility as described in the discussion as well as the ability to close the local store if it doesn’t catch on. Apparently small format, locally designed stores “are more productive to run and staff and stock with inventory.”
That raises the question of comparing smaller to traditional formats to see why as the store gets bigger it becomes less productive.
This concept has been successful for many retailers over the years. We have learned a thing or two along the way that Kohl’s should keep in mind. This works better in dense urban environments where there are more customers within walking distance or near transit who will appreciate these stores. Walmart, for example, tried a rural approach to this and it wasn’t as successful. The other issue is keeping a really keen eye on product assortment. Understanding pack size, key items, grab and go in food — this will make a huge difference. You can’t just shed you worst items and call it an optimized assortment. Careful thought has to be put into what items will work best for the neighborhood and size of the store to make it successful.
In the UK, smaller format stores have proved very successful for many larger retail chains that previously operated hypermarkets. The smaller the store, the more critical the assortment and store merchandising layout. Space is critical, so you have to be much smarter about the use of that space. Smarter technology using AI can really target local demand and make a huge difference to the success of this format. Store specific merchandising layouts are critical to maximizing revenue and profitability. Not just whether sizes, local tastes or age profiles are different but all other factors. It’s tough for humans to take on all that – that’s what AI and computers are good at.
The smaller format is not the story here, but localization is. The essence for Kohl’s success in hyper-localization is to either distribute the function to the local store managers or enable data-driven technologies to capture localized differences (or both). Merchants and buyers can then leverage these inputs to select assortments, prices, and merchandise. What Ms. Gass is driving towards with her focus on data science is still maintaining centralization of localized goods and it seems Kohl’s will rely heavily on its data science. Hence good data vs bad will determine the success of the program. The other aspect that Kohl’s must look into is the distribution of local vs “core DNA” merchandise on the shelves. Shifting to a local-heavy ratio can translate into logistics challenges. Being too “core DNA” focused will lead to lack of differentiation, defeating the purpose of the initiative (and wasting costly data resources).
I think that when you take a known format and shrink it down, you better be good at product presentations. If you hear, “they used to carry X” too often, get your thinking corrected quickly.
A smaller footprint provides a foundation for better productivity on a per square foot basis. It also adjusts the service mix with less employees on the floor of the store to service the needs of shoppers and less checkout lanes. I love the idea of making it easier to shop the store, plus adapt style/fashion to the tastes of its shoppers by location.
This makes total sense for Kohl’s. The strategy around smaller footprints will resonate with shoppers and give Kohl’s another intersection with consumers. I also would not be surprised to see some repurposing of former spaces to emerge as mixed-use formats (fulfillment and store front). Hyper-localization, speed-to-market, and last-mile delivery are more than just buzzwords they are fast becoming table stakes.
Different markets may not need the larger stores. A city location may not need the larger footprint. The proper way to merchandise is to understand your local customer, which is why the hyper-localized approach can work. Furthermore, it forces the merchandisers to choose the right merch for the stores, which is what they should be doing in every store, regardless of size. The smaller store size just pushes the importance of proper merchandising.
As online sales increase, many retailers are experiencing diminished financial returns in their physical stores. Along those lines, having smaller formats in the mix of stores is likely a smart move as long as the assortment in those smaller footprints provides a sufficient array of categories and variety to attract shoppers. Despite all efforts to tailor the products to the community and demographics, if shoppers feel they are being too limited in their options in the smaller stores — vis-a-vis the larger Kohl’s stores — some may not find the smaller stores sufficient for their needs.
What’s in a name? Well, everything, right? Isn’t that the point of becoming known for something (and in this, let’s make that many somethings under one roof) and then the name speaks for itself? So, Kohl’s, like Target and Starbucks, is known to the general public, by name, as being about the same stuff, in each location, throughout the land.
Meanwhile, a Starbucks can localize their operations, easily and simply, by making a Chicago mug only for their Chicago operations, and so forth. A Target, too, can offer specific, albeit simple goods to a specific, area-based crowd. Kohl’s can also do this, in their smaller or even bigger stores.
But just doing something does not make it so. More would need to be done, if they want to be seen as truly local over interloper. However, those measures might make matters worse. Actual naming, like, as example, Kohl’s-LA, would signal true intent. But there’s no way corporate will pay for that. Just getting them to pony up for a buyer of local goods is a stretch.
Further to that point, it will be quite easy for Kohl’s to find nearby makers to sell them goods. I mean, what artisan doesn’t dream of the deep pocket buy of a big retailer? Yet these are the most dangerous alliances of all. From the moment those items appear in both a Kohl’s and “the little shop around the corner” guess who can best afford pricing them lower? Which can then create a no-turning-back point for the little guys.
Nevertheless, this won’t stop Kohl’s from doing what they say to all of us is such a wonderful thing for the individual places they operate. But I do not think it will be that way, really.