One of the more intriguing developments in mass market retailing in recent weeks was the announcement by Kohl’s Corp. chairman, president and chief executive officer Kevin Mansell that the department store operator will team up with Aldi, the hard discount grocer, as part of a program designed to optimize its store base. During a conference call with Wall Street analysts following the release of Kohl’s very solid results for the quarter and fiscal year ended February 3, Mansell said that the company will scale back selling space within about a dozen locations and, at between five and 10 of those stores, turn the real estate over to Aldi.
The partnership should prove beneficial for both companies. The effort by Kohl’s to rightsize its stores — which range from 35,000 to 88,000 square feet — to match conditions in individual markets will accelerate. The retailer is intent on becoming “operationally smaller” where appropriate. By honing the merchandise mix and modifying the store design, the intention is to enhance the shopping experience and maximize profitability. The addition of Aldi to the shopping centers where the department store chain typically does business will also generate a high level of repeat customer traffic.
By teaming up with Kohl’s, Aldi will gain access to desirable real estate as it looks to rapidly build its already formidable presence in the U.S. market. In June the German company stepped up its aggressive growth strategy — a $1.6 billion program to remodel 1,300 stores by 2020 — earmarking an additional $3.4 billion to expand its store base in this country to 2,500 by the end of 2022. If, as expected, Aldi and Kohl’s flourish side by side, the supermarket chain may be able to capitalize on hundreds of additional real estate opportunities.
Mansell indicated that by the end of the year some 300 of Kohl’s 1,158 stores will be converted to a smaller format. Aldi is likely to get first crack at the excess store space, but Mansell said that other businesses that generate a lot of consumer traffic, including various kinds of retailers and health clubs, would also be suitable.
The partnership with Aldi isn’t the first time that Kohl’s has dared to do things differently. In arguably the most notable example of its willingness to go its own way, the company is working with Amazon.com, the bête noire of brick-and-mortar merchants, selling the latter’s technology products and serving as a drop-off location for Amazon returns.
Rapid-fire changes in consumer expectations and shopping patterns make the kind of thinking exhibited by Kohl’s management — thinking that at one time might have been viewed as eccentric, if not downright reckless — a necessity for traditional retailers who want to continue to prosper. Fueled by advances in digital technology, the rise of e-commerce companies, especially Amazon, has forever changed the rules of the game. During last year’s holiday selling season, Amazon accounted for 89% of online sales, according to Earnest Research, despite stepped-up efforts to compete in that sphere by Walmart, Target Corp. and other brick-and-mortar retailers.
That’s just part of the challenge. As a new study from Deloitte Insights makes clear, the retail marketplace — where, despite the phenomenal growth in online business, 91% of sales still occur in traditional stores — and the economy as a whole are evolving in ways that work against the idea of a mass market. The result of research that took more than a year to complete, “The great retail bifurcation” points to a hollowing out of the middle market, where retailers have used a combination of price and promotion to bring value to customers. The market share they’ve lost has gravitated to opposite ends of the spectrum. Retailers focused on delivering the lowest possible price and those with premium offerings are increasingly winning the allegiance of consumers. According to Deloitte, the former’s revenues rose 37% during the last five years and the latter’s increased 81%, while those in the middle generated a mere 2% gain.
The shifts are playing out against the backdrop of widening income disparity. “Despite positive macroeconomic trends, it’s actually been an abysmal period for most Americans,” the report states. “For the past 10 years, the lower 40% income group has found itself struggling to keep up with expenses, while the middle 40% has seen its income shrink. Thus, for 80% of consumers, the last decade has generally represented a dramatic worsening of their financial situation.”
With the world around them changing so dramatically, mass market retailers can’t afford to blindly cling to strategies that were developed to address very different market conditions. The best of them realize that and are working to reinvent the way they do business. To cite just a few of many possible examples: Walmart is transforming itself into a true omnichannel merchant; CVS Health and Walgreens Boots Alliance are well on the way toward making the drug store into a true neighborhood health care center; and Albertsons Cos. is on the cusp of establishing a new retail paradigm, one centered on the intersection of nutrition and health, by leveraging the synergies created by its pending acquisition of Rite Aid Corp.
Like Kohl’s and Aldi, those retailers and others like them understand the truth of the idea expressed by Giuseppe Tomasi di Lampedusa in his great novel The Leopard: “If you want things to stay as they are, things will have to change.”