Around 1998 or so, under the stewardship of former Wal-Mart executive Pat Peery and under Larry Montgomery’s persistent nudging, Kohl’s Real Estate department was starting to get itself organized. In earlier years, Real Estate had essentially been the domain of Bill Kellogg, and in all candor it ran loosy goosy. Now there was the emergence of a far more formalized process for reviewing real estate opportunities.
Part of this more formalized approach was the creation of a spreadsheet that identified the potential number of Kohl’s that could be built in all the cities throughout the United States, based on population, demographics, family incomes, and other criteria. This spreadsheet was tweaked over and over again, as new data from newly-opened markets came in, as well as changes is acquisition strategies played out. For example, take over 13 former Bradlee stores in Boston, and that meant a delay in opening a new city in Arkansas or Florida.
Pat and his team also took a very hard look at the expansion of not only his former employer, Wal-Mart, but also Target, which along with Kohl’s was on an expansion tear throughout the 1990s. As an interesting sidebar, during much of the 1990s the signing of Target in a new real estate development was extremely influential in whether Kohl’s went ahead in opening in that complex, not unlike Pizza Hut coming in right after McDonald’s opened at a location in the 1970s. Almost every time, Target paid a premium, got the best pad on the site, and got top billing on the column signing/monument at the entrance to the shopping center. Our real estate team had a genuine respect for Target’s real estate group, and tried to gather as much information on them as we possibly could in developing our big-picture real estate strategy.
The question was often asked: How many Kohl’s stores can America support? While things were always in a state of review and re-review, it’s fair to say that in 2000 the company worked with a general number of around 1000 stores, assuming sales footage growth of about 15% a year.
As Larry Montgomery and his management team looked further out, it became apparent that the time was approaching that within five years the company was going to hit a saturation point of sorts. The company had always had a model of 20% increase in sales, fueled by a 3-5% comp store sales increase, and the rest in new store openings. Well, do the quick math and see that as your base of stores gets larger, the number of stores you have to open going forward gets much, much larger as well. Looking back, I think it caught management a bit by surprise. I remember when I left in April, 2000 we had fewer new stores planned for the years 2002, 2003 and 2004 than actually ended up being built. The numbers had to be revised upward, basically to make the math work.
In 2000, the idea of building a smaller store, to the tune of 50,000-55,000 square feet vs. the standard 86,000 now seen throughout the country, started to gain some steam. An initiative was launched to further develop the concept: it would have to involve going into smaller markets, cutting back on assortments, and other adjustments. Strategically, the smaller box could then become a major part of Kohl’s expansion at the end of this decade, after the current prototype started to hit the wall in terms of markets that could support those larger stores.
While very much part of the company’s real estate strategy, it was kept extremely confidential outside the company. In fact, there was very little build-up leading up to the opening of four smaller model stores in the Fall of 2002. While Kohl’s had earlier announced that stores indeed were going to be built in those markets, they did not indicate that they would be in the smaller format.
In an October, 2002 interview, Kohl’s President Kevin Mansell, when asked about the launch of the first four smaller format stores, said, “It’s a test. That’s all it is.” Six months later, at a fiscal year-end March, 2003 conference call with investors and analysts, Mansell had to be prodded to even comment on how the four stores were performing. His answer was a short: “We’re pleased with them so far” with no elaboration.
While Kevin certainly didn’t mean to deceive anyone, don’t believe it for a second that it’s “just a test…that’s all there is”!
To begin with, as mentioned earlier, Kohl’s always tests something new before they go ahead with it. They are incredibly slow to change. So to that extent, the first four stores were indeed a test. But once the test is proven to be right, or tweaked to make it right, Kohl’s will make the move. That may take a few years. But when they’re ready, it will become a deliberate, major part of the expansion. Fast forward to 2007, this has certainly been the case.
Consider all the additional stores that can be now added to Real Estate’s spreadsheet, as a result of the new smaller box concept. It extends new store growth of the life cycle of the company, whatever it ends up being, by five or six more years.