As the senior management team was being assembled during 1986-1989, key aspects of the Kohl’s business model started to take shape and form. The juggernaut that Kohl’s would eventually become was in many ways still in its infancy. The company’s future dramatic growth was well planned and innovative. Let’s see how this model developed.One observation that Bill Kellogg and his team made early after ‘going to school’ on Mervyn’s in California was that despite there being a great many layers of retail already in the marketplace, there appeared to be an opportunity to cater to two-income families on a fairly tight budget that viewed department stores as perhaps a bit too pricey, but wanted higher quality than what was offered in discount stores, like Wal-Mart and Target. They defined their target customer as a woman in her 30s or 40s who has kids. The majority of these customers were from dual-income households, with annual total family income between $20,000 – 70,000 (today, that range is closer to $40,000 – 90,000).The Kohl’s team further identified their target customer as being quite loyal to brands such as Levi’s, Docker’s, Krups and Jockey. And while they knew these customers would be attracted by the brands, they would love the shopping experience even more if the brands were always on sale. We found this out the old-fashioned way, not through expensive market research or trendy focus groups. Instead, we went to Mervyn’s and other competitors and carefully studied how they did business. The strongest impression we came away with was that shoppers really loved buying name brands. It was a lesson the senior management never forgot.Kellogg recognized that traditional department stores had major overhead associated with the presentation and selling of their merchandise. Department stores like Macy’s and Federated had built international reputations as phenomenal merchandisers, creating what the former CEO of Macy’s, Ed Finkelstein, would call ‘presentational theatre’ in the stores. They spent huge capital expenditures building extravagant ‘stores within a store,’ and launching major resources such as Ralph Lauren/Polo, Tommy Hilfiger and DKNY. Dramatic mannequin presentations and other examples of ‘visual candy’ characterized these stores’ business models. It was thought that these efforts would help shape the customer’s views as to where she preferred to shop.Bill Kellogg and his associates weren’t so sure. While all that glamour and glitz logically would appeal to an upscale, urban customer living in New York City, could there be an alternative? Was there some way they could ‘leverage’ the huge amounts of money and effort that the traditional department stores had invested in creating all this name recognition and appeal of the big name brands, without having to really ‘pay’ fully for the privilege? Yes, they concluded. IF the shopping experience in the end got the customer what she ultimately wanted: the merchandise! Focusing on their Midwest base, Kellogg believed that if he and his merchants could obtain the big name national brands and create some credibility, then customers would forgo all the fancy-schmancy, allowing Kohl’s to run their stores with a much more lower expense rate.In addition, Kohl’s management looked at JC Penney’s, Sears and other traditional store chains. For the most part, they all had large stores, usually in excess of 200,000 square feet, located in multi-level shopping malls. Stores within a particular division were not uniform in their size and ‘footprint’, in terms of the locations of entrances, escalators, dock doors, offices, checkouts and aisles. As a result, it was very difficult for these major store chains to standardize the process involved in the ordering and presentation of their merchandise. There was no real way they could ‘cookie cut’ the process, adding yet an additional expense to the business model. Not surprisingly, these department stores weren’t particularly efficient or productive, with sales on the order of $150 per square foot.The Kohl’s senior management team started to develop the position that despite the overall proliferation of brick and mortar retailing taking place throughout the country (new stores seemed to be popping up all over the place), a significant portion of the population was being underserved.There were a number of other shortcomings at these major stores. A good example comes from JC Penney. Store Managers were empowered at the time to get involved in much of their own buying of goods for their individual store based on their customers’ perceived needs, seasonal issues in the marketplace, etc. For a management team like Kohl’s, this de-centralized approach was antithetical to a low-cost strategy for managing a business.Bill Kellogg and his team started to ask some key questions:–Was there not a simpler, smaller alternative to a large, multi-level store like a Sears or a Penney’s with so many departments, mazes of fixtures and aisles, and hard to find check-out stands throughout the store?–Wouldn’t customers appreciate a smaller store that was much easier to shop in, with one centralized check-out for ease of shopping?–Why not focus on offering the customer value in a clean, bright store where everything is easy to find, and almost always in stock? Isn’t that a better alternative to what the traditional department store guys built, huge monuments to ‘fashion’? After all, isn’t making the customer feel like she is getting a deal at the heart of this strategy? And were the shoppers really satisfied with stores that talked a lot about service but weren’t delivering on the convenience value-added proposition?–If a much more efficient, low cost department store could be built and properly managed, couldn’t you get more aggressive in promoting your branded and other products by offering more frequent and steeper discounts than the big national chains?As Kellogg and his team began to answer these questions, they formulated a strategy that was described within the organization as creating a ‘wedge’ between discounters and traditional department stores. Over the years, Kohl’s has been described as a ‘niche’ or hybrid. There is a lot of truth in that. Kohl’s brought to retailing the best aspects of both ends of the spectrum: national brands and pleasant shopping environments from the traditional department store models, and aggressive price promotions and low-cost culture from the discounters.Demographics suggested there was a large group of customers out there ready for this concept. In the early 1990s Kohl’s positioned itself squarely in the middle between the discounters and the traditional retail players: we hoped to have the Target customer trade up and we hoped over time to attract the traditional department store customer too, people who found our value proposition with national branded products on sale compelling. In other words, we were trying to persuade them that we could offer the best of both worlds.While these efforts were hampered in the early days by the initial challenges of getting major vendors such as Nike and Levi’s to sell to Kohl’s, the company remained focused on its objective of winning over these customers. Of course, over the years as Kohl’s experienced great success in attracting national branded product, the store also ‘moved upstream’ in attracting a slightly more affluent customer. When asked a few years ago who is the competition, Larry Montgomery took straight aim at the traditional department stores: “It’s all the people that sell national brand apparel. You are talking about the department store chains—May Co.(since merged with Federated and now Macy’s), Federated, Dillards, and Marshall Field’s(also now Macy’s), as well as J. C. Penney and Sears.”Fifteen years later, the essence of the business model created by Bill Kellogg and his senior managers in the 1980s still prevails. In a rare interview, Larry Montgomery was asked in 2002, “What does Kohl’s brand stand for?“ His reply:“Brands, value and convenience—and not one at the risk of any other. It’s having the best prices, being in stock, having clean restrooms and stores, having well-lit parking lots, and having easy access in and out of the stores”When something isn’t broken, why fix it? The Kohl’s business model has evolved, to be sure, and adapted to changing economic conditions. But the basics have held firm. Let’s examine some of the details.