Kohl's digital transformation has more to worry about than bad weather

Profile picture for user slauchlan By Stuart Lauchlan May 23, 2019
Summary:
Riding on Amazon's coat tails is about to go national for Kohl's.

It’s never a good sign when rain stops play in your organizational transformation, but blaming the weather was one of the excuses rolled out by US retailer Kohl’s this week to explain away some pretty dismal first quarter numbers.

Even digital sales growth was decidedly ‘meh’ at an unspecified “high single digit”. Compare and contrast with 42% year-on-year growth at Target! There are some positives - mobile commerce makes up three-quarters of digital traffic and 50% of digital sales, while Buy Online, Pick Up in Store adoption is growing.

But it is to the retailer’s alliance with Amazon that CEO Michelle Gass points as a major digital success story. We’ve noted before that retailers have a choice to make about how they react to Amazon. Some scrabble to be like Amazon and throw everything at getting online at any price; others try to find a way to co-exist with the predator.

Kohl’s falls into the second camp, piloting a returns program for Amazon customers to give back purchases inside the nearest Kohl’s store. When we last looked at how this initiative was progressing, Gass was still in cautious mode - as we noted, there’s a thin line between co-operation and capitulation.

But with precious little else to boast about, the Amazon alliance is now “the single biggest initiative of the year”, she says. Come July, every Kohl’s store in the US will become a returns depot for Amazon. Gass says:

We and Amazon together feel this is a highly complementary breakthrough program that will offer all of our customers a great experience. We are incredibly excited about the potential of this program. It has been rigorously tested for the past 18 months in Chicago and Los Angeles, and more recently in Southeast Wisconsin. We have found the program to be highly successful in achieving our goals in creating a convenient and easy experience for both Kohl's and Amazon customers.

This is a tie-up that is a positive development for Kohl’s, she insists, driving engagement with existing customers and, crucially, attracting new ones. It’s also about driving traffic into Kohl’s stores:

Our top strategic priority is driving traffic, and this transformational program does just that. It drives customers into our stores, and we are expecting millions to benefit from this service.

Trials

The decision to roll-out the program nationally follows a lengthy test in local markets, most notably Los Angeles and Chicago, she adds:

We tested those for 18 months, so we have a lot of data. It was important for us and Amazon to feel really good about the results and the customer experience. And clearly we do feel really good because we're taking it across our stores.

I'd say the single biggest thing we saw and consistently across those markets - and it was consistent across time - was a pretty significant lift in traffic. Now, the bet for us is that some of that traffic converts over to sales and we did see that too… I think what's really key and what our data would suggest is that we're also bringing in new customer and we're bringing in a younger customer. And so as we think about the long-term value that is significant.

The model works. It works for us it works for Amazon. And importantly its part of our long-term strategy to create a great experience once the customer comes in the door to drive loyalty with those either further loyalty with existing customers and importantly create a new relationship with a new customer.

The working relationship with Amazon is now pitched by Gass as a competitive differentiator:

I feel very confident in the execution capabilities of our organization. That's something we're really strong on. And in terms of what the rollout looks like we learned a lot through the test. We've optimized. It's not an easy thing to do to get the whole end-to-end chain fully working and optimized on. Frankly nobody else that we can look to has created this type of experience…We do expect immediate benefits as it relates to once we turn this on in July. But it is an important long-term strategic priority for the company to acquire new customers.

My take

In common with other retailers, Kohl’s is also concerned about what happens next with respect to President Trump’s trade war with China. Gass says:

It's fair to say, it's still a very fluid situation right now. Our teams are working very closely with our vendors to make sure that collectively we've got a strong plan. So that's been of the highest priority for our merchant leaders and merchant teams…Obviously, we're all in this business paying close attention. What I will tell you is Kohl's has always had a very diversified supply base and that's been a strategy with been going harder at over the last couple of years. So I think from that standpoint, we're well positioned. But clearly if it's something more dramatic happens to other businesses like apparel, there's an impact to the industry.

Frankly that’s an additional problem that the firm doesn’t need. The Amazon relationship is a pragmatic one, but despite Gass’s claim, it’s one that is entirely replicable by other retailers with a bricks-and-mortar real estate portfolio. And that’s the big problem for Kohl’s - what’s happening that’s exciting, innovative and transformational that doesn’t involved riding on Amazon’s coat-tails?