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Kohl's Department Store: fastest growing retailer in 2007.(Instructor's Note)

CASE DESCRIPTION

The primary subject matter of this case concerns an overview of the U.S. retail industry and specifically addressing an in-depth view of the Kohl's Department Store strategy. This case is primarily based on secondary source information and is ideal as a leadoff case for business undergraduate students (level 4) to demonstrate their ability to interpret basic strategic planning concepts. The case was written to provide an opportunity for students to 1) apply Porter's Five Force Framework to analyze the impact of the competitive forces on industry attractiveness, 2) prepare a thorough SWOT analysis to assist in developing potential strategic options, and 3) practice evaluating an organization's strategy. The decision focus of the case centers on what strategy can sustain a competitive advantage given the high level of consolidation within the retail industry. The case is designed to be taught in 2 class hours and is expected to require 6 hours of outside preparation by students.

CASE SYNOPSIS

The retail industry is in a state of flux, marked by a high-level of consolidation and new partnerships. The long-term trend of consolidation and intense competition for the mass market has been especially difficult for the traditional department stores as the popularity of the shopping mall declines while big-box discounters and specialty stores become more attractive alternatives. Amidst the recent restructuring arises the need to transform the competitive landscape; executing a well defined corporate strategy will be a key factor in determining which retailers will stay on top.

Making headlines with its aggressive five-year growth strategy, Kohl's Department Store continues to capture the attention of the public and investors alike. After years of retail consolidation, how does Kohl's manage aggressive department store expansion? Will the Classic American Family be able to "expect great things" from Kohl's ten years from now or will the department store overextend itself and relapse into stagnant sales growth?

INSTRUCTORS' NOTES

Overview

The U.S. retail industry is once again in a transition state surrounded by mergers and ongoing consolidation activity. The traditional department store may soon find itself wedged between low-end discounters and high-end retailers while struggling to revitalize itself as the preferred one-stop shopping destination. With consumers more educated, time-conscious and value-oriented, discount stores, specialty shops, and on-line shopping have become increasingly popular retail channels replacing the old fashioned enclosed shopping mall. In order to encourage sales growth and survive, department stores must offer merchandise that is valued and distinctive while meeting customer service expectations. Focusing on differentiation will separate their stores apart from other shopping destinations in a highly competitive industry.

Based in the Midwest, Kohl's Department Store has expanded to operating 834 stores across 46 states since 1962. The family-oriented store maintains its core concepts of brands, value and convenience for the middle-income family by offering competitively priced apparel and home product/houseware merchandise. The retailer strives to exceed the expectations of women aged 35 to 44 with children which represents a 6.1% share of retail sales totaling $4.7 trillion in 2006.

Central to the Kohl's strategy is providing exclusive and private labeled merchandise that competes primarily with mid-tier retailers. In effort to increase same-store sales figures and attract new customers, Kohl's will continue implementing feasible department extensions that will differentiate itself in effort to become the preferred, one-stop shopping destination. The "Only At Kohl's" and "Expect Great Things" marketing jingles are backed by the retailer's mission statement: "To be the leading family-focused, value-oriented specialty department store offering quality exclusive and national brand merchandise to the customer in an environment that is convenient, friendly and exciting."

To further enhance the shopping experience, the retailer will apply its three-prong prototype approach to new store locations and redesign existing locations to make the shopping experience more enjoyable. New locations will primarily be located in suburban neighborhoods where Kohl's core target segment resides. The free-standing stores offer easy access, ample parking, and a race track floor plan with centralized checkouts for the convenience of its core customer, "her." The interior redesign efforts include remodeling restrooms and service counters, widening isles, adding additional directional signs and larger fitting rooms with lounge areas. By 2010, Kohl's plans to operate 1,200 locations by opening 100 stores annually, making it the nation's fastest growing retailer.

Recommendations for Using the Case

The focus of the Kohl's Department Store Case Study is twofold: first, an overview of the U.S. retail industry and second, a more in-depth view of the Kohl's Department Store strategy. This case is primarily based on secondary source information and is ideal as a leadoff case for business undergraduate students to demonstrate their ability to interpret basic strategic planning concepts.

The case was written to provide an opportunity for students to 1) apply Porter's Five Force Framework to analyze the impact of the competitive forces on industry attractiveness, 2) prepare a thorough SWOT analysis to assist in developing potential strategic options, and 3) practice evaluating an organization's strategy. The decision focus of the case centers on what strategy can sustain a competitive advantage given the high level of consolidation within the retail industry.

The Kohl's case study can be used effectively for a written or an oral assignment. Students who complete the case assignment questions prior to class should be well prepared to contribute insightful responses to classroom discussion. The case questions and answers are not intended as a complete set of options or responses but rather as a vehicle to demonstrate strategic thinking and to strengthen practical application of strategic analysis tools. The questions were designed for the purpose of getting students off on the right foot in understanding basic strategic concepts and how to think strategically about a company. The case contains a wealth of information regarding the current state of the retail industry as a whole, including economic factors which influence purchasing decisions. Student familiarity with discount stores, specialty stores, and shopping malls will aid in their comfort level, ability to identify competitive issues, and generation of feasible alternatives.

Building a competitive strategy is about devising and executing a plan that will differentiate one's organization from its rivals by offering customers a unique service and/or merchandise as a way to effectively compete. In preparing for class discussion and/or a written case study, students should be asked to identify and develop potential strategies that take advantage of industry opportunities while building on the strengths of the Kohl's Corporation. As alternative solutions unfold, encourage students to evaluate each alternative and prepare a defense for the chosen path forward. Short-term and long-term goals for achieving the recommended course of action should be clearly defined and include timeframes for completion. When applicable, assigning responsibilities to functional areas within an organization will simulate accountability in executing the chosen strategy.

TEACHING OUTLINE AND ASSIGNMENT QUESTIONS

1. How has the U.S. retail industry changed over the past three decades? Apply Porter's Five Forces Framework to describe the current state of the industry. What are the leading economic factors influencing the retail industry?

The U.S. retail landscape has undergone significant change over recent decades. The downtown stores of the 1970s lost market share to more centralized shopping mall structures which offered a variety of selections under one roof. Following the rise of home development in less urban areas, shopping malls were typically located in suburban neighborhoods. During the 1980s, the malls began losing favor to more economical shopping destinations, the manufacturer outlets, which competed on price and offered an array of discount bargains during economic slowdowns. These outlets continued to benefit as more retailers strived to serve the value-oriented consumer. Retail outlet centers and large discount stores began popping-up while high-end retailers in downtown districts remodeled and formed downtown shopping destinations to attract clientele. Revitalizing locations however was not enough to combat the growth of strip malls, increase in catalog sales and growing popularity of on-line shopping as a result of the Internet in the 1990s. Today, closings and consolidations are commonplace since competition has stiffened; consumers have multi-line retail channels to suit their needs.

Porter's Five Forces Framework can be applied to the retail industry to provide an understanding of the current competitive state and a solid basis for students to begin formulating strategic suggestions. As a $4.7 trillion industry in 2006, retailers need to be conscious of the environment in which they operate to be better equipped to respond to industry change. Porter's Framework is one analytical tool that can be utilized by students to make an industry assessment which considers the impact of the power of customers, power of suppliers, threat of new entrants, threat of substitute products/services, and jockeying for position among current competitors.

Power of customers

Although more product differentiation reduces buyer power, consumers are more sophisticated, time-conscious and price sensitive which suggests more buyer power. If consumers can't find what they want at an acceptable price, they will shop elsewhere. Additionally, shopping has been coined "An American Pastime," especially for youth, singles, and empty nesters which typically have more disposable income. Basic necessities in both apparel and housewares can be purchased at any number of shopping destinations.

Power of suppliers

As the number of department store retailers continues to decline through acquisitions and consolidation, merchandise suppliers are also losing foothold. Fewer department stores which are capable of placing large merchandise orders exist, intensifying competition for suppliers. Additionally, as retailers continue striving to differentiate their brands, vendors who fail to design and deliver unique merchandise that meet the consumers' demands will likely struggle. Competition among suppliers has heightened as the number of retail chains continue to consolidate; fewer opportunities are available to land exclusive brand agreements. Department stores ultimately decide which lines of merchandise fit their product mix selection.

Threat of new entrants

Historically, barriers to entry have been low in the retail segment. Numerous retail shopping destinations have popped-up as U.S. citizens continue to prosper. However, department stores in particular have been on a downswing in popularity as large discounters and specialty stores gain the spot light. With the increase use of the Internet, those seeking convenience have turned to cyber shopping as an alternative. Today department stores are faced with increasing threats of consolidation and acquisitions, making the likelihood of new entrants a relatively low threat.

Many surviving corporations are restructuring their operations to become more competitive. Retailers are looking to 1) maximize economies of scale, 2) transfer knowledge and share best practices among locations, and 3) strengthen their leveraging position as powerful buyers. Larger budgets are being allocated to national advertising and marketing campaigns to draw consumers inside, making it more difficult for smaller organizations to compete. Additionally investments in distribution centers for store replenishment and direct-to-consumer processing and building new store locations or upgrading existing sites have become commonplace. Barriers to entry for retailers have clearly risen.

Threat of substitute products

The general public no longer sews its own clothing as done in former generations indicating few substitutions for apparel. Although "hand-me-downs" are still common, especially among pre-school and grade school aged children, the threat of substitution for apparel and home products is relatively low. Interestingly though, resale shopping (purchasing gently used clothing) and rummage sale shopping for unique housewares and children's toys have become popular trends. Often sighted in women's magazines are articles that feature how to transform "another's trash" into your own treasure as recycling and environmental awareness programs continue to capture the public's attention.

Jockeying for position

Competition among retailers is high. Consumers have an endless choice of shopping destinations to meet their fancy. Mid-tier department stores as mall anchors such as Sears and JC Penney are on the decline whereas specialty stores located in lifestyle centers are rising in popularity. Some analysts believe department stores are being wedged between the high-end retailers and the low end discounters and warehouse clubs which cater to customers seeking value deals. Whether destinations are discount stores, specialty shops, town centers, or the Internet, consumers have the flexibility to shop when and where they please. Today's consumer tends to be more price and time-conscious, forcing retailers to adjust their strategies to meet consumer demands if they are to survive. Furthermore, brand-building of larger, national chains provides retailers an advantage over smaller, independent or regional companies who just don't have the financial means to advertise as effectively. As fewer firms increase their size and power, competitive advantages for these companies are a likely result.

Consumer spending is directly related to economic factors which influence discretionary income. With a weaker U.S. dollar, one's purchasing power is challenged especially during present times when financial pressures from rising interest rates, higher costs of health care, and escalating energy and fuel costs are so prevalent. These factors indicate a slower economy since consumers tend to tighten their purse strings in order to cover the basic necessities. Discount retailers are impacted more severely than high-end retailers since their target market has less discretionary income for apparel and houseware purchases to begin with. Likewise, with only modest levels of income growth, a somewhat stagnant job market, and a declining housing market, consumer spending habits tend to reflect the uncertainty of the times.

2. What would a SWOT Analysis for Kohl's Department Store entail? Internal Analysis

Strengths

* Publicly traded organization and favorable financial performance permits store expansion and opportunities to invest in new markets

* Solid reputation for offering quality merchandise at fair prices

* Exclusive and private label merchandise provides highly valued product differentiation

* Ownership of nine distribution centers and one e-commerce fulfillment center

* Emotional tie to serving the "Classic American Family" through financial contributions, scholarships, community service, and merchandise fundraisers for schools, hospitals, and non-profit organizations

* Dedication to product extensions of popular apparel brands into home collections lines

* Free-standing structure and race track floor layout offers customer convenience, locks-out competitors, and minimizes premium property expenses

* Ability to operate on a national level enhances efficiencies, reduces advertising expenses, attracts professional talent, and generates greater leverage with suppliers Ideas to build on strengths

* Experiment with offering a cafe in prototype stores

* Expand merchandise selection to offer gourmet food stuffs and related packaged gifts

* Solicit employees and families to showcase in an in-store, back-to-school fashion show

Weaknesses

* Lack of services offered such as salon, eyecare, photography, and custom decorating

* Website primarily features "basic" products, thus limits access to exclusive merchandise

* Limited prime real estate locations for new suburban, stand-alone store locations

* Fifty percent of merchandise mix is "basics" which can be purchased at discount stores

* Reliance on domestic market

Ideas to minimize weaknesses

* Expand website to include broader range of merchandise mix and offer in-store pickup for on-line orders

* Occupy mall anchor locations with spin-off business that offers family-oriented services

* Open stores in new markets such as in Puerto Rico, Canada, and Mexico

External Analysis

Opportunities

* Consumers have become more sophisticated, time-conscious, and price sensitive

* Internet sales are rising fourfold faster than traditional retail formats

* Media coverage on sour mergers, unfavorable reactions to change, and competitor strategic plans provide insight to industry-wide trends and pre-emptive strike ideas

* Reorganization efforts provide a time-factor edge in the short-term; lag in competitor profitability typically results

* Duplication of stores in close proximity as a result of mergers may lead to closings and an overall reduction in number of shopping destinations

* Consolidation aids growth strategies for controlling firms, providing learning curve and economies of scale benefits

* Rise in spending habits during the back-to-school shopping season

* Favorable trade relations as a result of Agreement on Textiles and Clothing Act quotas

Ideas to investigate or take advantage of opportunities

* Develop a centralized, corporate training center for new hires, professional development, and rollout of new organization-wide support functions/activities (inventory management systems, computer system upgrades, employee benefit registration)

* Research manufacturing opportunities for large volume items overseas such as the "basics" and search for unique apparel styles to be introduced to U.S. as exclusive brands

* Employ interns to assist with website development ideas and implementation

Threats

* Industry consolidation results in fewer firms gaining both strength and leveraging power

* Stagnant product lines drive consumers to specialty stores and high-end merchants

* Competition from discounters and specialty stores contribute to a 50% decline in multi-line or department store retailer's revenue

* Financial pressure as a result of rising energy costs, inflation, and interest rates impacts discretionary spending

* Decline in popularity of shopping malls affects department stores as mall anchors

Ideas to minimize or overcome threats

* Employ a task force to research and evaluate stand-alone store locations for acquisition and/or building of new structures

* Solicit customer feedback on merchandise mix, store upgrades, and customer service

* Set organization-wide goals to reduce inefficiencies and implement cost-cutting incentives/continuous improvement programs to ensure best value is passed onto customers

3. What are the key components of Kohl's strategy as of 2007?

Students should have little difficulty identifying the key components of Kohl's business strategy. The following outlines the highlights presented:

Expand the number of stores by 20% annually: Credited as the nation's fastest growing retailer, operating 834 stores spanning across 46 states; Aggressive five-year growth plan to operate 1200 stores by 2010, opening new stores at the rate of 100 locations annually Locate new stores primarily in suburban neighborhoods: Suburban stores represent 93% of new store openings and offer location convenience for Kohl's target market, the middle-income family; Free-standing stores offer easy access, ample parking, and locks-out competitors; Innovative store design follows three-prone prototype model to serve a variety of markets

Customer service: The "3E" quality standard of exceeding customers' expectations (every store, every customer, every time) is an internal measure of employee dedication; Shopping with ease is enhanced by Kohl's website and on-line ordering capabilities, private-label credit card, various denomination gift cards, and life event gift registry opportunities; Ongoing feedback is solicited to increase customer loyalty and attract newcomers; Race track layout is consistent among locations providing quick access to departments and central checkouts for customer convenience; Reasonable return policy

Attract new customers: Two new segments Kohl's is targeting include the independent taste segment and the self-focused explorer, both non-family oriented women groups (4.5% and 3.1% market share opportunity respectively); Fashion has become equally as important to the merchandise mix as the basics; Launching exclusive "Only at Kohl's" merchandise and private-label apparel are central focal points

Enhance remerchandising efforts: Kohl's continues to emphasize its exclusive and private label brands while downplaying national brands; Successful product lines are researched and considered for product extensions into home collections while the cosmetic and accessory departments continuously evolve; High profile names are being used to develop, launch and promote merchandise such as skateboard icon Tony Hawk, high-profile apparel designer Vera Wang, and television personality Christina Saralegui; Good-better-best strategy categorizes lifestyle segments and identifies product gaps in merchandise offerings; Visual merchandising demonstrates fashion coordination ideas

Redesign and upgrade facilities: Exterior has a more contemporary look, featuring large display windows and earth-toned marble accents as part of the building; Customers directly benefit from wider aisles, additional directional signs, and improved lighting throughout the stores; Relaxed atmosphere is enhanced by an increase in size and in the number of fitting rooms, lounge areas with entertainment and comfortable seating, and newly remodeled restrooms and customer service areas

Reduce operating expenses: Expansion into the development and manufacture of its own private labels; Efficiency in advertising and promotional campaigns along with providing economies of scale from volume discounts as a national chain; Race track layouts and centralized checkouts offer efficiency for vendors and customers; Isolated store locations minimize premiums otherwise invested in real estate and additional costs associated with mall locations such as security and maintenance

Continue to be a leader in the community: Kohl's Cares for Kids Program raises funds through corporate contributions, provides scholarships, and sells fundraiser merchandise for schools, hospitals, and non-profits; Corporation encourages employees to take an active role in their communities by volunteering their time; in 2006, 57 thousand hours were volunteered for charitable events and partnerships formed between Kohl's and 143 hospitals; Kohl's is blazing trails by promoting green power; it aims to convert 75% of its California's store locations to solar power by close of 2008

4. Assess Kohl's financial performance during fiscal years 2002-2006. Do you think Kohl's will be able to sustain its growth goals?

Review of financial statements is an essential component of any company and industry comparison analysis. To evaluate Kohl's financial situation, refer to the data provided in Exhibits 8 and 9 of the case to reveal a number of interesting statistics including:

Kohl's store expansion

a. Kohl's has opened 360 new store locations during the past four years.

b. The number of new store openings has been steady but not at the 20% growth rate Kohl's strives to maintain on an annual basis. Beginning with 2003 through 2006, the number of stores added to the Kohl's operation each year was 85, 95, 95 and 85 which represents an 18.6%, 17.5%, 14.9%, and 11.6% percent increase respectively.

c. Number of stores has risen from 457 in 2002 to 817 in 2006, a compound annual growth rate (CAGR) of 77.8%.

Compound annual growth rate (CAGR) can be applied to more than just operating data. The formula for CAGR is: [(ending amount / beginning amount) (1/number of years) - 1], and then multiply by 100 to illustrate as a percentage. Application of CAGR will yield the following Kohl's statistics:

a. Net sales have risen from $9,120 million in 2002 to $15,554 million in 2006, a CAGR of 11.3%.

b. Gross margin has risen from $3,139 million in 2002 to $5,654 million in 2006, a CAGR of 12.5%.

c. Net income has risen from $601 million in 2002 to $1,109 million in 2006, a CAGR of 13.0%.

d. Earnings per share have risen from $1.75 in 2002 to $3.31 in 2006, a CAGR of 13.6%.

Profitability ratios

a. Kohl's and its primary competitors in softline merchandise have gross profit margins well above the industry standard of 28.3%. Gross profit margin (gross profit as a percentage of sales) for Kohl's in 2006 is 36.35% ($15,554/$5,654).

b. Both operating margin and net profit margins are almost two-fold above industry standards. Operating profit margin (operating income as a percentage of sales) for Kohl's in 2006 is 11.67% ($1,815/$15,554). Net profit margin (net income as a percentage sales) for Kohl's in 2006 is 7.13% ($1,109/$15,554).

c. Return on assets (ROA) measures the amount of net income that is generated by every dollar invested in company assets. The higher the ROA, the more profitable the company. Kohl's ROA is 10.33 whereas the industry standard is 8.01. Similarly, Kohl's return on investment (ROI) at 15.26 is well above industry standard of 11.91.

Other ratios of interest may include:

a. Kohl's has plenty of short-term liquidity, with a current ratio of 1.77 whereas the industry standard is 1.18. The current ratio indicates that Kohl's is well positioned to pay its maturing obligations and meet unexpected needs for cash in the short-term.

b. Long-term debt to equity ratio is .19 which is relatively low in comparison to industry standard of .49 and key competitors.

Students will realize that Kohl's strategy is yielding acceptable financial performance.

5. What obstacles may Kohl's encounter with its aggressive five-year growth strategy?

Often organizations are consumed by the desire to grow their business which can negatively impact their ability to remain profitable and can result in deviations from the organization's strategy. Kohl's has maintained its desire to grow in store locations by 20% annually and has also demonstrated the desire to broaden its product mix as evidenced by the increased focus on exclusive and private label merchandise offerings. Typically, department stores tend to expand by offering new services, extending product lines, and making acquisitions to reach growth goals. This can be dangerous when Management's actions are not in alignment with the corporate strategy. Trade-offs to growth exist and are to be considered when students evaluate strategic options available. Compromises taken to pursue growth goals can dilute an organization's competitive advantage yielding a loss in focus. Revenue may increase temporarily but not necessarily in relation to profits.

With Kohl's aggressive store expansion plans, the organization may face a number of obstacles including:

* Real estate opportunities and premium prices for prime locations

* Hiring personnel, training and retaining professionals at a sustainable rate

* Impact of consolidation on department store landscape

* Rise of Internet shopping

* Threat of discount stores offering better quality or name brand merchandise

* Lack of adequate infrastructure to support growth

* Dilution of brand reputation

6. As the newest member of the Kohl's Executive Committee, what recommendations would you make to sustain company growth and profitability?

Students should be encouraged to develop strategic recommendations for Kohl's by identifying reasonable options based on the case information and current industry events, evaluating alternatives, and developing short-term and long-term goals to achieve their chosen strategy. The following list provides a starting point for discussion on alternative strategies available:

* Branch out into Canada, Mexico, and U.S. Commonwealth of Puerto Rico

* Employ vertical integration such as purchasing its own fleet of trucks for transportation

* Develop partnerships with international suppliers and manufacturers

* Provide internships for apparel and jewelry designers to assist with rollout of new lines

* Open store locations at outlet shopping centers for overrun merchandise and promotion of exclusive brand merchandise

* Add in-store cafes or coffee shops to prototype locations

* Acquire Mom and Pop businesses which design unique hardline merchandise

* Occupy and/or transform mall anchor locations into stores with specialized services such as eyecare, photography, and beauty salons

* Develop marketing campaign and expand product offerings to include segment catering specifically to college-bound students for dormitory living

* Encourage charitable contributions by holding promotional events that offer customers who donate gently worn Kohl's brand merchandise additional, in-store savings on new merchandise

Stay on course

EPILOGUE

New challenges surround retail department stores during an era of rapid consolidation and new partnerships in the industry. As consumers lean towards other retail channels, department stores will need to revamp their strategic plans to remain competitive. As presented in the case, Federated, JC Penney, and Kohl's are expanding their domestic presence either through acquisition or building new store locations. Although this will present new opportunities to attract customers and gain market share, saturating the market with an influx of store locations is not enough. To be competitive, these retailers will need to develop a solid report with their core target market, the middle-income family, and offer desirable merchandise and customer service levels that exceed customer expectations. Kohl's will continue to broaden its exclusive and private label brands to differentiate itself. With department store chains becoming fewer in number and larger in size, differentiation will be key to survival.

Julie A. Zachman, University of Wisconsin-Parkside

Cathleen Folker, University of Wisconsin-Parkside
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Title Annotation:Instructor's Note
Author:Zachman, Julie A.; Folker, Cathleen
Publication:Journal of the International Academy for Case Studies
Article Type:Case study
Date:Jul 1, 2009
Words:4482
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