La Habra, Calif. — Kohl’s is cutting a giant retail swath across five Southern California counties today as the Menomonee Falls, Wis.-based retailer stages its biggest expansion yet by opening 28 doors.
This story first appeared in the March 7, 2003 issue of WWD. Subscribe Today.
Analysts expect the entry to capture a sizeable chunk of the mid-priced market and perhaps unseat some long-standing local competition along the way.
As is Kohl’s custom, all 28 doors swing wide today alongside a massive advertising and promotional push that’s been communicating its focus on brand names, low prices and convenience to customers for two months. Eight stores have landed in Orange County, seven stores in Los Angeles County, three in Ventura County and five each in Riverside and San Bernardino counties. The stores average 89,000 square feet.
“The strategy is to create as much noise as possible,” noted Dana Cohen, an analyst at Banc of America Securities. “They know they need name recognition. They’ll create more buzz by doing this.”
Indeed, women with toddlers and teenagers in tow wandered into a unit here that quietly opened its doors a few days ahead of schedule, looking wide-eyed at the neatly merchandised concept featuring compact stroller carts, centralized checkouts, few interior walls and a circular “racetrack” aisle.
“There’s a shirt I bought at Robinson’s-May and it’s a little cheaper here,” exclaimed Jennifer Lopez, a 20-year-old Whittier, Calif., student.
Positive feedback is just what Kohl’s president Kevin Mansell expects, given the company’s practice of undergoing years of meticulous demographic research before entering a market.
In Southern California alone, it took three years to locate the right real estate and tailor the merchandise to the mostly single-level freestanding concepts (six of the 28 stores are two levels). The result is a broader assortment of street-active and true activewear, as well as expanded updated misses’ and petite departments.
Given the region’s lifestyle preferences, Kohl’s has added 50 percent more activewear here than in its units elsewhere, and has positioned the department close to entrances, prominently displaying Nike cropped workout pants for $32 and Gloria Vanderbilt velour tracksuits. Prices range from hoodies at $12.99 to pants at $17.99.
The misses’ department, also double the size of formats elsewhere, features more updated items including one of the must-haves of the season, a safari-inspired jacket from Nine & Co. at $74. The petite department, also twice as big, features a vast array of soft sweaters and linen pants from the retailer’s private labels, Sonoma and Croft & Barrow, with average tickets in the $30 to $40 range.
“If you walked a store in New York and you walked a store in Los Angeles today, you would see a significant difference in the assortment,” said Mansell, noting there would be as much as a 30 percent difference between the stores.
It’s this kind of attention to detail that has made Kohl’s one of the industry’s hottest growth stories. In the fourth quarter ended Feb. 1, a period Goldman Sachs analyst George Strachan called the retail sector’s worst in recent memory, Kohl’s cut costs in areas such as distribution and credit cards, growing its profits faster than sales. The chain said it earned $279 million in the quarter, up 19 percent from $233.8 million a year earlier. Sales rose 16.9 percent to $3.18 billion, while same-store sales rose just 1.2 percent.
In Southern California, Kohl’s has spent most of its efforts anticipating the needs of the area’s 6.6 million Hispanic customers who reflect Kohl’s focus on family and brand names. Kohl’s first zeroed in on the Hispanic customer last year when it entered the Houston market with 12 stores and practiced wooing the group with bilingual workers and signage. Each California store’s associate base reflects its neighborhood’s demographic. Mansell estimates about half of Kohl’s workers are Hispanic.
Having invested an average of $13 million for each store here, Mansell said he expects first-year sales to reach somewhere between 75 and 85 percent of an average store’s yearly sales, or $21 million. That means Southern California’s 28 stores alone could approach $400 million, considering there are only 10 months left in this year.
“What we’ve learned is that if we can have a significant density of store openings that will support aggressive marketing, we can often drive that percent of first-year sales faster from awareness,” said Mansell.
Kohl’s has spread its message to markets it hasn’t yet reached through national advertising, including 16 more stores set to bow in Nevada and Arizona this October. Three stores are slated for Las Vegas, 10 are set for Phoenix, two in Tucson and one in Flagstaff, Ariz. Kohl’s spent 3.6 percent of 2002’s yearly sales of $9.2 billion on advertising, or $331 million. Assuming Kohl’s would reach its projected increase of 20 percent in sales this year, national advertising dollars at the 3.6 percent rate could approach $400 million, according to Mansell.
“Our approach is to market aggressively so we’ve taken savings [national ad rates afford] and reinvested them into more markets,” said Mansell.
Three 30-second TV spots have been airing in the region since Jan. 12. The ads focus on branded merchandise the retailer carries, such as Mudd, LEI and Levi’s; the store environment, like shopping carts and hassle-free returns, as well as the diversity of people who shop there.
“We’ve been focused on educating the customer and creating excitement so they’ll check us out,” noted Julie Gardner, Kohl’s senior vice president of marketing.
Many analysts agree Kohl’s is well positioned to give some heady competition to such long-standing local fixtures as Mervyn’s and Robinson’s-May. Kohl’s arrives in the heart of Mervyn’s country, which has 124 stores in the state. Most analysts single out the Hayward, Calif.-based retailer as having the most to lose with the Kohl’s expansion because of its lack of financial wherewithal, lack of price leverage and little push from parent company Target Corp. With its “Big Brands, Small Prices” motto, Mervyn’s launched full-page ads in newspapers this week touting the Gloria Vanderbilt brand with the slogan, “The thrill of a bargain. The agony of too little closet space.”
Robinson’s-May unveiled a smaller concept at the Irvine Spectrum in Irvine, Calif., on Oct. 9, admittedly taking cues from Kohl’s with a greater emphasis on casual styles, centralized checkouts and shopping carts.
George Whalin, chief executive officer of Retail Management Consultants in San Marcos, Calif., believes Kohl’s will no doubt succeed, but will stop short of being the region’s dominant retailer. “There are too many other larger retailers here,” he said, citing Wal-Mart with 133 stores in California; Target with 175 stores, and J.C. Penney Co. with 98 stores as among the stronger players. “Dominating Southern California is very difficult, if not impossible.”
Mansell said he is particularly aware of Penney’s strategy of offering national brands like Levi’s, LEI, Mudd and Unionbay at prices lower than other department stores. “If there’s one company that’s most similar to Kohl’s from a content and concept standpoint, it’s Penney’s,” he said.
Part of Kohl’s strategy is aggressive pricing by leveraging its size to a narrow vendor base of some 50 vendors that account for more than 60 percent of its business. Kohl’s advertised a markdown of branded goods by 30 to 50 percent to celebrate opening weekend, a practice sources say happens almost immediately after the goods arrive in stores.
But convenience, not price, has the tendency to differentiate Kohl’s, maintains Mansell. “Price is literally the way you get admitted into the customer mind-set, but they will not shop you based on that.”
Peter Camaniti, a senior account executive at Los Angeles-based denim brand LEI, who works closely with Kohl’s, agrees.
“They aren’t successful because they have the lowest prices,” he said. “It’s the right formula, the right brands, the right presentation, the right advertising and the right retail location. It’s the combination.”
Marty Weisfeld, a partner at New York-based Mudd, expects Kohl’s West Coast entry to boost his business by 10 percent. “They’re probably one of the most legitimate people we do business with,” he said. “They don’t break any rules. And they pay on time.”
The 28 Southern California stores account for about a third of the 80 stores Kohl’s plans to open in 2003, bringing its total to 537 by yearend. Between 95 and 100 stores are expected to fill in existing regions in 2004. In California, Mansell said the chain will extend its reach to the San Diego, Fresno and Sacramento markets. The greater Los Angeles area remains a key focus.
Mansell declined to identify how many stores are ultimately planned for the metropolitan area, but loosely indicated that an analysts’ prediction of 40 might be on the conservative side.