The Best Retailer You've Never Heard Of With $3 billion in sales last year, Kohl's department stores are threatening the bigger-name competition.
By Anne Faircloth

(FORTUNE Magazine) – Who does Sears, one of America's most admired retailers, consider its most fearsome competitor? Kmart? J.C. Penney? Wal-Mart? No, it's Kohl's.


Don't expect to be posing that question much longer. In an aggressive push out of the Midwest into East Coast markets, the Milwaukee-based chain grew from 150 to 182 stores last year and is plowing its way onto the national stage. Since the company went public in 1992, its stock is up tenfold--a bigger gain than for any other major retailer during that period. And as Kohl's consistently pulls in some of the best earnings and growth numbers in the industry, Sears is not the only competitor looking fearfully over its shoulder.

"Every decade or so a retailer emerges with a new way to skin a cat. Kohl's seems to be it," says Jay Van Cleave, an analyst with Robert Baird, a Milwaukee-based firm. "The magic of the company is that it combines the cost structure of a discounter and the brands of a department store. It straddles those worlds and takes share from both."

While its competitive prices may be reminiscent of Wal-Mart or Target, Kohl's provides the higher-end shopping experience of Sears or even Dillard's, with a strong emphasis on brand-name apparel. Conventional retailing wisdom scoffs at the notion of positioning a company as neither one thing nor the other, but Kohl's has disproved that logic and capitalized on the fact that there is nothing else like it in the retail world. It is uniquely positioned to please the vast masses who represent middle America--not too upscale, not too low rent. Like many things about the company, this is simple yet ingenious.

For years Kohl's reveled in the growth opportunities that came from being the underdog. Shunning the press, its managers have preferred to let their results do the talking. But CEO Bill Kellogg and his executive team sat down recently with FORTUNE to tell the Kohl's story to the national media for the first time.

"The whole thing ties into convenience," says Kellogg. The Kohl's shopper is typically a woman in her 30s or 40s who juggles a family and a job and has a household income between $20,000 and $70,000 a year. Kohl's can appeal to such a wide income band because higher-income shoppers--like their lower-income counterparts--crave the value-priced Lee jeans, Fieldcrest sheets, and Reeboks as well as the quick service Kohl's provides.

For the Kohl's customer, "routine shopping is a pain in the ass," says Ed Weller, president of Weller Research and a longtime follower of the company. This shopper wants a clean, bright store where everything is easy to find. She wants to be treated well, and she wants to get in and out without waiting or hassles. Most of all, she wants value.

It may sound like a vague premise on which to build a retailing success story--make shopping less of a pain--but Kohl's is proof that it works. It led the nation's department stores over the crucial Christmas season with an 11.7% increase in same-store sales. (By comparison, department stores on the Bloomberg retail index posted same-store gains of just 3%, while discounters were up 6%.) Kohl's sales increased 10% on a comparable-store basis for all of last year, leaving the competition in the dust: Wal-Mart 6.1%, May 3.6%, Sears 2.3%, and J.C. Penney down 0.3%.

The secret to Kohl's success sits on the desk of senior vice president Jim Tinglestad. It is a sign that reads NO SURPRISES. That is the Kohl's philosophy in a nutshell: no bells, no whistles--just meat and potatoes elevated to high art. "We do 20 simple things that have impact when taken together," says COO John Herma. "The key is the consistency of the execution."

A walk through a Kohl's store reveals how the company plays out its unique concept of a discounter/department-store hybrid. It starts at the door, where all the cash registers are clustered in a centralized checkout, as in a Wal-Mart. This cuts down on staffing and lets shoppers collect all their purchases and pay at one time. Whenever more than two customers are waiting in line to check out, a sales associate opens a new register.

Stores are laid out on a human scale--at an average of 85,000 square feet, they are about half the size of a regular department store. The focus is overwhelmingly on apparel--clothes and accessories account for about 80% of sales; housewares and linens make up the remainder.

Unlike the merchandise grouping at regular department stores, which is often by price (better dresses on three, sportswear on five), at Kohl's everything for women, for example, from underwear to blouses, is in one area. David Cole, CEO of retail consulting firm Kurt Salmon Associates, praises Kohl's "clear, tight assortment of merchandise." A recent KSA study shows that Kohl's 1996 sales of $237 per square foot top the discounters' median $182 and traditional department stores' $158.

Kohl's presentation is straightforward--no expensive glass and marble, but no cheap metal shelves packed with motor oil or garden hoses, either. The clothes, too, are nothing more and nothing less than what Kohl's shoppers want. High fashion is decidedly not the name of the game. Rather, Kohl's specializes in apparel commodities: socks, athletic shoes, khaki pants, and above all jeans. Kohl's sells more Levi's per store than any other retailer in the country. Remember our harried shopper: She doesn't want a designer evening gown; she needs staples.

These Kohl's has in abundance--and in the major brand names that discounters simply don't carry: Nike shoes, Jockey underwear, Tefal cookware, and those ubiquitous Levi's. "Middle America loves brands," says President Jay Baker, who oversees the company's merchandising. Baker has worked hard to develop relationships with vendors. Mark Marcon, an analyst with Cleary Gull in Milwaukee, says Kohl's spent more than two years lobbying Levi Strauss before being allowed to sell Dockers nationally. Baker, it seems, can take much of the credit. "I can't think of another merchant I respect as much as Jay Baker," says Paul Charron, CEO of Liz Claiborne. "When you shake hands with him, it's a deal."

Landing such brands is essential because they separate Kohl's from the discounters and even from department stores like Penney that focus more on private-label merchandise. Kohl's has its own brands, notably the popular Sonoma jeans, but private-label sales make up only 20% of revenue, vs. 50% at Sears.

It's not enough to pack the stores with highly visible brands if the price isn't right. Here Kohl's scores again, with a heavy emphasis on promotions--sale merchandise accounts for two-thirds of revenue. The company blitzes the market with advertising, anchored by a weekly circular in the Sunday papers. In case shoppers miss the point, signs in the store on nearly every rack and shelf proclaim SALE. In essence, the sale price is the everyday price because items are so frequently marked down.

Such promotions are not a gimmick; they are an integral part of Kohl's strategy. Customers, responding to the constant discounts, come in droves, allowing Kohl's to steal another point or two of market share. As a result of a pricing study he conducted last year, Marcon discovered that over an eight-week period, Kohl's average price for specific items was lower than the lowest sale price of the competition, which included Sears, Penney, and Marshall Field.

Kohl's is able to provide that kind of value because of its low cost structure. Shoes, for example, are self-service: You can select the style you want and pull the box off the shelf. But the help is there if you need it; although Kohl's has fewer associates than a typical department store, the company stresses service, telling salespeople to "smile and say hi." Veteran analyst Walter Loeb praises the "fanatical attention to service. When I walk into a store, I'm greeted. I feel at home."

"The devil is in the details," says Marcon, stating what could be the Kohl's mantra. The company ensures that its stores are clean, well lit, and uncluttered. All restrooms have baby changing stations (baby wipes included). And Kohl's offers an ingenious stroller that transforms into a shopping cart.

Perhaps the most significant detail at Kohl's is the company's obsession with having merchandise in stock. "In retailing, the biggest single customer-service complaint is not having the item," says vice chairman Larry Montgomery. If Kohl's is promoting Dockers at 25% off this week, you'd better believe the pants will be in the stores, in all sizes. Otherwise, says Kellogg, "it's like inviting someone into your house and not offering him a seat."

Kohl's straightforward, no-surprises style comes direct from the top: Kellogg, Baker, Herma, and Montgomery. Dressed in trousers and sweaters, they are indeed a low-key executive bunch. "We are not gurus," protests Baker. When told they had been described as faceless by an analyst, Kellogg sounded pleased: "That's fine by us--nobody here wrote the book on retailing."

The company's salt-of-the-earth Midwest origins no doubt inculcated this modesty. A three-store, family-run chain, Kohl's was bought in 1972 by Batus, a unit of U.K.-based BAT Industries. Kellogg, who had started as an assistant store manager under the Kohl family, became CEO in 1978. (Herb Kohl, a son of the founder, went on to find fame as a U.S. Senator and owner of the Milwaukee Bucks.)

One Sunday in January 1986, Batus management called Kellogg to New York to announce that it was putting Kohl's on the block. Kellogg flew back to Milwaukee that night and met Herma and other executives in a local restaurant. "They're putting us up for sale," he stated grimly. Herma, who had just read a FORTUNE article on LBO gurus, suggested that they attempt a management buyout. "I'll stay home tomorrow and call the folks I read about in the magazine," he proposed. Sure enough, several investment banks offered advice, and the LBO was completed later that year.

But this was far from a glamorous Wall Street deal: Kellogg and Herma used every available dollar, including triple-mortgaging their homes, to finance the purchase. They paid off the debt of the LBO within the first two years, but the culture of frugality remains strong at Kohl's. Kellogg, Herma, and Baker share a secretary, and no one flies first-class.

It's a shock, then, to realize how wealthy these men are. Following the 1992 IPO, Kohl's stock hit the ground running. It was recently at $79, more than ten times its initial offering price. Kellogg's 7.5% stake is worth $461 million. Herma is the next-largest shareholder, with a 4.6% stake worth $282 million. Baker has a 3.6% stake, worth $222 million. Montgomery, who joined after the LBO, has significant holdings as well.

They may all become a lot richer, too. In a languid retail climate, Kohl's stands out as one of the few solid growth companies. It intends to add about 35 stores a year for the foreseeable future, in new markets in the Middle Atlantic region and the Midwest as well as in cities where Kohl's has established a beachhead. "It sounds aggressive," admits Van Cleave, "but Kohl's is not suffering from hubris. They can take it to that level."

The company proved as much with successful moves into Philadelphia and Washington, D.C., last year. This year it plans more stores in these metro markets as well as in cities like Winston-Salem, N.C., and Turnersville, N.J.

In 1992, Kellogg announced a goal of increasing sales 20% a year. Not only has Kohl's exceeded this target, but its consistent double-digit same-store sales growth also proves that it is not just adding revenue by adding new locations--it's stealing market share from competitors in areas where it has long had a presence. Even Wisconsin, the company's most mature market, posted a 7% increase in comparable-store sales over the Christmas period. In spite of the costs of aggressive expansion, Kohl's has also produced a solid profit. In 1996 the company earned $102 million on sales of $2.4 billion.

"The only thing that would put a damper on us," the CEO says, "is if our heads got too big. It would be a mistake to look at our 11% comparable-store sales and say, 'Boy, we made it,' when we should be asking, 'How can we get to 14%?' " He insists that "nobody broke out a bottle of champagne" to celebrate the results. "Well," admits Baker, "maybe a beer."