Did Kohl's make a deal with the devil?
By Daphne Howland | Sep 25, 2017
Kohl’s surprised the retail world earlier this month with news of two major collaborations — with Amazon.
The first is a plan to feature a new "Amazon smart home experience" at 10 Kohl’s stores in the Los Angeles and Chicago areas, where customers will be able to purchase Amazon devices, accessories and smart home devices and services in 1,000-square-foot zones dedicated to Amazon and staffed by Amazon associates. The second, the opportunity for Amazon customers to return orders for free in 82 of its stores, also in Los Angeles and Chicago.
Many analysts hailed the program, calling out the benefits to Kohl's, which has struggled in its turnaround for several quarters. Gordon Haskett analyst Chuck Grom called the Amazon announcements "intelligent" in an email to Retail Dive, while Jeffries analysts told Retail Dive they reflect "thought leadership" at Kohl's and predicted the collaboration would spread to more stores.
But there's another element to consider, as Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, noted to Retail Dive: "Amazon is the enemy."
"The last retailer that signed up with Amazon, it ended up in a great big lawsuit," he told Retail Dive over the phone, referring to the 2004 claim by Toys R Us (which filed for bankruptcy last week) that Amazon violated the exclusivity it had promised in their contract. "Kohl’s is doing this on an incremental basis — this is a test, is what I think it is."
The upside for Kohl’s
Like any brick-and-mortar retailer, Kohl's needs foot traffic. Simply, the ability to return Amazon orders or check out Amazon's smart home devices and services will drive people into stores. Plus, according to Davidowitz, Amazon's growth in apparel sales (which, online, routinely see a high rate of returns) is not to be ignored.
"If I’m Kohl's and I don’t pay attention to Amazon’s growth in apparel — I’m a fool. Amazon is going to do more business in apparel than Macy’s. If you’re Kohl’s your priority has to be footsteps, and this ties in with that priority."
Howard Davidowitz
Chairman, Davidowitz & Associates
"If I’m Kohl's and I don’t pay attention to Amazon’s growth in apparel — I’m a fool," he said. "Amazon is going to do more business in apparel than Macy’s. So Kohl’s is sitting there and saying 'what are my objectives?' If you’re Kohl’s your priority has to be footsteps, and this ties in with that priority."
All the analysts Retail Dive spoke to said the Amazon deals will spur traffic to Kohl's, which may result in more in-store purchases in the process.
Maddison Tailor, director of marketing at digital CRM agency Ansira, told Retail Dive in an email that it's also an opportunity for Kohl's to piggyback on Amazon's reputation for quality and customer service. And Kohl's "may get some level of halo effect being seen as an innovator providing new solutions for customers, and have some customers consider shopping with them who otherwise wouldn't," David Sobie, CEO and co-founder of return logistics platform Happy Returns, told Retail Dive.
The downside for Kohl's
There are certainly dangers to this partnership — Kohl's is now in business with "the enemy" and therefore playing with fire, experts told Retail Dive. While brands can indeed take more control of their sales and marketing by selling directly through Amazon's website, for example, they run the risk of Amazon evaluating their best sellers and basing its own private-label items on their performance.
For example, Amazon Essentials accounted for 4% of the site's daily best sellers, up from zero a year ago. Its top-performing item was the "Men’s Cotton Pique Polo Shirt," markedly similar to Dockers’ "Men’s Short Sleeve Solid Poly Pique Polo Shirt" at half the price. "With Levi’s/Dockers owning the second highest share of Best Sellers in the Men’s clothing category, this suggests Amazon’s private label brands pose the greatest threat to the very brands that are top of the category today," according to a recent report from digital insights firm L2.
The fear that Amazon will create private label versions of other brands' best selling items is very real. A merchant like Kohl's, which has spent years creating and marketing a stable of exclusive brands, has lot at stake here.
When it comes to returns, it will be Kohl's staff that will have to implement, manage and operate Amazon's returns, Sobie said in an email to Retail Dive. "Someone has to bear the cost of these returns," he said. "It's not clear if that's Kohl's or Amazon."
"Companies that have previously partnered with Amazon, such as Borders and Toys R Us, have found themselves struggling to remain competitive. One need look no further than this week’s Toys R Us bankruptcy headlines to see the lasting implications of these struggles."
Jason Nyhus
VP, Global Marketing, Digital River
Prior collaborations between retailers and Amazon have ended badly, warned Jason Nyhus, vice president of global marketing and communications at global e-commerce software provider Digital River.
"Companies that have previously partnered with Amazon, such as Borders and Toys R Us, have found themselves struggling to remain competitive," Nyhus told Retail Dive in an email. "One need look no further than this week’s Toys R Us bankruptcy headlines to see the lasting implications of these struggles. To avoid a similar fate, it’s critical that Kohl’s has a balanced channel strategy that encompasses online as much as in-store."
That entails providing a level of personalization that Amazon, considering its dearth of brick-and-mortar stores, is incapable of at the moment. "With this focus on the direct channel, it’s possible that the Amazon partnership will be a win-win for both companies involved," Nyhus said. "Without it, I believe we’ll see Kohl’s encounter many of the same challenges as Borders and Toys R Us."
What's in it for Amazon?
Even with its nascent push into bookstores and recent acquisition of Whole Foods, Amazon has a thin brick-and-mortar portfolio and is missing out on its many advantages. A collaboration with a physical retailer like Kohl's brings Amazon products and customers in actual buildings, where by far most retail sales still take place.
"Kohl's still has too many stores and they’re a little irrelevant," Lee Peterson, executive vice president of brand, strategy and design at WD Partners, a global retail design firm, told Retail Dive. "But they’re kind of perfect little boxes for Amazon’s stuff. Their locations are good — freestanding units that are well positioned for buy online pickup in store. They’re suburban in pretty well-to-do areas, unlike Sears, which are in old suburban areas."
The in-store return proposition is also a way for Amazon to expand on its already stellar reputation for customer service, Tailor said. And it will save Amazon a lot of trouble, Jim Fosina, CEO of Fosina Marketing Group, told Retail Dive. "It's a smart move by Amazon," he said. "They potentially save operating costs by having a third party manage the return process, which could at times be very time consuming."
"Assuming this program will be popular with customers, this raises the bar for all other online retailers in the same way Amazon/Zappos did with free shipping."
David Sobie
CEO and Co-Founder, Happy Returns
That's a good thing, considering that product returns is one of Amazon's few shopping pain points. If successful, it could also set expectations shoppers have of other retailers selling online.
"This is obviously a major validation of the value of in-person returns for online purchases," Sobie said. "Assuming this program will be popular with customers, which based on our experience at Happy Returns and also HauteLook/Nordstrom, we believe is very likely, this raises the bar for all other online retailers in the same way Amazon/Zappos did with free shipping. [It] will make providing in-person returns with an immediate refund the new bar for service in online retail."
Most of all, the partnership between these two retailers is an educational opportunity for Amazon, Shelley Kohan, vice president of retail consulting at store analytics firm RetailNext, told Retail Dive. "Amazon is looking for ways to understand the brick-and-mortar business," she said. "By acquiring Whole Foods they get a quick education on the grocery story business, albeit on a small scale, within a very short period of time — that’s just how smart they are and that’s how much talent they have. They make themselves an expert very fast."
Partnering with Kohl's, which Davidowitz believes has the best matrix among department stores thanks to its locations, merchandising and prices, could yield information about that business. "It's really great for Amazon," Kohan said. "They'll get a really different view of a department store that's a bit closed about how they function. Not to say that Kohl’s is going to divulge any great secret to Amazon. I can completely understand Amazon-Kohl’s, it just clicks with me."
But there's always the possibility that Amazon could lose sales to Kohl's, especially where their merchandise overlaps, Sobie said. Plus, "it's not clear if the returns at Kohl's will include an immediate refund," he noted, something that many retailers with physical stores already provide. "If they don't, it's possible customers will be disappointed and the program will not achieve its desired effect."
Overall, most experts see little downside for the e-commerce giant. "I think Kohl’s does a really good job collaborating with brands," Kohan said. "I don’t think it’s anything that Amazon would be worried about."
Is Kohl’s the next Whole Foods?
Ever since Amazon’s takeover of Whole Foods, speculation has only swelled about which retailer the e-commerce giant might acquire next. Location analytics company Foursquare recently made a splash with data-fueled musings that Amazon may be interested in scooping up home improvement retailer Lowe’s, eyewear startup Warby Parker, or department store Nordstrom.
"Smells to me like something’s going on, either a hostile takeover or an acquisition," Peterson said of the Kohl's announcements. "Amazon returns, really?"
Many analysts are skeptical for a variety of reasons. "That would be a giant deal — I can’t believe they would buy Kohl’s," Davidowitz said. "But, maybe they will, maybe they won’t."
Fosina sees it that way too, but believes that Amazon is probably studying the level of potential, weighed against the real estate and labor costs of Kohl's operations. "Amazon will be able to understand what percentage of current Amazon customers purchase products at Kohl's incremental to their Amazon purchase," he said. "If [they find] that the Kohl's buyer is either A.) not a frequent Amazon consumer and/or B.) will actually spend more in combination between more expansive Amazon's offering and a physical presence in Kohl's, it could be a smart move."
"If Amazon were to buy Kohl’s, it would be a huge move towards gaining a large brick-and-mortar retail presence. No retailer would be safe from 'The Amazon Effect.'"
Maddison Tailor
Director of Marketing, Ansira
Tailor sees the partnership as part of Kohl's recent push to bring more name brands into stores. "I don’t think this new partnership with Kohl’s points towards an acquisition [by] Amazon," she said. "Kohl’s is currently going through a major business remodel, and part of this remodel includes partnering with other brands. Kohl’s is trying to gain a share of the tech market by selling Amazon Echos. It has done something very similar in a partnership with Under Armour, selling Under Armour products in stores to increase its share of the athletic wear industry."
If the Amazon-Kohl's combo does lead to a merger however, retailers would be facing a whole new kind of enemy. "If Amazon were to buy Kohl’s, it would be a huge move towards gaining a large brick-and-mortar retail presence," Tailor said. "No retailer would be safe from 'The Amazon Effect,' as Amazon’s seamless omnichannel capabilities would allow it to dominate both the in-store and online competition."
Write to Daphne Howland at daphne@industrydive.com
Article was originally published here.