Kohl’s and Aldi: A Solid Partnership That Will Likely Expand
During a March 1 earnings call, Kohl’s CEO Kevin Mansell briefly mentioned the company would provide space to discount grocer Aldi at five to 10 locations across the U.S. Other than the fact that Aldi will lease vacated space adjacent to the retailer, Mansell did not provide many details, calling the relationship a “pilot effort.”
His comment (understandably) sparked headlines, and to some extent overshadowed a very upbeat call in which Kohl’s announced a whopping 6.3 increase in fourth quarter same store sales—its largest gain since 2001.
The announcement followed comments Mansell made at the ICR Conference in early January, when he noted that Kohl’s was considering shrinking its larger stores to be closer to the newer 35,000 square foot format. Retailers in general are reducing store footprints as online sales have reduced the need for large stores.
In its fourth quarter earnings call, Kohl’s said it has 1,158 stores with total selling space of 82.8 million square feet—that’s an average of about 72,500 square feet per store. Mansell noted that about 500 stores are being considered for a transition to a smaller footprint as part of an overall “standard to small” strategy. He stated that the company would consider other retail formats as partners based on several factors, including “traffic drivers, strong brands [and] strong balance sheets where we know that we can coexist together for a long time.”
Meeting dual objectives
Bringing in Aldi as a partner meets Kohl’s objectives of reducing store footprints and bringing in a partner that will drive traffic. Furthermore, Aldi is a growth brand with a stated goal of expanding to 2,500 locations in the U.S. by 2022.
Aldi experienced a 17.4 percent increase in sales in 2017, according to Supermarket News’ annual survey of the nation’s top 75 grocers. The company jumped from 19th to 17th place with estimated sales of $16.8 billion. Aldi achieved this growth organically through opening and remodeling its stores with no reported acquisitions.
Aldi operates smaller stores than traditional grocers, with average footprints of 25,000 to 30,000 square feet. Based on Kohl’s current average store size, it seems there’s more than enough room for Aldi to open competitive stores within Kohl’s locations. The relatively small pilot of up to 10 stores will allow both partners to see what works, but it should be no surprise if Aldi and Kohl’s expand the program in the future.
Why the deal makes sense
The grocery industry makes a lot of sense as Kohl’s first foray into retail partnerships. The company’s board of directors includes grocery veteran Steve Burd, the longtime CEO of Safeway, which Albertsons acquired in 2015. In addition, Kohl’s CFO Bruce Besanko recently joined the company after a stint as CFO of Supervalu, the well-known grocery wholesaler and retailer.
To dig deeper, I reached out to our good friend Bill Bishop, co-founder and chief architect of Brick Meets Click and former founder and CEO of Willard Bishop Consulting. Bill has studied Aldi for years, and he shared some of his insights.
“Both companies are price/value concepts and attract a customer base that seeks to save money,” he says. “Thus, not only will Aldi customers drive Kohl’s traffic, but these customers probably overlap well with both retailers. Secondly, both companies have well-known private label strategies. For many years, retailers have developed ‘own brands’ to provide a less expensive alternative to well-known brands. Aldi is well known to primarily offer private label brands. Kohl’s also has a well-developed private label strategy, which may represent as much as 60 percent of sales.”
Bishop added that some grocery retailers have struggled for years to shrink their footprints, with mixed results bringing in video store departments, in-store banks and other concepts to fill vacated areas. In many cases, grocers abandon certain store areas from their selling space. While there are no large-scale examples of grocery chains having success reducing space, Kohl’s strategy of bringing in partners such as Aldi may be the best example of a retailer finding an effective way to shrink its stores.
An exception involves positioning hardware stores next door to or inside grocery stores. Independent grocers such as Lowe’s Markets (Texas) have been doing this for years; perhaps the bigger chains are watching. Industry rumors suggest Kroger may join this trend by bringing Ace Hardware stores inside its supermarkets.
We should expect to see more news on Kohl’s success, especially given its stated strategy of resizing as many as 500 stores. Furthermore, this may be the start of a new twist on the old retailer trick of co-locating with other retailers to combat the headwinds facing the retail world.
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Mike Fordney
Managing Director, Food, Consumer and Retail Group
During a March 1 earnings call, Kohl’s CEO Kevin Mansell briefly mentioned the company would provide space to discount grocer Aldi at five to 10 locations across the U.S. Other than the fact that Aldi will lease vacated space adjacent to the retailer, Mansell did not provide many details, calling the relationship a “pilot effort.”
His comment (understandably) sparked headlines, and to some extent overshadowed a very upbeat call in which Kohl’s announced a whopping 6.3 increase in fourth quarter same store sales—its largest gain since 2001.
The announcement followed comments Mansell made at the ICR Conference in early January, when he noted that Kohl’s was considering shrinking its larger stores to be closer to the newer 35,000 square foot format. Retailers in general are reducing store footprints as online sales have reduced the need for large stores.
In its fourth quarter earnings call, Kohl’s said it has 1,158 stores with total selling space of 82.8 million square feet—that’s an average of about 72,500 square feet per store. Mansell noted that about 500 stores are being considered for a transition to a smaller footprint as part of an overall “standard to small” strategy. He stated that the company would consider other retail formats as partners based on several factors, including “traffic drivers, strong brands [and] strong balance sheets where we know that we can coexist together for a long time.”
Meeting dual objectives
Bringing in Aldi as a partner meets Kohl’s objectives of reducing store footprints and bringing in a partner that will drive traffic. Furthermore, Aldi is a growth brand with a stated goal of expanding to 2,500 locations in the U.S. by 2022.
Aldi experienced a 17.4 percent increase in sales in 2017, according to Supermarket News’ annual survey of the nation’s top 75 grocers. The company jumped from 19th to 17th place with estimated sales of $16.8 billion. Aldi achieved this growth organically through opening and remodeling its stores with no reported acquisitions.
Aldi operates smaller stores than traditional grocers, with average footprints of 25,000 to 30,000 square feet. Based on Kohl’s current average store size, it seems there’s more than enough room for Aldi to open competitive stores within Kohl’s locations. The relatively small pilot of up to 10 stores will allow both partners to see what works, but it should be no surprise if Aldi and Kohl’s expand the program in the future.
Why the deal makes sense
The grocery industry makes a lot of sense as Kohl’s first foray into retail partnerships. The company’s board of directors includes grocery veteran Steve Burd, the longtime CEO of Safeway, which Albertsons acquired in 2015. In addition, Kohl’s CFO Bruce Besanko recently joined the company after a stint as CFO of Supervalu, the well-known grocery wholesaler and retailer.
To dig deeper, I reached out to our good friend Bill Bishop, co-founder and chief architect of Brick Meets Click and former founder and CEO of Willard Bishop Consulting. Bill has studied Aldi for years, and he shared some of his insights.
“Both companies are price/value concepts and attract a customer base that seeks to save money,” he says. “Thus, not only will Aldi customers drive Kohl’s traffic, but these customers probably overlap well with both retailers. Secondly, both companies have well-known private label strategies. For many years, retailers have developed ‘own brands’ to provide a less expensive alternative to well-known brands. Aldi is well known to primarily offer private label brands. Kohl’s also has a well-developed private label strategy, which may represent as much as 60 percent of sales.”
Bishop added that some grocery retailers have struggled for years to shrink their footprints, with mixed results bringing in video store departments, in-store banks and other concepts to fill vacated areas. In many cases, grocers abandon certain store areas from their selling space. While there are no large-scale examples of grocery chains having success reducing space, Kohl’s strategy of bringing in partners such as Aldi may be the best example of a retailer finding an effective way to shrink its stores.
An exception involves positioning hardware stores next door to or inside grocery stores. Independent grocers such as Lowe’s Markets (Texas) have been doing this for years; perhaps the bigger chains are watching. Industry rumors suggest Kroger may join this trend by bringing Ace Hardware stores inside its supermarkets.
We should expect to see more news on Kohl’s success, especially given its stated strategy of resizing as many as 500 stores. Furthermore, this may be the start of a new twist on the old retailer trick of co-locating with other retailers to combat the headwinds facing the retail world.
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