Amazon was given a
warrant to buy 1.7 million
Kohl’s shares as the retailer agreed to accept the web giant’s returns at its stores.

Amazon and Kohl’s Corp. are making it official.

And the tentative partnership that was solidified Thursday — with the retailer agreeing to accept Amazon returns at all its stores and the web giant receiving a warrant to buy up to 1.1 percent of Kohl’s — illustrates just how much Kohl’s and Amazon have changed their approach to serve shoppers with both clicks and bricks.

The rise of a new retail power couple also signals an important shift in the broader competitive landscape.

Kohl’s has been tentatively working with Amazon since the fall of 2017, when it started to sell Amazon gadgets and also test the return concept that is now being rolled out more widely. The retailer accepts Amazon items, without a box or label, and returns them for free, drawing in foot traffic just as retailers of all stripes are struggling to capture an increasingly digital consumer’s attention.

“If I was a Kohl’s competitor, I’d be looking very hard at this and say, ‘How should I respond?’ You’ve got to respond. You can’t ignore it,” said Antony Karabus, chief executive officer of HRC Retail Advisory.

Karabus praised Kohl’s ceo Michelle Gass and the way she’s addressed two of the most vexing problems for legacy retailers — too much space and too few shoppers.

Gass clearly isn’t afraid to think out of the box when it comes to reshaping the department store model — perhaps because she came from outside the sector, joining Kohl’s from another retailer that lives on innovation: Starbucks. In her short time as ceo — a role she took on last May — she has moved to reduce the size of Kohl’s stores, partnering with third parties, such as the gym Planet Fitness, which will take on some of the space in Kohl’s stores and draw traffic. She is also moving to introduce more exclusive brands, recently signing a deal with the Olsen sisters to introduce their Elizabeth and James label only at Kohl’s.

“The way I think about competition is that we compete with practically everyone. The lines have blurred across brands, retailers and certainly channels,” Gass told WWD earlier this year. “We’re certainly unique. We’re positioned so differently. We go against the competitive [grain]. The whole idea of location relative to traditional department stores is different because we’re located off the mall. We drive home the notion of ease and convenience. Digital has put the world at the customer’s fingertips. I say that I want things to be strategically surprising. We really take advantage of all the data we have and being true to the customer. We’re making all the bold, unexpected, disruptive moves we can make to keep the customer interested.”

By accepting Amazon returns — and the costs of processing them — the department store retailer is driving even more traffic to its store base.

“She’s trying to offset the unavoidable traffic deceleration that every retailer’s facing by creating another reason for people to come into the stores,” Karabus said of Gass. “That is a very good strategic move.”

It’s a strategy, though, that begs the question of just how close Kohl’s and Amazon will become.

Kohl’s recently expanded its product relationship with Amazon and will start carrying merchandise from the online merchant in more than 200 stores.

And Amazon — which accounts for about half of the e-commerce market — certainly has a taste for more retail. It has launched its own store concepts, including the cashierless Amazon Go concept and Amazon 5-star, and spent $13.7 billion to buy Whole Foods in 2017.

Kohl’s has stores within 15 miles of about 85 percent of U.S. consumers and, like Whole Foods, is well established in its sector.

After the deal on Tuesday sent shares of Kohl’s up 12 percent to $75.51, the retailer’s market capitalization tallied $12.3 billion — very much bite-size for Amazon, which is valued at nearly $947 billion.

“Would they end up buying Kohl’s and then putting the full weight of Amazon’s omnichannel [capabilities] and Amazon technology into Kohl’s? It’s not out of the realm of possibility,” Karabus said.

The warrant for Amazon to buy up to 1,747,441 Kohl’s shares vests over five years, starting in January 2020. The warrant shares carry an exercise price of $69.68, below Kohl’s current stock price.

Certainly, Amazon is a retail wild card. The company not only has access to about as much money as a retailer would want to put to work, it has also always marched to the beat of its own drummer and has a stated goal to go big.

Founder and ceo Jeff Bezos, in his letter to shareholders this month, said: “As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures.”

Owner of the Washington Post and Founder of Amazon Jeff Bezos Delivers Remarks at an Event Celebrating the New Location of the Washington Post in Washington Dc Usa 28 January 2016 United States WashingtonUsa Washington Post Grand Opening - Jan 2016

Jeff Bezos  Reynolds/Epa/REX/Shutterstock

Simeon Siegel, an analyst who follows Amazon at Instinet, said: “This is Amazon laying more groundwork in brick-and-mortar. It does feel like the next generation of merging online and offline.

“Amazon is trying to make it so you can find them anywhere, so whether it’s the locker [for consumers to pick up goods], whether it’s Kohl’s, Amazon wants to be the everything store everywhere,” Siegel said.

Just what the relationship is and will become between the two companies is in flux, but certainly it’s a connection that other retailers need to pay attention to.

“There would be no need to have a stake in the company if Amazon simply viewed them as a place to park a locker,” said Siegel, who added Amazon could also simply view the expansion with Kohl’s as an opportunity to further “test the waters.”

Kohl’s started working Amazon on returns in 2017 and expanded the effort to currently help consumers send back goods bought through the web giant in 100 doors across Los Angeles, Chicago and Milwaukee. Now the feature will be rolled out to the retailer’s entire 1,150 store fleet.

That move will cost the retailer, but also drive sales. Kohl’s has been carefully testing the balance between the two and thinks it tilts in the favor of expanding with Amazon.

In a regulatory filing, the retailer said the returns program would impact “on sales and selling, general and administrative expenses” and that it would update its expectations when it releases first-quarter results.

“Amazon and Kohl’s have a shared passion in providing outstanding customer service, and this unique partnership combines Kohl’s strong nationwide store footprint and omnichannel capabilities with Amazon’s reach and customer loyalty,” said Gass. “This new service is another example of how Kohl’s is delivering innovation to drive traffic to our stores and bring more relevance to our customers.”

As more Amazon customers appear be turning into Kohl’s shoppers, the big question is whether the two groups of customers will one day become one and the same.

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