Low Cost Culture (part of Chapter 3)

With all the news in recent years about corporate accounting scandals, the public has become well acquainted with the dynamic of corporate culture. It all begins at the highest level. Sure, when things go well the pubic turns conquering CEOs into superstars (Jack Welch, Bill Gates, etc.). But when things go bad, the fall from grace also starts at the top. As the old saying goes, the fish rots from the head down. The excesses of Enron, Worldcom, and Adelphia, for example, sadly illustrate how senior management ruined their companies. These top people defined corporate culture at every level, in how they set up working environments, in how they traveled and entertained, and how they spent the company’s money.

The term ‘corporate culture’ touches on many different facets of how a company is managed and how its employees approach their work. The overall attitude and perspective of the company and its employees helps form the picture. Yet perhaps the most defining aspect of corporate culture involves how senior management manages the company’s money: obtaining new business, attracting employees, retaining employees, and rewarding employees. And of course, how they spend money on themselves.

Before joining Kohl’s, I had experienced disparate corporate cultures. Not surprisingly, the differences were most striking when it came to how the company’s money was spent. For example, during the eight years I was with Macy’s, we spent money lavishly, and in retrospect, with little regard to how it affected the rest of the organization, much less how it impacted the bottom line. This was particularly evident in the years following the ill-fated management-led leveraged buyout in 1986, leading up to the bankruptcy filing in early 1992. Headed by Ed Finkelstein, R. H. Macy & Co. experienced enormous success in the 1970s and was considered to be one of the dominant traditional department stores in their trading market. Through the vision of Finkelstein, strategies were initiated that took merchandise presentation to a new level. For example, with Macy’s launch of The Cellar in the basement of the Herald Square store in downtown New York, Finkelstein took on uptown arch rival Bloomingdales. Customers at Herald Square were treated to dazzling visual displays in a series of enclaves offering the latest in housewares and food. Other improvements included the introduction of first-floor boutiques which frequently rotated the hot items or fashion trends of the season. A major renovation of the linens and domestics departments took place. Terms like ‘presentational theater’ and ‘pop and sizzle’ became mainstays of the corporate lingo. The company went to enormous lengths to create ‘spectacular’ selling environments, headed by an extremely talented Director of Visual Merchandising, Joe Cicio, who became renowned for playing to Ed’s large ego.

Similarly, the rest of the Macy’s stores were upgraded during the mid to late 1970s, with customers responding quite favorably, resulting in some of the best comparable store growth in the country during that period.

To be sure, during this time Macy’s put a major emphasis on attracting and retaining some of the best retail talent in the country. The company had a world-class executive development program. Going through the Macy’s executive training program out of college was like getting a retail version of a Harvard MBA. So people were well compensated at a relatively young age. And like most New-York based retailers at the time, along with the position came a lot of perks.

Somehow the idea of ‘pop and sizzle’ transcended the selling floor and came to include the pampering of executives. This ultimately proved to be disastrous for the company. Much of it was ego-driven, and this culture of ‘perks’ and privilege pervaded the organization; in fact, it personified the organization. The lavish lifestyle of the top corporate execs were emblematic, it was thought, of the company’s success. And Finkelstein spared no expense. At his urging, the ‘back of the house’ was upgraded: corporate offices were palatial, with access only by private elevator. Finkelstein would often have lunch outside his office on his private balcony. The place took on the feel of an upscale residence more than a place of business. And when the executives were on the road, they took their perks with them. Everyone traveled first class. The senior executives had limos with personal drivers. Joe Cicio refitted the company’s Gulfstream jet with improved interior decorations. Were these Hollywood superstars or hard working businessmen? The line became hopelessly blurred.

Time for some perspective. While rewarding your key executives appropriately in a highly successful company is in itself an important part of capitalism, living this ‘large’ and establishing this kind of ‘high-cost’ corporate culture creates all kinds of challenges when times call for a change. To make the assumption that the business situation will never change, that things will always remain rosy, is a gigantic miscalculation.

And indeed, the good times were about to end. Following the LBO in 1986, Finkelstein and his trusted advisors, notably Mark Handler and Mike Ulman, embarked upon a strategy that was headed for disaster. While we all stepped on the gas to drive volume, and generated impressive sales gains in the first couple of years, we did very little to pare down expense. We still lived large, flew first-class. I remember when the Macy’s entourage came to Los Angeles following our acquisition of Bullock’s. We all checked in at the Bel-Air Hotel and stayed there for weeks! When you’re living in paradise, you don’t want to leave. When any Bullock’s senior executive traveled to Atlanta for a meeting at Macy’s South headquarters, we all stayed at the Ritz-Carlton across the street of the Peachtree store and ‘corporate.’ When Ed and entourage would visit, they would fly in on their company-owned Gulfstream jet, and take a limo to the stores. What kind of message does that give to your employees, the vast majority of whom were making less than $9.00/hour? Perhaps more importantly, what kind of message is it sending to yourselves, the top executives? Is it going to put you in a mindset of keeping down costs?

Long story short, we never did get the expenses down to help pay down all that debt associated with the LBO, and the company filed for bankruptcy in 1992. All of us (myself included) who were part of this ill-fated leveraged buyout realized that we had screwed it up. But as I look back and see just how loose we were with expenses, it’s no wonder we ended up where we did. It was a great–but lost–opportunity and learning experience, and I have my worthless Macy’s Stock Certificate No. 5012 framed in my home office as a reminder of how important the fundamental components of a business model needs to be for a company to succeed.

In my next experience of fiscal corporate culture, I was exposed to a whole new world, where virtually every monetary issue was under scrutiny. After leaving Macy’s six months before they filed for bankruptcy, I took the family and headed off to Canada, and joined the Toronto-based Hudson’s Bay Company, the oldest retailer in North America. Hudson’s Bay was the parent company of The Bay, a group of traditional department stores, as well as the “Wal-Mart of Canada,” Zellers (before Wal-mart actually arrived in that country in 1994). At the time, Zeller’s could do no wrong, almost always displaying exceptional financial performances. The Bay, on the other hand, had troubles with making the business model work; in many respects the same kind of issues that plague the May’s and Federated’s today: tremendous margin pressure from the discounters, rising labor as well as fixed costs, and, most troubling, difficulty getting enough customers through the door.

From the first day I started as an Executive Vice President of The Bay, I saw that there was an incredible emphasis on expense management. There was an expectation in the corporate culture that all executives discussed expenses whenever and wherever they could. Unlike my experiences at merchandise-driven Macy’s, where a store visit would primarily entail a walk-through of the selling floor with the Store Manager and his management team and discussing sell-throughs of the merchandise, store visits at The Bay reflected a striking difference of corporate culture: they would start, and often end, in the manager’s office, where the Store Manager would review their expenses line by line, and make commitments to attain mutually agreed upon goals. It was rarely about the customer. It wasn’t about the shopping experience. But it was very, very much about making the profit projection, no matter what. It was definitely a 180 from Macy’s, but something told me that that this wasn’t exactly the right way to go either. Shifting from one extreme to the other was not the answer.

At Hudson’s Bay, our low cost culture was worn on our vests like a badge of honor. We flaunted it whenever we met with vendors, particularly with American manufacturers; HBC’s CEO, George Kosich, would go out of his way whenever the opportunity presented itself to highlight the difference between our tight control over expenses and the recklessness of his competitors south of the border.

At The Bay, which was suffering during this time with unfavorable dollar exchange rates (prompting a regular exodus of Canadian consumers to ‘cross the border’ and shop at the malls at Buffalo and a hundred other points in the United States), I would offer that never in the history of retailing was there as much focus and pressure to ‘make a month’, that is, make in-the-month decisions to adjust variable expenses, and create last-minute sales to ensure that you hit the statistical goals. While the idea of adjusting your game plan to accommodate changing business conditions is Business 101, the way we went about it was extremely short-sighted, creating all kinds of zigging and zagging. It never let up, and it was a heavy burden on the organization. The whole idea of ‘constant scrambling’ became part of the culture. Often one could look at the decisions that we hastily made and characterize them as penny-wise, pound-foolish. It was a very challenging business model to help manage and direct, much less be those poor guys in the stores at the receiving end of last-minute ‘about faces’ and changes to the promotional calendar, and the necessary re-do’s of floor and signing set-ups. I think a lot of department store retailing is like that today, and it isn’t a whole lot of fun.

So when I began to look at Kohl’s in 1993 as a new career opportunity, I felt that I had experienced both ends of the spectrum in a very real and concrete way. I knew the ups and downs of both approaches. I had lived through the good times and the bad, had seen the best and the worst. After I joined the company in 1994, I soon confirmed that Kohl’s has a corporate culture of frugality that arguably is one of the best-managed in the retail industry. Low cost culture started early in the company’s history, it was even-handed, played no favorites and pervaded the entire culture of the company. It was supported at the top: everyone flew coach, we all stayed at Budgetels, later Hampton Inn and Baymont, and there were strict per diems. The store district managers drove Honda Accords (Regional Managers drove Camry’s or something similar). While one might argue about the safety of these managers rushing from store to store, often in lousy weather conditions, in a small vehicle like a Honda, it was a regular reminder to all those who came in contact with that car that the company watched over its expenses. It’s a cliché to say a picture is worth a thousand words. But it’s true.

Corporate offices tells a lot about a company. At Kohl’s, for many years it was appropriate to describe them as Spartan: more recently ‘understated’ would be the right word. Still, the emphasis has steadily remained on keeping costs down and never going beyond what is reasonable when it comes to appearances. The first corporate offices in the 1980s were located in the basement of the Brookfield, Wisconsin store. As a former executive who worked there says, “It was really rough. There were no windows, everyone was really cramped, we shared phone lines and did whatever we could to save money. That was the beginning of low-cost culture.”

Even after eventually moving to larger quarters a few miles north in the late 1980s, visitors experienced no grand entrances, foyers or open spaces. The offices were built on the cheap. It was clean and safe. A few years later, as the company growth plans required yet another move, they purchased a large tract of land in the same area and built what is now the company’s corporate headquarters. Built in 1996 and subsequently having undergone some additional expansions, the Kohl’s headquarters is a handsome facility with large windows.

But go inside and you quickly pick up the low-cost culture embraced by everyone who works in the building. It’s interesting to note that no senior executive had a personal secretary. In fact, for years, Bill Kellogg, Jay Baker and John Herma – CEO, President and COO – all shared one secretary! And if a senior executive at corporate wanted better furniture, he was expected to pay for it himself. This was a company that went out of its way to reinforce the costs savings concept. This extended all the way to the top. At least until Bill Kellogg’s retirement, most people in the company did not ‘live large,’ despite the fact that they had financial riches beyond their wildest expectations. The top guys have lived in homes in Milwaukee that, we can safely say, will never be featured on MTV’s “Cribs.” Very nice, mind you, but not in the top tier of homes in the area.

Analysis of the Kohl’s business model reflects an emphasis on keeping expenses low and attempting to leverage the company’s growth by reducing selling, general and administrative expenses (S, G & A) as a percent to sales. In fact, as the largest variable expense, Kohl’s has managed to run some of the lowest selling costs in the industry. Let’s take a closer look.

Sales Associates – The number employed by Kohl’s at each store is small compared to competitors. The company is able to make this happen through a variety of means. The checkout stands are centralized, not scattered throughout the store, and there are not very many of them. And the sales associates who are manning the selling floor are expected to quickly come to the checkout stands to lend a hand if the lines get too long. Their jobs are to either ‘work’ the selling floor in setting up or taking down sales, filling in stock and keeping the fixtures sized and merchandise properly folded and presented or to check out customers courteously and efficiently. That is where the emphasis is – they are paid to “Smile and Say Hi” and keep performing their assigned tasks vs. the traditional department store expectation of “Acknowledge and Approach”(i.e., drop what you’re doing, walk up to the customer and engage them, even if that means accompanying them to the fitting rooms).

Buying line – This is another area where Kohl’s has effectively clamped the lid on costs. The company had just under 50 Buyers in 1995, and even by 2002, with so much expansion, there were only about 55 Buyers. An incredibly low number when you consider the volume they are handling. This is significantly fewer buyers than traditional department stores. And yet they have been trained in such a way that the company’s ability to purchase the products they want and need has not suffered.

Stores – Kohl’s is not weighted down, like so many of its competitors, by overmanagement. There are only four salaried execs in a Kohl’s store. These are the Store Manager, a combined Personnel /Operations Manager (commonly know as Pers/Ops), and two Assistant Store Managers (each running their respective areas, Apparel /Accessories, or AA, and (Children’s/Footwear/Home, or CFH).

Compare this to when I was the Store Manager of the Macy’s in the Dallas Galleria in 1988, illustrative of a larger traditional department store: me, the Store Manager, one Councillor (sort of a lead assistant store manager), 5 ASM’s (assistant store managers), 25 Department Managers, 7 Assistant Department Managers, Dock Supervisor, Loss Prevention Manager, Visual Manager—over 40 salaried executives! Yeah – 57 million in sales in the first year, but look at the expense at a rate to sales. Which of these scenarios actually results in a more profitable bottom line?

That’s the whole point. When you go down the spreadsheet and look at every variable expense, KSS had a laser beam focus on keeping things lean. And this allowed for much lower S, G & A vs. the traditional department stores. It was our competitive edge.

When you consider the high-growth mode the company has enjoyed over the years, one can appreciate how the adoption of a genuine low-cost culture has paid huge dividends. But it came with a lot of planning, intense dedication, and, make no mistake about it, a certain amount of sacrifice.

MCW & Michael Vick No Longer Have Something in Common

It’s official.  The Medical College of Wisconsin(MCW)  Department of Physiology, headed by one of the most respected yet old-school veterans in the field,  Dr. Allen Cowley, has finally relented to public pressure and will no longer be killing dogs in their student labs.  And earlier this week, on Monday, November 26, 2007, the New York Medical College also announced that it will be ending it’s live dog lab, the fourth and last New York state medical school in 18 months to end this outdated practice.That’s the good news.  The bad news is that MCW will still be one of only 10 medical schools in the entire U.S. that will continue to use live animals in these classes:  now, instead of killing dogs, Dr. Cowley will oversee the killing of pigs.  To contact MCW directly to voice your disapproval over the use of live animals, call 414-456-8277.  And to learn more about this topic, see  www.pcrm.org/resch/meded/ethics_medlab_list.html.

Zak Black - Fall, 2004 (Mequon, Wisconsin)

The Zak Black store was opened in August, 2004, and closed a few short months later. Here are some interior and exterior shots of the store.

        

Connections.....Wisconsin Humane Society

Here is a notice that ran in early 2007 in the Milwaukee Journal Sentinel in support of trying to get the Medical College of Wisconsin to stop killing dogs in their physiology labs. This was part of a significant campaign, involving the use of a billboard, having a press conference at the Wisconsin Humane Society, and later, and having well-publicized protests in front of the medical college. The efforts have seem to have paid off. It appears that MCW will not be killing dogs ever again in their student labs, and that their old-school dean of the physiology department, who just couldn’t bring himself to changing an antiquated and inhumane practice, will hopefully be retiring soon. Stay tuned.

Narrow, Deep & In-Stock Assortments (part of Chapter 3)

As the Kohl’s business model evolved and became more fine-tuned, senior management grew increasingly familiar with the shopping habits of their expanding customer base. Some of the strongest sales, which customers were buying in large quantities, were in areas of promoted apparel basics such as socks, hosiery, khaki pants, underwear and tee shirts. Not surprisingly, the mantra around the buying office became “develop ‘commodity’ businesses.” This line of thinking was particularly apparent in the roll-out of major programs of denim jeans in the ladies, men’s and eventually kid’s departments.While there had always been an emphasis on maintaining narrow and deep assortments in the stores, the challenge to be in-stock in the sizes and colors that were advertised, not to mention simply expected by the consumer, proved to be a gargantuan task, especially since the company was growing at the rate of 30% a year.There has been so much improvement in this area that Kohl’s is today considered to have some of the best in-stock positions on an ongoing basis of any national retailer. But it wasn’t always like that.Around 1994, when I joined the company, the stores were constantly complaining about out-of-stocks merchandise. Weekly conference calls allowed the Regional and District Managers in the field to call headquarters and discuss what we liked to call “opportunities” (aka, things that the company was screwing up!)Larry Montgomery, as the Director of Stores, started to hear the growing chorus of complaints about our in-stock positions on supposed “Never Out” programs (such as white athletic socks or basic tee shirts or Levi 550’s). He realized that he had to take on the merchants, headed by a very stubborn Jay Baker, who often felt that his merchants could do no wrong. Us store guys were forever doing individual store counts, actual hand-counted inventories, so we could drive home the point that we were disappointing the customer. Some stores voiced their dissatisfaction too loudly to be ignored. A great example would be Jim Tingelstad, Regional Manager of the Chicago area stores. Curmudgeon that he was, Jim was relentless in his criticisms, correctly arguing that the stores needed appropriate inventory to cover sales events or simply day-in, day-out inventory levels of key items. Over time, using extraordinarily effective navigational skills, Larry won over Bill, who helped apply some pressure on Jay and the merchants to take stronger in-stock positions. In fact, Bill would refer to advertising something on sale and then not having it in stock “like inviting someone into your house and not offering him a seat.”While I remember going through a period of yin and yang between the stores and the merchants (i.e, Larry vs. Jay), eventually they made progress in correcting the problem of out-of-stocks. New planning and allocation systems were implemented to help Kohl’s buyers put the right items in the right quantities in the right stores at the right time. But what’s important to remember here is that these vital improvements would never have been implemented if the upper management had ignored or brushed off what they were hearing from their people at the store level. Instead, after some wrangling, they worked together to find an appropriate solution. There was a lesson to be learned there that could be applied to many other areas of the business.Today, Kohl’s in-stock position is a major selling point for shoppers. Customers at Kohl’s can go to the store with confidence that the item they saw in the ad will be there in the size and color they need. Says Larry Montgomery in an interview, “Our in-stock position is always in the 90% range, and we always have a great price. And because we are selling national brands, our target customer is the exact same customer as at the traditional department stores.”Kohl’s planning and allocation strategy is an excellent example of adapting to change to accommodate growth. When I joined the company back in 1994 we had 85 stores. It was a fairly simple matter back then to “cookie cut” the orders. Not too many surprises. But with our rapid expansion outside of our Midwestern base and deep into the South, that all changed. I oversaw the opening of three stores in Charlotte, North Carolina in 1997. There were seasonal variations and other regional factors to take into account, and we initiated a ‘Southern Strategy’ for our stores warmer climates than back in the upper Midwest, where the event called ‘Spring’ occurs only once every few years. Planning and allocation became increasingly important. In response to the need, in 1997-1998 Kohl’s embarked on a major expansion of its merchandising group and formed a separate planning and allocation division. As the Kohl’s expansion became essentially ‘national’ in 2005, the key concept of “always in stock” took on increased urgency.Another important aspect of the business model related to the merchandise involves inventory levels as a means to drive the top line. When times get tough for a retailer, there is often a natural inclination to get cautious, pull back inventory, and cancel purchase orders. It’s one of the reasons that off-price discounters like Ross Stores and TJ Maxx generally perform so well during recessions, they’re like scavengers at the docks of manufacturers ready to buy excess inventory. In other words, they’ve set themselves up to make opportunities out of what others consider to be a bleak situation.Kohl’s takes the same viewpoint and sees tough times as a great chance to gain market share. They take the position that pulling back on inventory is ultimately self-defeating. It becomes a self-fulfilling prophesy, with sales falling even further as a result. Rather, the merchants at Kohl’s will load up on basic items, fashion ‘basics’ and gift items. It’s sort of like that old Boy Scouts’ motto: Be Prepared. Then, when some unexpected downturn hits, instead of being caught with its pants down, the company is in a position not only to ride out the bad period, but quite possibly make some gains.This was certainly the case post 9/11 in 2001. Kohl’s increased inventories significantly to the tune of mid-teen increases comp store vs. LY (last year), and ran high single digits to low-double digits in all departments during the fourth quarter. And this was during a holiday season that was extremely challenging for most everyone else. Looking back on the strategy, Larry Montgomery said, “We got very aggressive in delivering brands, value and convenience to customers who maybe didn’t want to go to a mall because of everything that was going on. It played right into our niche. We took huge market share as a result.”Larry’s approach has always been clear to the organization. The key to his message, interestingly enough, is its very simplicity: “We have never been shy about building inventories. You can’t sell what you don’t have.”

Hi-Lo (part of Chapter 3)

If getting the national brands was the most important component in the Kohl’s business model, frequently offering those brands on sale was the second most important component.From the outset, Kohl’s management recognized that because it was able to operate its stores at a much lower expense rate than their traditional department store competitors, they were in a position to aggressively promote and advertise to attract customers to the store and establish a loyal customer base. With a heavy emphasis on promotions, and offering constant discounts, Kohl’s was able to slowly but steadily steal away customers from competitors and increase market share.This was accomplished by blitzing the market with regular advertising, with the cornerstone being a weekly circular in the Sunday papers. The advertising message was simple and straightforward: show the brand, show the value – the rest was pretty secondary.Kohl’s quickly recognized that the customer was drawn to these promotions, and very much appreciated their perceived savings. Women in our focus groups told us time and time again that they ‘loved’ the sales that Kohl’s always had. They could never get enough of it. When asked are we on sale too often, the answer was invariably a resounding: “NO, keep ‘em coming”!For years the number one vehicle for driving business has been the Sunday newspaper insert. By 2002, over 20 million households were receiving the weekly Kohl’s insert in their Sunday newspaper. But analysis showed that newspaper circulation was declining or staying flat at best, and that the company had stores in markets where large portions of the population was not getting heavily exposed to the Kohl’s message. This was particularly true in faster growing markets, such as Dallas. As a result, Kohl’s advertising, which represents about 3.6% of sales, quickly adapted to changing conditions, Kohl’s adjusted their advertising accordingly. There was been a transition from print to electronic media – radio during drive time to work and television during the evenings and weekends.Once the customers arrived in the store, they were inundated with signs on nearly every fixture proclaiming “40% Off,” with a price comparative always shown between the regular price and the sale price of the featured item. It was saturation advertising at its best. And the evidence poured in that the strategy was working.Indeed, this ‘Hi-Lo’ strategy has been a critical part of the success of Kohl’s in conveying the value proposition to the customer. From the beginning, there was never a doubt that Bill Kellogg and his team felt very strongly about this promotional tool: the Kohl’s business model strongly embraced the idea that the customer truly derived a genuine value when they visually saw the difference between the regular price and the discounted price they were getting. We had an aversion to the notion of EDLP, or everyday low pricing. Sears had tried it in the 1980s, only to abandon the strategy after sales plummeted and market surveys revealed that their core customer thought they no longer were getting the same kind of deals. The only time EDLP works, in my mind, is when the truly lowest price retailer can put a stake in the ground and claim that they always will have the lowest prices. Only one guy can do that, and their name is Wal-Mart.A lot is said about how you can no longer ‘fool the customer’ when it comes to placing a price on an item. This may be true, but I am unbending in telling you that Hi-Lo pricing strategies work. The customer perceives that there is real deal in front of her, and that she’s saving money. For Kohl’s, it was simply a matter of aggressively highlighting Hi-Lo wherever they touched the customer: in the stores, in advertisements, wherever they could.During the roll-out of Kohl’s nationally, the traditional department store guys really chafed at their Hi-Lo pricing strategies. After years and years of building up the national brands and establishing ‘regular price’ credibility, here comes this hot-shot retailer who has a lower cost structure that enables them to constantly promote these same goods at significant savings for shoppers. The traditional department store guys spend millions of dollars positioning and creating incredible brand equity for these resources, and have to sell about 35% of these goods at regular price to make it work, then Kohl’s come in and carries these same products, almost constantly ‘off-price,’ or on sale. Before you know it, the traditional stores’ customers are complaining that they don’t sell their goods on sale enough. She starts shopping more often at Kohl’s and less often at her old hunting grounds. No wonder the traditional guys were getting so frustrated!As we will see in a future chapter, in the past several years the issue of ‘pricing’ has become an issue for consumer watchdog groups and governmental agencies. Kohl’s has felt the heat, and has backed off on having such a high percentage of goods on sale at any particular point in time. But make no mistake, Hi-Lo has been a huge reason behind the huge growth gains of Kohl’s in the 1990’s, and continues to be a major part of their value proposition to the customer.

Getting the Brands: Thank You Sir, May I Have Another? (part of Chapter 3)

“Middle America loves brands.” – Jay BakerJay Baker knew from the beginning that acquiring well-known, national brands would be perhaps the most important component of the new Kohl’s hybrid retail concept. And the most challenging. Key resources emerging during this time—Levi’s, Docker’s, Nike, Krups, Warner’s, Reebok, Champion—were viewed by Baker and his merchandise team as ‘must-haves’ if Kohl’s was ever to establish a reputation as being a department store with brands.It was an amazing struggle at the start. Back then, these resources were the exclusive domain of the major national traditional department stores. Creating some degree of exclusivity provided them distinction in the marketplace. They were not interested in letting some small upstart retailer in the Midwest upset the retail world order.Time and time again, during trips to New York during various ‘market weeks’ (where buyers from all over the country descend on the city for a week of meetings, looking at the new season’s lines, placing orders and developing relationships), Jay Baker would go into a vendor showroom and plead the case for them to carry their merchandise at Kohl’s. He would point out that the company was quickly growing. He would make it clear that Kohl’s wasn’t a low end discounter trying to have the best of both worlds. This company was truly different, and these manufacturers had everything to gain and nothing to lose by jumping on board. They could be part of the future rather than become mired in the past. Kohl’s was changing the world of retail, and they could be a part of it. It all sounded well and good. However, though the vendors would be cordial during the initial visits, invariably they would then diplomatically decline the opportunity.But Jay Baker was not discouraged, and his incredible persistence eventually paid off, and Kohl’s began to acquire an impressive array of major national brands. The story behind Kohl’s finally obtaining the Dockers line of khaki pants and other men’s sportswear is legendary in the company. Kohl’s had an exploding business in denim pants with Levi’s (owned by Levi-Strauss) when Jay Baker first approached them about carrying the Docker’s line in the stores. He’d go in, knock on the door of Levi’s senior management, be told no, pick himself up by the bootstraps, and try again the next time he could. It was a constant battle that continued for two years. Finally, Levi’s relented and set up Docker’s shops in nine Kohl’s stores in Columbus, Ohio. After a one year test, the company slowly rolled out the other markets where Kohl’s had stores: first Chicago, then Milwaukee, and finally at all of the stores. Business mushroomed in the Men’s department, and a year later, Docker’s for Women was added to the ladies apparel assortments. And within a matter of a few years, Kohl’s became one of the largest accounts of Levi-Strauss’ in the world. Baker’s persistence won the day. Of course, it became more and more difficult for the vendors to say no to a company that had blossomed into the fastest growing retailer in the country! In between his visits, say, a gap of six months, Kohl’s would have grown by $50 million and added 10 stores. You turn down a company like that at your own peril.There is another famous story in Kohl’s folklore that vividly illustrates the kinds of obstacles that stood in the way of the company’s early efforts to win over the major manufacturers. In those days there were two different retailers owned by the Milwaukee-based Kohl’s family: the first, Kohl’s Food Stores, was a grocery store. The other was Kohl’s Department Stores. These were two separate companies, each operated by a different brother.At some point the management of the department store had the bright idea to provide customers with the same kind of metal shopping carts commonly found in grocery stores. It was thought this would make things more convenient. Remember, back then the stores were somewhat like Wal-Mart, a real mix of softgoods (like apparel) and hardgoods (including towels, small electronics, etc.). Customers in Milwaukee just loved the carts, particularly the older folks who often used them for support as they walked through the store and shopped.As Kohl’s expanded into other states, and the Kohl’s model started to roll out, there was always an ongoing debate about the aesthetics of the carts: yes, they were a convenience, but they really were an eyesore, and gave the wrong message to the kind of new customer we were trying to attract with the new store layouts, improved fixturing, nicer assortments, etc. There was a lot of discussion among senior management on the issue.One group in particular had a very strong objection to these shiny metal shopping carts: the national brands! Our competitors understood the problem all too well – and exploited it to their advantage. Time after time Buyers from our local competitor, The Boston Store, would take their vendors out in their cars when they were visiting Milwaukee. They would always be sure to take a little side trip to the parking lot of our Brookfield store (at the time also the home of Kohl’s corporate offices, in the basement). They’d stand in front of the store, where customers were coming in and out with their carts, and say, “Why would you ever want to sell to these guys? They operate like a grocery store. You wouldn’t want this for the image of your brand, would you?!”The strategy worked. Every time. The top brass from national brands, when introduced to this ‘discount’ image, were quickly convinced that Kohl’s was not an appropriate new channel of distribution. It made things particularly difficult for Jay Baker, who was relentless in his pursuit of these brands. This wasn’t just an embarrassment. It was losing the company money.Well, here’s how we helped Jay and his senior merchants get the goods: soon after I joined the company in May, 1994, we assembled a small group in the corporate offices to explore ways that we could do away with the metal carts, but design some kind of ‘cart’ that would still serve the needs of the customer, particularly the loyal Milwaukee shopper, and at the same time win over the vendors whose brands we so desperately wanted. We retained the services of a design firm and began to review sketches of ‘conveyors of merchandise’ that looked more updated than the old metal carts. It was like reinventing the wheel. But it worked…after some trial and error. They were to be built with thicker tubing painted black, with larger black rubber wheels. Somewhere along the design process we hit upon an epiphany: why not build this more like a children’s stroller, with a bag to hold merchandise right behind it? Boy, it quickly made sense. The hip-looking stroller would have immediate appeal to our target customer, Mom. But we wouldn’t lose our existing customers either. The ‘stroller cart,’ as it came to be called, would hopefully still appease our very local and vocal Milwaukee customer.Most importantly, in terms of our quest for new vendors, we could present the stroller cart as a great way to meet the needs of our primary customer, a mom shopping with a child. And, oh by the way, there’s this little bag behind the child’s seat that can house merchandise she may select before going to the front of the store and checking out. It was one of those rare win-win situations. Or at least we thought.There were some drawbacks too. Our ad hoc committee had the design firm build a few prototypes, and we tested them in a couple of Milwaukee branch stores, with mixed results. The older customer, who really had no need for the ‘stroller’ part of the stroller cart, complained that there was not enough room to house merchandise like the former cart. There were also some issues regarding the ‘stability’ of the prototypes; since many of these older customers relied on the carts for support (a store-provided version of a walker, if you will). We tried to address these concerns. For example, future styles of the stroller cart increased their stability. Still, we realized that it is impossible to fully please all of the people all of the time. Especially with older people, sometimes change itself is the problem, as the older we get the more resistant we are to change.But most of our target customers (again, moms with kids), generally loved the carts! They viewed it as a major convenience to their shopping experience. And in the new markets where this new concept for shopping in a department store was introduced for the first time, we received kudos for how ‘hip’ the stroller carts looked. I think Mom liked tooling around the store with her kid in one.Needless to say, Jay Baker and his senior merchants seized on the opportunity provided by the replacement of the old metal shopping carts with these sleek, black stroller carts and approached vendors who had been reluctant to sell to Kohl’s because of the “image problem” caused by the old carts. No longer could this be viewed as “something you’d see in a grocery store.” To the contrary, Jay put a positive spin on it (long before anyone was using the word “spin”). He would say, something to the effect “look at how we listened to the needs of our primary customer and developed this novel, patent-pending stroller cart.” I would say the same thing when accompanying visiting stock analysts on store tours who had not been impressed with how the old shopping carts negatively defined the Kohl’s business model. Now I could point to the new stroller cart as yet one more example of how we were creating convenience for our valued customer.Apparently, our success with the strollers caught the attention of our competitors. There’s no compliment stronger than imitation. In subsequent years, other retailers basically copied Kohl’s with the stroller cart concept: Mervyns first picked up on it, followed by Sears, which has used them in many of their markets throughout the country. (note: we were given the opportunity to obtain the exclusive rights to the design of the original stroller cart, but we declined to do so; it is my understanding that the design firm, seizing on their big score with Kohl’s, smartly went on and pitched these other companies).Success capitalized on success and, on the heels of Jay’s triumph with Levi’s and the Dockers line, other vendors followed and began to work with Kohl’s. At the same time we had solved the shopping cart problem, and taken away a weapon our competitors could use against us. Sure, they could still try to pick on the fact that all of our registers were at the front of the stores, there were no attendants at the dressing rooms, etc. But the customers didn’t seem to be complaining, and in the final analysis that was what truly counted.In the mid-1990s, our major vendors were primarily in the denim and housewares categories. At that point, the company was slowly moving ‘upstream’ and attempting to more aggressively attract the traditional department store customer. We needed to learn more about these customers’ habits. Market surveys discovered the following: many of the traditional department stores’ shoppers (predominantly women) would come in, buy all her kids’ clothing, go to the back of the store and buy, say, a Krups coffee maker for the family, and then, perhaps, go to the Men’s department to purchase a sweater for her husband. All fine and good, but with one glaring problem. She wouldn’t do much shopping for herself. She would often only shop for herself in the sports apparel section (for example, Nike warm-up suits), her athletic shoes and maybe a bra and some hosiery in the lingerie department. Yet this typical customer did not shop in the front apparel areas of the store. We hungrily eyed the potential for opportunity. But how?First, it’s important to understand what were the old ways of doing things. Part of the strategy had always been to approach a major branded resource with a significant national presence with the larger traditional department store groups and begin to negotiate with them to carry their line in our stores. With several hundred new stores to be added to a manufacturer’s distribution list at a time when business has been challenging, it is often very difficult to pass up entirely. In other words, Kohl’s was expanding so rapidly the vendors simply could not afford to ignore us. Vendors such as Liz Claiborne would create a new line exclusively for Kohl’s (and possibly a couple of other similar ‘tier’ retailers, like Mervyn’s in California), and hang a tag and other marketing materials that has a tagline “by Liz Claiborne” after the name of the line.Branded labels at Kohl’s were brought to a new stage of development with the arrival of Rick Leto from Macy’s. A veteran merchant, with extensive experience on both coasts and points in between, Rick convinced Liz Claiborne to sell to Kohl’s and aggressively upgraded corporate casual and built up inventories in key departments, like dresses. This was right around the time when “dress down Fridays” were becoming popular and Rick had his finger right on the pulse of it. It was a high-growth period for the company, and Rick led the charge with his merchants to “buy with conviction.”When asked to comment on the ongoing strategy to slowly trade up the customer, Larry Montgomery replied: “Mom has been shopping for the kids and dad and for the home at Kohl’s for a number of years. Now, she’s buying a lot more for herself while she’s there.” Clearly, he had tapped into something big that we could capitalize on. And the best part was that we were doing it at the expense of the larger, traditional department stores who had spent many years and many millions building up what they thought was an impregnable barrier of exclusivity. They soon came to realize that the retail world was dramatically changing, and would never go back to the old ways. In recent years, Kohl’s has added Columbia in outerwear and apparel, OshKosh B’Gosh in children’s and Nine & Co., a Nine West line, in women’s shoes. I can just imagine the various shades of purple some of the top guns at the big chains must have turned when they finally understood – too late – what was happening.The story of OshKosh B’Gosh is an interesting one. Based in Oshkosh, Wisconsin (the same state as Kohl’s corporate headquarters), the children’s manufacturer had been an earlier resource in Kohl’s merchandise assortments. In fact, in the early 1990s it was the dominant branded vendor in the kid’s department and was prominently displayed throughout. However, around 1997, senior management at OshKosh, which had been under serious pressure from the traditional department stores complaining about the aggressive promotional strategies of the upstart regional Kohl’s chain, decided to knuckle under and pull out of Kohl’s in the summer of 1998. I suppose the clothing manufacturer thought there was a certain logic to their strategy. They would abandon their fastest-growing client in hopes that they would be able to ‘trade up’ their spot in the marketplace, fortify their position with the major national traditional department stores, and improve their financial performance.The news, needless to say, was not well received by Jay Baker and the General Merchandise Manager of Children’s, Kevin Mansell. There were several meetings with the senior management of OshKosh, but ultimately, the manufacturer was firm in their decision, and they did indeed pull the plug on us.Baker, Mansell and the rest of the children’s buying team did not panic, and prepared for the significant loss of volume by adding another branded vendor to the mix, Carters, in addition to dramatically improving sport apparel assortments and private label programs. The gang figured it out, and we managed that first year not to lose much business in the kid’s department, a real tribute to the organization.Things did not go so well with OshKosh. Expecting that relations with the traditional department store groups would improve and result in larger purchase orders and incremental business, they discovered in the late 1990s that their strategy was flawed, and sales flattened and profits deteriorated. As a result, OshKosh stock plummeted, reaching a ten-year low. They had badly miscalculated the way things would play out. In leaving Kohl’s they had walked away from a huge amount of volume. They thought they could make up for that lost volume with the traditional department stores, but that never materialized in the numbers they had hoped for.In the end, tail between their legs, OshKosh came back to Kohl’s and re-introduced their product line in 2002. Sales began rising again, and OshKosh stock rebounded. No doubt, the key merchants at Kohl’s hoped other vendors, like Ralph Lauren, Tommy Hilfiger and Nautica, were taking notes. And I’m sure they were.In the past ten years, the ‘build-up’ of brands added increasing credibility to the Kohl’s value equation. Look at the following additions to the Kohl’s assortments by major national vendors over the years (and the year each vendor was introduced, to the best of my knowledge) and one can see how Kohl’s increasingly has become a threat to the traditional department stores:Adidas(1993)Airwalk(1997)Arrow(2001)Axcess by Liz Claiborne(2002)Bali(1998)Bugle Boy(1994)Buster Brown(1994)Calphalon(2000)Carters(1996)Champion(1995)Columbia Sportswear(2000)Counterparts(1995)Dockers(1996- national)Fieldcrest Cannon(1997)Fila(1995)Gloria Vanderbilt(1996)Haggar(1994)Healthtex(1996)Jantzen(2002)Jockey(1996)KitchenAid(1997)Krups(1995)Lee(1993)Levi’s(1992)Lily of France(1999)Maidenform(1995)Mickey & Co.(1996)Mudd(1998)Nike(1993)Nine & Co. by Nine West(2001)Norton McNaughton(1998)Olga(1996)Oshkosh(re-introduced 2002)Pfaltzgraff(1997)Reebok(1994)Russell(1998)Sag Harbor(1995)Savanne(2002)Skechers(1997)Speedo(1996)Sperry(1997)Springmaid(1997)Starter(1997)T-Fal(1996)Union Bay(1995)Vanity Fair(1997)Vans(1997)Villager by Liz Claiborne(1996)Warner’s(1995)Winnie the Pooh(1996)By the early 2000’s, an impressive 80% of merchandise sold at Kohl’s Department Stores were national brands. As a result, Kohl’s was able to fiercely compete with the major traditional department stores, while managing to maintain a much lower cost structure.

Chapter Three - Defining the Business Model: The Wedge

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.

Chapter Two - Building The Team: A Trio, Then a Quartet

To best understand how the management component of Kohl’s incredibly successful retail concept was formed and developed over the years into what was considered world-class and the envy of so many of it’s competitors, one really need to go back and examine the extraordinary, yet at times, unremarkable, leadership skills of the head guy.When I was conducting my own due diligence on Kohl’s back in 1993 before eventually joining in the summer of 1994, I called around and spoke to people who had previously been with the company or who had some inside scoop on the key players of the company.Here are the brief descriptions taken from my notes that I wrote back then on Bill Kellogg:–“like a Sam Walton”–“a true gentleman”–“by far the easiest to work with”–“very down to earth”–“has lived a simple life”–“tries to stay close to the customer”Having had the opportunity of seeing Bill Kellogg in action, the above descriptions were really right on. Frankly, when I first got to know him, I was initially befuddled that Bill was the CEO of this fast-growing company. To be blunt, he just doesn’t dazzle you. Sure, when you realize he’s worth $1.5 billion, that’s impressive. But almost hard to believe. Still, if you buy the argument of late that ‘great’ companies aren’t run by flashy dynamos, then Bill Kellogg was a great example to support your point. He’s decidedly low-key, somewhat self-effacing, and clearly tries to stay off the radar screen.In the years that I’ve observed Bill, one thing about him has stood out and, in a very real way, has defined who this man really is. Bill had a undeniably strong commitment to people, most notably the folks in the trenches. You hear that accolade about business leaders a lot these days, but in many cases it is just a cliché. Not with Bill. This is a guy who, in the early years, would go to McDonald’s on the way to one of the stores, buy a couple bags full of hamburgers, and give them to all the sales associates upon his arrival! He clearly had a sense of purpose to treat his employees well, to always be attentive to the customer, and to reward those people who had confidence in us and invested their money in his company. That commitment became the heart of Kohl’s corporate culture and it has been evidenced throughout his tenure at the helm.When relating to the executives at the corporate offices, Bill always went out of his way to make us remember that we had a duty to listen to the needs of the customer. He would also encourage all of us to “take care of your people.” This was most evident as one of the quarterly meeting was coming to a close. After the key speakers had reviewed our recent performance (quarterly management boards that bonuses would largely hinge on), the microphone would then be handed over to Bill. The low key CEO would invariably open up with an observation about all the great talent that was assembled in the room, and identify some of the recent hires and their expected future contributions. When the meeting was finally coming to a close, Bill would always pause, look around at all of us, and say, “Remember, take care of your people.” It reminded me of a scene straight out of old reruns of “NYPD Blue” and “Hey, be careful out there”!In my opinion, all of this was part of the brilliance of Bill Kellogg. Later in his career, when the Kohl’s business model seemed unstoppable, Bill was in so many ways the perfect guy to oversee it all. Somewhere along the way he recognized that the continued success of the company was dependent on his ability to bring in great talent in the top positions, and allow them to grow and establish themselves, and take on greater positions of leadership. He increasingly took a back seat as the Executive Committee filled out, and the succession plan took shape. He truly, truly let his team run the show.Was Bill the most effusive, affable CEO the world has ever known? Clearly not. For example, he rarely walked the corporate offices just to ‘touch’ people (except for Christmas Eve), and he barely ever met anyone in the stores, particularly in new markets. To be sure, he was kind of a shy guy. I know that may sound like an incongruity for people on the outside looking at the leader of a hugely successful retailer, but that was the beauty of the business model: the success of Kohl’s was not based on the sizzle of a hot-shot celebrity CEO. A former executive with the company said it best: “With Bill, it was never an ego thing. In a lot of ways, he was the opposite of what most people expect to see in a leader of a large company. I mean, the guy was amazingly low-key! He really disliked confrontation. But, man, he really knew how to bring together a team.”The need to do just that – bring together a team –was top of mind in 1988 when Kellogg took stock and evaluated the state of his company. To be sure, things were quickly changing at Kohl’s. There were so many events that were rewriting the company’s future. First there was a management-led leveraged buyout, followed soon thereafter by a major recapitalization allowing for the purchase of a company that more than doubled revenues overnight. Bill Kellogg and his management team began to develop a new business model that was the beginning of what became one of the most successful models in the history of retailing.During this time, Kellogg began to take note of a young and fast-growing company based in California, owned by Minneapolis-based Target. It was a department store group called Mervyn’s, and it appealed to a more upscale customer than the (at the time) discount Target. While Target’s primary focus was on hardgoods, Mervyn’s placed far greater emphasis on apparel for everyone in the family: Mom, the primary shopper, her kids and husband. It was like a bell went off in Kellogg’s head. What intrigued him most was the vast potential of the Mervyn’s model. He had the vision to realize that this chain was well positioned to please the vast masses who represent middle America – not too high end, yet not too low brow. That middle ground was almost empty on the retail landscape. And business abhors a vacuum just as much as nature does.In addition, part of the strategy was to attract customers with national brands, much like a traditional department store, but at lower price points. Back in those days Target was trying to create a niche for a new kind of customer. They wanted to carry established name brands, but sell them more cheaply than traditional department stores.In a move that would have profound implications for the rest of his career and the future of his company, Bill Kellogg became a student of Mervyn’s, and even traveled to the West Coast to visit stores with his management team to better understand their business model. The more and more they evaluated Mervyn’s, they became convinced that most of the main components of their model could be successfully migrated to the Midwest and eventually implemented in the Kohl’s stores.Kellogg recognized he needed two key senior executives to help carry out his vision. These executives would have to complement his own strengths, and position the company for growth. First he needed an operator. And then he needed a merchant.And quickly to follow, Kellogg knew he needed to bring in a guy who could be in the on-deck circle when things started to take off.JOHN HERMAJohn Herma joined Kohl’s as Director of Human Resources in 1980, and was elevated by Bill Kellogg to Executive Vice President and Chief Operating Officer in 1986, the same year as the leveraged buyout. A New Yorker who grew up in Brooklyn, in his life before Kohl’s Herma held senior executive positions on the East Coast, notably with Gimbel Department Stores.When I was Director of Stores at Los Angeles-based Bullock’s in the late 1980s, I was introduced to a management adage that has stuck with me ever since. Sue Graham, the Store Manager of the South Coast Plaza Bullock’s, one of the highest-volume department stores in California, would often exhort her fellow associates in the store to “inspect what you expect.” This meant a truly hands on approach to management. You set clearly defined goals, then carefully inspect the results to see if those goals are being met. In working in a management capacity in a retail store, it’s all about the journey and almost never about the destination. You can work your tail off and get the store in great shape, but all it takes is a major sale day or a busy Saturday afternoon and the store is trashed. And then you have to repeat the fundamental task and get the store back to the high standards you’ve established for yourself and your associates. The process repeats itself, over and over and over again. It’s not complicated science, but to truly succeed at it, a manager needs to constantly walk the talk. Basic blocking and tackling. Keep it simple. Constant. Repetitive. Execution.From my vantage point while I was with Kohl’s, John Herma epitomized the business leader who embraced the adage “inspect what you expect.” He had a passion about establishing measurable objectives, and then devoting whatever time necessary to ensure that those standards were maintained. In describing John’s managerial style and the contributions he made to the success of Kohl’s, former direct-reports (i.e., his immediate subordinates) call attention to his “constantly listening to the needs of the customer.” In his early years with the company, John would frequently go out to one of the local Milwaukee stores during a Saturday afternoon or during a major sale and for hours he’d watch the flow of customers checking out at the registers. He would take lots of mental notes, then come to work on Monday morning and haul people into his office to discuss what he saw, and explore ways to make the customers’ shopping experiences more efficient, and more enjoyable. He focused on the operational issues in the stores, such as the length of lines or how long it took to complete a transaction. He would also zero in on real, everyday situations, such as the difficulty of an associate to find the right box size for the cookware she just sold to the customer.For example, when he received feedback that the number of customers waiting in line at the register were exceedingly high too much of the time, Herma advocated a customer service policy of “no more than two in line.” If that number was exceeded, an ‘88’ is called out over the loudspeaker and an additional associate should swiftly open up a new register. And when new policies such as these were implemented, procedures were put in place to “inspect what you expect” to insure compliance.Herma did what too few executives are willing to do. He spent a large portion of his time as the guy who rolled up his sleeves, delved into the ‘guts’ of the business, broke down all the processes into manageable parts, and then explored ways to simplify, improve and make less costly. It was a hands on kind of style that he never felt was “beneath him,” and he wasn’t willing to shirk these duties or assign them to a subordinate. The payoff was tangible. A vast accumulation of knowledge about the inner workings of the store.In one of the few times he was quoted for a magazine article, when describing the Kohl’s business model, Herma said: “We do 20 simple things that have impact when taken together. The key is the consistency of the execution.”His style of micromanagement was best summed up by one of his colleagues, who described him as “the toughest guy of the group to work with, but only with the people who work for him.”It’s true that not everyone in the company liked John Herma. He could be, in many instances, quite challenging. Yet, for whatever reason, I took a liking to John, and I think he made sincere efforts to support me in my role. I think toward the end, when it became apparent that Bill was not going to hand the CEO baton over to him, John appropriately pulled back. But he was not the type to lust after power. Instead, he kept the company’s best interests in mind, as well as his own.John had great conviction about the viability of Kohl’s new business model, as evidenced by getting extended lines of credit on his largest personal asset, his home, so that he could maximize his equity position in the new business venture. Talk about commitment! And in the end, it was worth it. The taking of that kind of risk during the LBO reaped enormous benefits for John and his family. While he has clearly lived the more quiet, ‘simple’ life like his partner Bill Kellogg, he, like the rest of the group, upon retirement, has treated himself for all that hard work.As a legacy, above and beyond all of the other significant contributions he made to the early success of Kohl’s, John Herma will be best remembered from my vantage point as the person who most exemplified ‘low-cost culture’ in the company. Unlike previous experiences, all of us at Kohl’s felt like we were working toward a common goal. From the CEO on down, you generally felt that everyone was being attentive to expense management. If we all traveled coach and stayed at budget hotels, we knew that genuinely improved our chances of ‘maxing’ the year-end team bonus. Along with the help of Arlene Meier, who later would replace Herma as COO, an emphasis was placed on the proactive planning of expenses in plenty of time to make it all work. Sure, we would zig and zig a bit when business got tough to pull out a month, but there was so much planning that you never felt we were out of control and pulling things out of a hat. There was a simple, understandable game plan. And John Herma’s role was to insure that selling, general and administrative expenses were leveraged as the company grew.JAY BAKERBorn and raised in Flushing, New York, Jay Baker, like so many other successful retailers, had exposure to the business of selling merchandise in a family business. Following graduation from the University of Pennsylvania in 1956, he had a two-year stint with the U.S. Army. Following his discharge from the armed forces, Baker entered the Macy’s training program in 1958. He went on to assume several assignments at a number of retailers in both merchandising and storeline positions in the 1960s and 1970s. Notably, he was a general merchandise manager at the Famous-Barr division of May Co. in St. Louis, was later director of stores and general merchandise manager at Saks Fifth Avenue in New YorkIn the early 1980s Baker became head of the BATUS Thimbles division, and once that business model started to stall, headed the BATUS corporate buying office for Gimbel’s, Marshall Field’s and Kohl’s. It was during this job that he first made contact with Bill Kellogg.Jay Baker was approached by Kellogg and joined Kohl’s in 1986 and quickly positioned himself as the head merchant, overseeing both the general merchandising and marketing functions of the company.Jay’s arrival at Kohl’s was a timely one. A former member of the Kohl’s Executive Committee in the 1980s put it this way: “Bill really didn’t recognize the merchandising needs of the company. It wasn’t until Jay came on board before the merchandise buying decisions started to really make sense.”Here’s some of the bullet descriptions of Jay Baker that I wrote down back in 1994 when I was researching my own job opportunity with Kohl’s:–“an incredible merchant, really knows how to get customers in the store”–“aggressive, highly motivated”–“very opinionated, can be difficult, at times mercurial and loud”–“has an extraordinary love of the game”–“protective of his own team, will take shots at the other guys, particularly the stores"Say whatever you want about Jay Baker, the man has a passion for retailing. Just picture this veteran aggressive New Yorker coming into a Midwestern company whose interaction was more civil than it was confrontational. But at the end of the day, people who worked around Jay were more than a little thankful that he was on their team and not the other guy’s team. With Jay, you knew you were going to win.When Jay came on board, he filled a major void. While the company had enjoyed limited success in recruiting some general and divisional merchandise managers from other companies over the years, up until that point Kohl’s had never really had a top-shelf merchant with a national reputation. Clearly, the timing was right for Jay. He had had some success in his prior assignments, but certainly no homerun. Once he arrived, they got very aggressive buying merchandise, and promoting it. In the chapters that follow, we’ll see how he was the most instrumental person in the history of Kohl’s to negotiate the carrying of national brands critical to the success of the business model. Jay Baker successfully enticed well-known brands to the company including Nike, Levi’s, Lee, Dockers, Reebok, Champion, Sketchers, Mudd, Calphalon, and many, many others.Jay Baker steadfastly maintained a vigorous routine to his workday. It involved a repetition of the fundamentals. Over the years I’ve seen senior executives grow weary of the routine, and eventually lose their enthusiasm and dedication to the business. Not so with Jay; he had a never-ending passion for retail, and thrived on the success of Kohl’s. Perhaps the spoils of victory were that much sweeter because in all the years leading up to his joining Kohl’s, he had never had The Big Hit.As an aside, The Big Hit is hitting a huge, towering financial homerun; this was a term I picked up many years ago from a former Macy’s CEO I used to work with, Art Reiner (who over the years no doubt has had some doubles and triples along the way, and continues to work as CEO of the Finley jewelry company).There are two parts of Jay’s routine that I will most remember. In many ways, they defined his personality as well as the culture of Kohl’s.A significant portion of Jay’s workweek involved participating in meetings with his key merchants and the advertising team to review the ad copy they were preparing. These "blue-line meetings” were opportunities to review an upcoming advertisement in its later stage, prior to going to press. In strict advertising jargon, a blue-line is a temporary, one-color proof made directly from the film on the printing press. It is used as a final proofing device right before the film goes to press, producing millions of ‘rotos,’ or inserts. These would be placed in Sunday newspapers in markets where Kohl’s had stores.Jay Baker was zealous in his active and passionate involvement in the creation of all of the printed, and later other media (radio and TV) advertising material at Kohl’s. He would spend hour upon hour reviewing every item on every page, challenging price points and inventory levels (or “prep,” for preparation), on the models he was shown. Says a former divisional merchandise manager who attended hundreds of these meetings with Baker over the years: “Jay always wanted to convey value and brands to the customer. He always drove us as merchants to promote aggressively. Those meetings could often get loud, so you just didn’t want to go in there without a lot of prep(i.e., substantial inventory to ‘support’ the ad) and great price points.”As will be discussed in more detail in a further chapter, one merchant who worked for Jay all those years was deeply affected by his boss’ ‘hands-on,’ methodical approach to advertising. Kevin Mansell, who was a senior hardgoods merchant when Jay joined Kohl’s in 1986, learned from the master and was well-prepared to take over the reins when Jay retired. The baton was passed, and the thoughtful, sometimes plodding process of preparing the Kohl’s advertising continued in much the same way as those early days.Another defining aspect of Jay’s was his routine of visiting stores, particularly on Saturday afternoons, following a morning at the corporate offices. Here’s the typical scenario: Bill, Jay and John would get into the offices on Saturdays around 9:00 a.m., look over the numbers from the previous week, meet with some of the senior management team in informal sessions, and then generally head out around noon or 1:00 p.m. Bill would tend to lay low the rest of the day, unless it was a big sale day. John would visit a couple of stores, though in the last couple of years he was there, this tailed off.Jay, on the other hand, maintained a routine that was extraordinarily consistent. While he would often visit one of a number of stores in the Milwaukee area as his first stop (usually either Waukesha, West Allis, Brookfield or Southridge), he almost always visited the Bayshore store, located just on the western edge of Whitefish Bay, part of the ‘northshore’ of Milwaukee suburbs. The store was located about a mile away from Jay’s home on Lakeshore Drive. The events that took place at that store on Saturday afternoons go down in the annals of Kohl’s folklore.At the time of Jay’s tenure at Kohl’s, the Bayshore store was older and tired-looking compared to the new prototypes we were churning out in all the new markets. It was clearly a problem store: we had a tough time retaining both management and highly productive sales associates. In addition, there was a formidable group of ‘old-timers’ who were incredibly resistant to change, much less raising the bar with respect to customer service and selling floor maintenance standards. They were part of the original gang that had managed to negotiate some sweetheart arrangements with respect to schedules, responsibilities and overall expectations. (Note: More so than perhaps any other store I was directly responsible for over my primarily storeline management career, the Kohl’s Bayshore store brought me back to 1983 when I was the assistant store manager of the Macy’s Herald Square store, which was unionized. During my first week there, I was ‘written up’ by a union steward for not calling in a ‘stand-by’ while I was bringing some new merchandise arrivals to the selling floor and placing the merchandise on the fixtures; see, the union had negotiated with management an agreement that if a manager wanted to ‘merchandise’ the floor [i.e., touch the goods] they would have to have a sales associate come up and literally ‘stand by’ the manager. Have you ever heard of anything so idiotic? Well, if you’ve ever been associated with some of the dynamics of a labor union, you probably have. But I digress….).Needless to say, it was a tough store to manage and to establish and maintain high standards on the selling floor and at the checkout areas. Jay would come in toward the end of typically the busiest day of the week, and he was often greeted with merchandise on the floor and long lines at the registers. Jay would walk the floor, get upset, then track down the Store Manager and rip into him (or her). Since this store was such a hotspot, the Store Manager reported directly to a Regional Manager (instead of a District Manager), who during my many years at Kohl’s was me, so I often was in the store when Jay would make his visit. Once he’d let things off his chest, he’d then cool down, go around the racetrack again with the store’s management team and then head home. It was during those walk-throughs that we would try to make observations that would later help us think of ways to better serve the merchandising and in-stock needs of the customer.Often, Jay would contact the Director of Stores, Larry Montgomery, and preach about how the stores were really letting the company down, that the merchants had done such a good job procuring the goods, and here we are at Bayshore not capitalizing on all that hard work.It didn’t raise its ugly head all that often, but during times like these Jay would get really uppity about the value of “the merchants” and begin to talk down and belittle “the store guys.” It was kind of an East Coast mentality (one that he no doubt refined when he was with Gimbel’s) that permeated the cultures of department stores in the 1970s and 1980s. With companies like May Department Stores or Federated Department Stores, the yin and yang of merchants vs. storeline is legendary. These store groups have historically been run by merchants, who tended to be less appreciative of the work of the store guys.Kohl’s, on the other hand, had been run by a guy, Bill Kellogg, who started in the trenches in the store, and related to the hard work of the sales associates and executives who worked nights and weekends when the customer was there. The environment was not conducive for Jay to take potshots at the stores while he was in the corporate office; he only let it rip when he was out in the stores. And Bayshore became his vessel to vent.Fortunately for me, Larry was great when it came to deflecting Jay’s criticisms of the local Milwaukee stores. He would let the criticism stop with himself. He would absorb it rather than send it up the chain of command. He was the kind of guy who rarely would ruin your Sunday afternoon with an “emergency” phone call; in fact, I’m sure there were times when Larry would check his office voicemail from his cell phone while he and I were playing golf and hear a “Jay Rant” and not even tell me about it. Usually, I would hear about a ‘Jay Sighting’ from one of my Store Managers or District Managers, and not from Larry.While often mercurial and not always the most pleasant to be around, Jay Baker was highly respected in the retail industry. He was viewed as a fair negotiator and a very knowledgeable merchant. Paul Charron, the former CEO of Liz Claiborne, has said of Baker: “I can’t think of another merchant I respect as much as Jay Baker. When you shake hands with him, it’s a deal.”In summary, Jay Baker is best noted for making some of the most important and everlasting imprints on the now famous Kohl’s business model. In the chapters that follow, you’ll see how his passion to provide customers with branded merchandise at terrific values in a pleasant shopping environment permeated the core values of the company.LARRY MONTGOMERYFollowing the hiring of John Herma and Jay Baker and the subsequent leveraged buyout in 1986, Bill Kellogg and his team made gradual steps toward implementing their collective vision of the new retail concept. They soon recognized a need to bring in another key executive who could help run the stores and assist in the further development of the business model.Through an executive search company, Bill Kellogg was introduced to Larry Montgomery and offered him the position of Senior Vice President – Stores. It was the beginning of an extremely successful partnership.Here are the brief descriptions made by others about Larry Montgomery when I was on fact-finding missions prior to joining Kohl’s in 1994:–“people like him very much”–“he walks, eats, works fast”–“great golfer, very competitive”–“not ruthless, but will eventually get marginal performers out”–“it’s hard to keep up with him”One of the ways I can help describe what it was like working for Larry is to set this up by telling a story. I once had a boss way back when I had earlier worked in Milwaukee for Gimbel’s Midwest. His name was Tony Cusatis, and he was a fiery Italian who, as the company’s top store manager expected, demanded, extremely high selling floor standards. Mr. Cusatis was famous for his oft-repeated line, “could be better.” He would occasionally pat someone on the back for a job well done, but it was always “could be better.”Working for Larry is a lot like that, although he rarely said the words to the effect of “could be better.” You just knew it could be better! If you’re looking for someone who’s into verbal positive feedback and pats you on the back for a job well done, he’s not your guy. But if you earned a spot and became a member of Larry’s team, and part of the inner circle (but not the inner sanctum: that was reserved for a couple of very close friends and relatives), you were incredibly well-treated. Larry took care of you, and you felt special. For these reasons, and obviously the success and momentum of the company during the 1990’s, Larry was able to recruit and retain many of the top retail executives in the industry during that decade.On the other hand, if you were not on Larry’s team, it wasn’t a whole lot of fun. In some respects there was a lot of positioning to be on the right side of all this, and, like most other companies, things got pretty political. Especially as the company began rapidly expanding, there were some people who couldn’t keep up, and there were certain people who protected other people. It never got too ugly, really, but it wasn’t all smooth sailing either.Unlike his boss Bill Kellogg, Larry did attend college, at Michigan State, playing briefly on the football team. Following his time in college, he eventually landed in retail with Block’s, a smaller division of Allied Stores Group, ascending to President and Chief Executive Officer in 1985. In 1987, Montgomery joined a division of May Department Stores, Indianapolis-based L.S. Ayers, as Senior Vice President – Director of Stores. About a year later, he moved over as Senior Vice President, General Merchandise Manager – Softlines, and soon thereafter, met with Bill Kellogg and joined Kohl’s in 1988.Larry is an extremely competitive individual, and attracts people with a similar passion about winning. There is no better example to illustrate this than sharing my experiences with Larry with his beloved game of golf. I will be forever grateful to Larry for introducing me to it. After I joined Kohl’s in 1994, Larry started to invite me to play with him at his club on Saturday afternoons following our work in the morning (it was standard operating procedure for Larry’s direct reports and some of the merchants in the buying division at corporate to work on Saturdays). I was a terrible golfer at first, but Larry was gracious in continuing to invite me to play in his foursome. I started to take a few lessons and over time my handicap got down to the mid-teens. But from the get-go, we always had some kind of competition on the course. It was nerve-wracking, to say the least. We started with smaller stakes, like dinner at the restaurant of the winner’s choosing, or a bottle of wine, something like that. But eventually, the stakes went up, particularly when Larry’s younger brother Dan and one of the then top regional store guys and one of my direct-reports, Beryl Buley, came into town. One weekend while we were all playing, someone came up with the bright idea of having a summer long, best of five tournament. We would play at different locations throughout the Midwest as we traveled and visited stores.We had great fun planning the rules of the contest and setting up the ‘prizes’ for this event. We played for some crazy things. One year we agreed that the losers would have to shave their heads, but Larry quickly reconsidered well before the first match, no doubt realizing that as Vice Chairman it might be a little tough walking into Monday morning’s Executive Committee meeting and explaining away a bald head. Instead, a new prize was set up: losers would pay for first-class accommodations with a weekend trip for the foursome to whatever golf resort location in the United States chosen by the winners. We headed out to Pinehurst, North Carolina, a few months later and we had the great experience of playing No. 2 just a couple of weeks before the U.S. Open, won that year by Payne Stewart.Perhaps the most memorable contest within our foursome was that one summer we played for tattoos. The deal was if you lost, it had to be at least the size of a quarter, but you could put it anywhere on your body. Fast forward to the end of that summer and I have a small tattoo of an orange burst Gibson Les Paul guitar (I’m a collector of vintage electrics, mostly). Beryl is still in corporate mainstream, so I’ll let him tell his story of the ifs, whens and wheres of his tattoo. Pretty high stakes, if you ask me.I have always been skeptical about the saying that you can learn a lot about a person by playing golf with them. That clearly was concocted by a low handicap golfer! But to know Larry is to recognize his undying love for the game of golf. The game, and all of the pageantry surrounding it, is a significant part of his life.What’s Larry’s game like? Well, he has a short backswing. While he can be erratic off the tee, he’s quite straight with his irons and very adept at the bump and run. He’s an excellent putter, particularly the long ones. He plays very fast. He’s quite good at getting into your head. And he rarely loses when he’s playing for something.Soon after arriving at Kohl’s in 1988, Montgomery was faced with the daunting task of incorporating the MainStreet stores into the Kohl’s organization. It was a massive undertaking. Says one executive still working at the company who was part of that merger: “It was complete and total running by the seat of our pants. We had a brief period of time to plan for the transition. First we interviewed all the Mainstreet Store Managers and Assistant Store Managers and decided who could handle our culture and who couldn’t. We then tried to get them up to speed. The merchants prepared to clear out all the merchandise we didn’t want and bring in some of the blockbuster deals they had purchased for the re-Grand Opening. It was an exciting time, but incredibly chaotic.”On the first day they opened with the name Kohl’s on their buildings, there was pandemonium in the stores. Customers flocked to all the great savings, only to discover that the newly-installed point-of-sale systems crashed, creating some of the longest customer lines in the history of retailing. Said an executive: “The deals were so terrific that no one wanted to leave them behind. So people stayed in line, unbelievably. We had lines with over 100 people at each register. It was more out of control than anything I’ve ever seen.”People who worked with Larry during that time remember him as cool under pressure, hard-working and driven to raise the bar and get it right. The organization quickly recovered from the incredibly strong opening of the former MainStreet stores, and soon found themselves operating as a much larger company, with stores located in over ten states.By the time Larry hired me in 1994, he had been promoted a year earlier to Executive Vice President – Director of Stores. Yet at the time, the leaders of the company were the original trio: Bill Kellogg, John Herma and Jay Baker. Management referred to the company as “Bill, John and Jay.” It wasn’t long, however, that the extraordinary leadership skills and charisma of Larry Montgomery changed that.In March, 1996, Larry was promoted to Vice Chairman. It was now Bill, John, Jay. And Larry.In February, 1999, Larry was promoted to Chief Executive Officer. He continued to serve as vice chairman and a member of the Board of Directors.And in March, 2003, he finally took the final baton from Bill Kellogg, and added the title of Chairman, roles that he continues to serve as of the date of this publishing.

Chapter One - Cheese Balls in the Aisles: The Early Years

To fully understand the story of modern-day Kohl’s, it all starts with cheese balls in the aisles. And a tall, young Milwaukee kid who got lousy grades in high school. His name was Bill Kellogg and he caught the retail bug at a young age. Or perhaps it was already in his blood, passed down from an earlier generation. Bill’s father, Spencer Kellogg, was head of merchandising for the Boston Store, Milwaukee’s venerable retailer, in the 1950s. As he was growing up, Bill spent a lot of time in the department store and started to learn the basics of the business. But this future executive wasn’t what you might call a whiz kid. In fact, he got a lot of D’s in high school. Deciding that college was not for him, he started working for his father in the corporate buying division.In 1967, Bill left the Boston Store and jumped to another retailer in Milwaukee called Kohl’s, founded by the late Max Kohl, father of U.S. Senator Herbert Kohl. (footnote: Herb Kohl, even though his family no longer owns the business, has always had a fond affection for the success of the company. When we opened the Washington, D.C. market in 1997, he gladly accepted our invitation to help cut the ribbon at the Springfield, Virginia store one Friday morning. He arrived in his trademark bright-colored sportcoat, said some very nice things to the crowd that assembled for the opening, and then spent the next hour walking the racetrack around the store reminiscing and taking enormous pride over the success of his dad’s company). Max and his extended family ran two retail divisions: a food division named Kohl’s Food Stores (later sold to A & P) and a small department store chain in the Milwaukee area, Kohl’s Department Stores, which launched in 1962. Bill started as an assistant manager of one of the Kohl’s three stores.Over a decade later, after starting their department store business in 1972, the Kohl family sold their three unit chain to Britain’s BATUS, Inc., a unit of British American Tobacco(BAT). During this period BAT was attempting to diversify their holdings into four categories: tobacco, paper, financial services and retail. BATUS (British American Tobacco United States) was formed and went on an aggressive buying spree, ending up with close to 20 different retail divisions throughout the United States. The subsidiary also purchased high end retailers like Chicago’s Marshall Field’s and New York’s Saks Fifth Avenue. They bought the four Gimbel’s department store chains headquartered in Philadelphia, New York, Pittsburgh and Milwaukee. They purchased other department store groups: Ivy’s in the Carolinas and Florida, Frederick & Nelson in the Pacific Northwest. And they even got into the specialty furniture business, purchasing the San Francisco-based Brunners.Following the purchase of Kohl’s Department Stores by BATUS, the Kohl family was no longer involved in the day-to-day operations of the business, but they agreed to allow their name stay on the buildings. After a few years, eyeing an opportunity for growth, BATUS funded an aggressive expansion campaign for the now five-store chain, which by 1978 was generating $28 million in revenue. That next year, in 1979, Bill Kellogg was put in charge of running the small division.During the late 1970s and early 1980s, Kohl’s was a cheap discounter with linoleum floors, rough selling floor standards, shaky service, and long lines at the register. It was the norm for a pallet of cans of cheese balls to be stacked head-high in the front of a Kohl’s store. Not exactly high class. Hard goods, such as motor oil, garden hoses and dinner plates, were merchandised on cheap metal shelves with virtually no attention paid to visual merchandising as in traditional department stores. In the apparel departments, there were few mannequins, and most of the merchandise was housed on ‘rounders’, circular metal fixtures that had plastic size rings to separate sizes. There no was real attempt to feature fashion trends. Clearly, this was a store that wanted to keep its costs down, and cared little about outward appearances.There was no real merchandise direction. Years later, the longtime Senior Vice President of Advertising, Don Oscarson, used to keep a can of Cheeseballs in his office as a remembrance of just how ‘cheesy’ things were during the earlier days: I remember the stores back then, particularly from 1978 through 1983, when I worked in Milwaukee for Gimbel’s Midwest. In all honesty, I thought the place was an embarrassment. Year after year sales were generally flat, and the business model was neither distinctive nor stellar. It was a small, regional department store that had some good real estate and appealed to lower-moderate customers in the state of Wisconsin, well before Wal-Mart and K-Mart became major players in this market. But at best it was a mildly profitable entity, with no apparent major upside.By 1986, BATUS, which had struggled with virtually all of their retailing divisions, decided that U.S. retailing was not a good fit for a British tobacco company. Clearly, in retrospect, selling apparel and furniture was nothing like selling cigarettes. A former senior executive at Gimbel’s Milwaukee, Ken Werner, remembers attending a yearly conference put on by BATUS where the top execs from each of the US based divisions met and reviewed the status of things:“I remember the President of British American Tobacco, who oversaw BATUS, coming in from London and making a presentation, and he started by saying that all companies have one of the following four characteristics: low growth, high cash flow; high growth, high cash flow; high growth, high cash flow; and low growth, low cash flow. He then proceeds to show us a chart: for tobacco he put low growth, high cash flow. For Appleton Papers (which at the time was producing 70% of the country’s carbonless paper), he put high growth, high cash flow. For Eagle Insurance (their main financial services business) he put high growth, high cash flow. And then for all us retail guys, he puts low growth, low cash flow. I left the meeting telling my colleagues we were toast.”In the couple of years that followed, BATUS sold most of its retail divisions to the highest bidder. It took time for their position in each division to ‘unwind’. They did decide, however, to keep the higher-end retailers: Saks Fifth Avenue, Marshall Fields, the West Coast-based furniture retailer Brunners, and an emerging specialty apparel store called Thimbles, headed by a former Gimbel’s senior executive, Jay Baker.The actions of BATUS were consistent with a trend that was developing nationally toward the consolidation or eventual demise of dozens of regional retail players throughout the country. This same scenario has played out dozens of times over the last twenty or so years. The stories almost all have striking similarities. Family run businesses were started in a city, and over time became a regional chain in 5-10 states. These were profitable ventures that had significant market share in their trading markets with genuine brand equity and loyal customers. Inevitably, of course, competition would arise. New retailers would come to town and start to steal market share. The most threatening competitors were companies with extremely solid business models with a mission to become national powerhouses, such as Wal-Mart and Target.Moreover, in the 1980s the country experienced a major expansion of “category killers” in home textiles and housewares (Bed, Bath & Beyond; Linen’s ‘N Things), office supplies (Office Depot, Staples, Office Max), and electronics (Circuit City, Best Buy). In addition, major off-price apparel retailers came to town: TJ Maxx primarily on the East Coast, and Ross Stores on the West Coast. And the home improvement retailers, Lowe’s and Home Depot, also began a major expansion.With their rapidly growing businesses allowing them to leverage expenses while being extremely aggressive promoting their merchandise, these interlopers were able to quickly establish a foothold in a new market, and place almost immediate pressure on the ‘hometown boys’. The days of the small, local retailer were numbered. Their business fundamentals were attacked from all angles: the overall saturation of retail dramatically reduced top-line growth, which put pressure on expenses, which often meant a lowering of customer service standards and an inability to invest in technology. Competitors were able to more aggressively promote, which in turn put major pressure on gross margin. Fewer sales, lower gross margins, higher expenses as a percentage of sales. It was a recipe for trouble. And the beginning of their respective ‘death spirals.’ Today very few of them exist. It was classic survival of the fittest.Just take a look at this list (certainly not comprehensive) of sizable retailers that once flourished but are now gone, either through bankruptcy, merger or consolidation: Uptons, Montgomery Wards, Herberger’s, Thalhimers, Miller & Rhoades, Wanamakers, Strawbridges, Abraham & Straus, Bullock’s, Stern’s, Bamberger’s, I. Magnin. And the list keeps growing.The same phenomenon happened to most of the retail divisions owned by BATUS in the mid 1980s. Division upon division essentially were shut down and consolidated into an acquiring company, usually Macy’s, Allied, and Dillard’s.Interestingly, there were indeed moments of intrigue and behind closed doors negotiations involving these divestitures. For example, a bidding war ignited for Gimbel’s Midwest, the best performing of the four Gimbel’s divisions, with three different groups making closely matched bids: Dillards, May and a management-led leveraged buyout syndicate led by the CEO of Gimbel’s Midwest, Tom Grimes. Grimes had been assured that if his bid was close to the others, even if it was not the absolute highest, he would get the prize. But at the last minute, Phil Miller, the CEO of Marshall Field’s, flew to London and made an eleventh hour appeal to the honchos at British American Tobacco to merge the best-performing Gimbel’s stores in the Wisconsin-based Midwest division into the Chicago-based Marshall Field’s division. BATUS took the bait, basically reneging on the earlier agreement with Grimes, who was then offered the conciliatory prize of the CEO spot at Brunners in San Francisco. Grimes cut his losses, and he accepted the offer and new direction in his career, where he stayed through the remainder of his career.Back at Kohl’s, in January, 1986, Batus management called Bill Kellogg to New York to inform him that it was putting Kohl’s up for sale. While certainly not a shock, a very disappointed Kellogg flew back to Milwaukee and quickly informed his senior management team of their parent company’sdecision. One of Kellogg’s key lieutenants in the organization, John Herma, upon hearing the news, was the first to suggest that they explore the possibilities of purchasing Kohl’s from BATUS with a management-lead leveraged buyout, similar to the strategy employed by their sister division in town, Gimbels. After meeting with several investment banks, and in partnership with the head of BATUS Retail, Robert Suslow, a proposal was drafted for investor’s consideration. Team Kellogg then began to approach parties that might be interested in participating in the deal.Earlier, as Kellogg was growing the Kohl’s division, he became acquainted with the mall developers Herbert and Melvin Simon. The brothers took a liking to Kellogg and saw promise in the opportunity in this small but growing and profitable division. The Simon brothers agreed to put in a substantial portion of the LBO offer.After making several successful pitches for others to come in on the deal, the management team was still short of the amount they needed to purchase the entire company from BATUS. Kellogg and John Herma scrounged up as much personal funds as they could, with Herma even triple-mortgaging his home, to finance the purchase. However, despite all their efforts, they were still short of the funds needed. Nevertheless, the pitch was made to BATUS. While the offer was ‘light’, BATUS recognized that they lacked other bidders for the Kohl’s assets, so they agreed to retain 25% of the new entity.By the end of 1986, Bill Kellogg was now truly in control of his own destiny. Between the three top managers of the new entity, they owned over 20% of the company. It was the true beginning of the business model that retailers world-wide have come to know and appreciate and admire.There was no time to sit back and relax. Within months of taking over, Bill was presented with an extraordinary opportunity to increase sales through acquisition. It was the first of many for the company.Federated had a specialty store based in Chicago called MainStreet. This chain had outstanding locations, in the third most populated city in the country. But the CEO of MainStreet, John Eyler (who later in his career took over as CEO of Toys R Us) was unsuccessful in getting the business model to work. Things started to deteriorate, and Federated went looking for a buyer. They had been hoping to attract the teenage customers who were giving so much business to places like The Limited. But their concept never really caught on. In fact, it crashed and burned and they sold the assets to Kohl’s. This was a coup for the upstart retailer for a number of reasons, in particular because it gave them instant access to the Chicago market, and expanded their base beyond Wisconsin.During this period, with some wind at their backs and sales gaining momentum, Kellogg successfully pitched Morgan Stanley’s buyout fund, which raised $300 million for Kohl’s to fund a recapitalization and expansion drive in 1988. Perhaps they didn’t know it fully at the time, but the stage was set for the growing Kohl’s to begin it’s march toward national prominence.

The Rise and Stall of Kohl's Department Stores

I worked for Kohl’s Department Stores as a senior executive from 1994 to 2000. After leaving, I realized that no one had ever written a book about the early beginnings and subsequent explosive growth of the company (like other books on Nordstrom and WalMart). So in 2001 I actually spent some time and wrote a book primarily about the success of the company, and actually tried to get it published, to no avail (actually, one prominent publisher was very interested, but they insisted that Kohl’s be willing to sell the book at point of sale in all of their stores, something which never was going to happen)! As it turned out, the rapid April stock splits of 1996, 1998 and 2000 have yet to occur again, and the ‘success story’ of Kohl’s has tarnished a bit over the last several years. As a result, I’ve had to add an epilogue and decided to change the title of the book.

UPDATE 9/2/2019: Please note that the above was on my blog posted in November, 2007. If anyone would like a digital copy of my book, please email at jrusinow@gmail.com, and I’d be glad to send you a pdf.

After the Tempe Facebook Garage

Last night in Tempe I attended the Facebook Developer Garage, held at the Tempe Center for the Arts (first time visit - very nice place). Hearing Dave Morin from FB talk about their growth was almost surreal; it’s hard to explain the degree of ‘growth’ that is going on here; in particular, the little fact that 250,000 people every day create a profile paints the picture. There were other over-the-top impressive facts (80% of the 50-plus million have opened at least one application), but the other one that really stood out for me was that a surprising large percentage (over 40%) of new profiles are coming from English-speaking countries other than the U.S.; this is an amazing global Internet phenomenon.

We will soon be launching our first FB application for TopNetPix, leveraging some of the existing assets developed on the site.

TopNetPix is on YouTube

10/28/07 - Scottsdale, AZ Kudos to our web designer Dawn and Richter Studios out of Chicago in getting the four video spots for TNP on the site and set up on YouTube: http://youtube.com/TopNetPix. We’re still so much in beta it’s not funny, but we are getting closer to getting the word out with some sense of comfort. Kevin, you better be right with what happens after you build it….

The False Hope of the Long Tail

9/7/07 - Vail, Colorado – While attending the Technology Leadership Forum sponsored by Pacific Crest, I had the opportunity to hear yesterday afternoon’s keynote presentation by Chris Anderson, Editor-in-Chief of Wired Magazine as well as the author of the very successful book The Long Tail. Most of Chris’ presentation was sort of a rehash of the book, but he did touch on his passion for global photographic mapping and briefly discussed his upcoming new book, entitled Free, indicating that he hoped most of its distribution would, in fact, be just that. Free.

When I read The Long Tail several months ago, it all made sense to me. But after hearing Chris speak (and, in particular, how he answered certain questions from the audience), I’m starting to see that while technological advances are lengthening the tail of almost everything we buy and experience and thus making it a terrific time to be a consumer of product, the dynamic of the Long Tail really sets up false hope for aspiring producers of product. To the point, while it is now so much easier to get your product out there in the market place, and that the tremendous increase of choices now diminishes the ‘highs’ of the blockbusters and spreads the wealth of purchases a further bit downstream, in reality, it really doesn’t change things for the aspirers. In the music world, as almost any other business enterprise, much of what we define as success is the same today as it was pre-Internet. Arguably, today’s Digg.com and Youtube and iTunes makes it slightly easier for cream to rise to the top. Or does it?

One of the people in the audience challenged the current state of unimaginable choice on the Internet, and the preponderance of crap, and suggested that people are already starting to reject it and that the pendulum was swinging back to previous/older/more traditional standards. After Chris repeatedly took a shot at Barry Diller who one time said that “people with talent won’t be displaced by the 18 million people” who put their shit on YouTube or MySpace or wherever (Chris suggested that Diller was old-school, myopic and just didn’t get it), the questioner said something like this: “Hey, I’m getting sick of the crap on CitySeach, I’m going back to Zagat; isn’t there the beginnings of a backlash?”

Chris Anderson wasn’t buying any of it. The Kool-Aid has been imbibed.

Anyway, as critical as Chris is of the “insanity” of interrupted media (aka TV commercials), I would like to suggest that the wasted time of vetting through all the crap on user-generated content sites can also be insane. Wasted time is wasted time. There is tremendous opportunity on the Internet to raise the bar and making ‘viewing’ much more satisfying to the individual.

My ending thought on this: just because you are a producer of product and you’re part of the Long Tail, BFD. The revenue generated by the aggregate of the tail for a particular product may be huge, but each individual piece of that tail doesn’t pay the rent. And thus, the false hope of The Long Tail.

Connections

Involvement in Companies and Organizations

BuyCostumes.com

Buycostumes.com was launched in the Fall of 1999. After leaving corporate mainstream in 2000 and becoming an angel investor, I became the Chairman and lead investor of the company, which became BUYSEASONS, Inc. Over the years, Buycostumes.com has become the largest seller of costumes on the Internet. In the Fall of 2006, we sold the company to Liberty Media (LINTA). Click here to read more about my experiences with BUYSEASONS

Silicon Pastures

After leaving Kohl’s in April, 2000 and exploring the new direction of becoming involved in the local, early-stage venture capital community as an private equity angel investor, I was surprised to learn that Milwaukee had not yet formed a non-broker dealer angel network that regularly convened, evaluated and invested in start-ups. Over the summer, I invited a bunch of people over to the house to considering putting together a formal angel network. From those informal gatherings, Silicon Pastures was launched in October, 2000. For more information, check out these links: 

• Angel investors step in where others fear
• Angel investors give out $800,000
• Business leaders join forces for investor network

ModernMed

ModernMed is a new startup launched in the Spring of 2007. Like the early days of BUYSEASONS, I am the Chairman and lead investor. The company’s goal is to become a leader in the health care industry that partners with primary care physicians in changing their economic model and facilitating a higher level of patient care and convenience.

TopNetPix.com

Before selling Christmas.com in late 2006, I was trying to leverage the four million visitors to the site into a more year-round business model, with a continued focus on shopping for gifts. After selling the Christmas.com url but retaining the content, I relaunched this new concept as TopNetPix.com. Originally planned to be a better solution to the overall unsatisfying experience of a Google search, our primary goal now has expanded to become the preferred aggregator for people who use the Internet, by combining great content, great search, and great customization. Think of a combination of Mahalo, Yahoo and Netvibes.

Christmas.com

My company, ETR Group, LLC, purchased Christmas.com in 2003

Wisconsin Human Society

I have been proudly serving as a director of WHS since 2005. Under the outstanding leadership of Executive Director Victoria Wellens, this non-profit is worldclass. In 2006 and 2007, I was particularly involved in supporting the effort, primarily coordinated by Physicians Committee for Responsible Medidine (PCRM), to stop the killing of dogs in a physiology class at the Medical College of Wisconsin.

ETR Group, LLC

ETR Group,LLC is the umbrella company for any small startups/acquisition I primarily fund myself. Currently the main investment is TopNetPix.com. Previously, ETR Group has owned Christmas.com and, alas, the ill-fated Zak Black!

Zak Black

ZAK BLACK was a new retail concept launched in the the Fall of 2004. Despite some of most dedicated management I have ever been associated with, we shut down the business a few months later.

Kohl’s Department Stores

I worked for Kohl’s Department Stores from 1994 to 2000, most recently as an Executive Vice President. After leaving, I realized that no one had ever written a book about the early beginnings and subsequent explosive growth of the company (like other books on Nordtrom and WalMart). So in 2001 I actually spent some time and wrote a book primarily about the success of the company, and actually tried to get it published, to no avail (actually, one prominent publisher was very interested, but they insisted that Kohl’s be willing to sell the book at point of sale in all of their stores, something which never was going to happen)! As it turned out, the rapid April stock splits of 1996, 1998 and 2000 have yet to occur again, so fast forward six years I’ve had to add an epilogue and change the title of the book. Click here to read part or all of The Rise And Stall of Kohl’s Department Stores.