October 21, 2019: Kohl’s new store concepts, Ross’ brick-and-mortar growth, Aldi’s grocery disruption

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TRANSCRIPTION

Julia Raymond:
Our guests today include Peter Fader and Sanford Stein. Peter is a professor of marketing at the Wharton School of the University of Pennsylvania. Besides his regular research and teaching activities, he’s co-founded two firms to commercialize his work on customer valuation. One ,named Zodiac, was sold to Nike last year and he continues to run the other, Theta Equity Partners. His recent book, “The Customer Centricity Playbook,” was recently named by Digital Book World as the top business book of 2019. Congratulations, Peter.

Peter Fader:
Thanks.

Julia Raymond:
That’s excellent. Our next guest, Sandy Stein, is a retail expert who spent over three decades providing consumer insight and trend analysis for the world’s leading brands. He’s the founder and moderator of Retail Speak on LinkedIn and the author of “Retail Schmetail.” He’s also a regular contributor at Forbes. Peter, Sandy, thank you both for joining us today.

Sandy Stein:
Delightful to be here.

Peter Fader:
Yes, indeed.

Julia Raymond:
So we’re going to go over a few hot topics in the news. The first one is our good friend Kohl’s. So they’re gearing up for the holidays. They’ve made some recent announcements, and similar to Macy’s Story concept, they’re planning on rolling out “Curated by Kohl’s”, which is something that’ll go to 50 of its stores, and it features six key brands that they will rotate out. So right now they’re including lingerie maker Adore Me and indie card maker Lovepop, those really cool cards that are 3D. They’re also testing out an outfit bar, that’s going to be about 600 square feet and they’re pairing some merchandise along with the styled mannequins that make it easier to show shoppers what kind of ensembles they can put together and buy a whole outfit at a time. So they’re making a lot of changes. Kohl’s Chief Merchandising Oficer, Doug Howe, told CNBC that he wants Kohl’s to be a pipeline of “newness” and “discovery” for its customers.

Julia Raymond:
Sandy, do you see Kohl’s stores winning back, maybe, some of the younger customers? And what are some challenges that you think Kohl’s is facing with it’s front-facing end?

Sandy Stein:
I’d love to believe that Kohl’s has the ability to drive a millennial customer in the store. Unfortunately, the statistics suggest that they’ve got some heavy lifting; their customer is older than either Macy’s or JC Penney. I think they’ve talked about some interesting, thoughtful ideas. I think Michelle’s a good leader for them, but I think that they’ve got some real challenges. I think that the big picture, their Amazon initiative has been a good one, I think it’s driving traffic. I don’t know that that’s converting. I think some of the things that they’ve talked about, such as the outfit bar and some of the new brands, are good, but I think things like outfits on mannequins have become table stakes a long time ago and Target is doing it very well in every one of their categories. And unfortunately Kohls, I think, is behaving more like these are tactics rather than a larger strategy.

Sandy Stein:
I did visit a number of the Kohl’s stores in the last several days. I’m not yet seeing any indication that there is any freshening up. I feel unfortunately, compared to what Target is doing with their new prototype, the Kohl’s stores seem crowded, a little bit disorganized, and they’re filling their drive aisles full of product, as we’re getting near the holidays, which to me seems a bit desperate. It’s just not as open and shoppable as it should be. So I think they have a fair amount of work to do and I’m not sure they have the financial wherewithal to do the kind of fundamental re-imagining of their brand that I think may be necessary.

Julia Raymond:
Fair enough. Peter, do you agree that it’s a bit, maybe almost a desperate attempt, when you look at the big competitors?

Peter Fader:
I agree with a lot of what Sandy is saying, especially his point that they’re doing a lot of tactical things that aren’t necessarily connected with each other and are not necessarily strategic, but some of those tactics that they’re trying are really bold. I mean, we have to acknowledge, let’s start with the Amazon one. Beyond the headlines that it got, that’s a pretty bold move. So at least they’re not being too defensive. It would be great if there was some vision behind it all, but if a couple of these tactics can hit and if they can then eventually find some strategic connection to say, “Oh yeah, that’s what we were thinking about in the first place.” I’m a bit more upbeat about their prospects than what Sandy was conveying, but there’s no doubt that there’s a tremendous amount of risk. A lot of these things they’re going to try aren’t necessarily going to work.

Sandy Stein:
I think that the Amazon move was a very bold, and I think a very interesting, one. I’ve said for some time that I believe ultimately they could well be taken over by Amazon. It might be a very interesting next step for Amazon in terms of becoming the retailer. And I know that the strategy has yielded footfall. People are coming into Kohl’s to avail themselves of the free returns with Amazon. I have tried it myself, and unfortunately, while the technical aspect of the return, it works very, very swiftly, and all that Amazon has provided is fluent and and effective, I waited 20 minutes in line because they were just not providing the number of support people. So it’s a mixed bag. It’s good, but it’s something that they might not have been prepared for in terms of just dealing with the number of returns.

Julia Raymond:
That’s interesting.

Peter Fader:
I have to admit, I was wrong about the Amazon thing. I was very skeptical. I guess I still am, to some extent, saying it’s a different kind of audience, a different kind of experience and everything, and that in some sense it was Amazon was using Kohl’s in the same way that they’ve used Toys “R” Us and Borders and other companies that they then eviscerated. But apparently, it really has been … It’s still early, but it has been much more successful for Kohl’s than I would have imagined. So, got to give them credit for it.

Sandy Stein:
Yeah, it’s driving traffic. The question is, is it creating conversion? And I’m a bit skeptical about that, but hopefully the numbers will prove that to be a success.

Julia Raymond:
Definitely. And I will jump in, that I read on an article recently that it was reported that the CEO, I think just at a event or something, told some of the attendees that they’re seeing about 80% of customers returning an Amazon package at their store are also shopping after they drop off the return. However, I think Kohl’s reached out officially and said that that number … They haven’t actually released any official data to the public. So it will be interesting to see when they finally do.

Sandy Stein:
Yeah. I read that too and I smiled a little bit.

Julia Raymond:
That’s really high. It’s a big number.

Sandy Stein:
Yeah. They could only hope that that is the case. I’m a bit uncertain about that.

Julia Raymond:
A little skeptical?

Sandy Stein:
Yeah.

Julia Raymond:
Well, whatever works. Got to stay positive. There’s so much going on. And I do tip my hat to Kohl’s because it seems like they are trying to come up with some creative solutions. There’s reports they’re also looking into Facebook to see what products are trending and try to bring those into their beauty checkout platform. So some interesting stuff, we’ll have to see where they go. But I like hearing both your thoughts and even on the points that you even disagreed a little bit. Any more on Kohl’s before we go and jump into Ross?

Sandy Stein:
I think Kohl’s will benefit from what is, to me, ultimately the likelihood of JC Penney’s demise. I think that there’s some crossover there. They do have a very loyal customer. They do do a very good job with their loyalty points programs. And the fact that they’re off-mall is probably the biggest benefit they have going for them right now, in that they’re not dependent on mall traffic, which is just continuing to fall. So they’re in a better position, it’s a matter of what they do with those stores and whether they can find the money they need to make the kinds of investments that are more strategic and forward-looking and move from a tactical to a more strategic play.

Peter Fader:
Agreed. Agreed.

Julia Raymond:
And Peter, you agree, maybe even on the J.C. Penney point that they’re following in a bit of their footsteps?

Peter Fader:
Oh, absolutely. I think they’re in a very good position to pick up some of that business. And again, I think their locations, that’s a very big plus. That was a strategic decision they made a long time ago, and I think it’s already been paying off, but I think that the best is yet to come on that particular issue.

Julia Raymond:
Absolutely. Well, thank you both. I’m going to jump into Ross. The news is that Ross is on track to open 100 locations this year. So in just the last two months they’ve already opened 48 new stores across the United States and that brings their current total footprint to over 1,800 stores. So pretty significant for Ross. And while the apparel sector is facing more store closings, is this something that is a smart move for Ross? They continue to forge ahead with top line sales increases of 6.5% last quarter, so financially doing somewhat well. Peter, is this something that you see as a positive thing for Ross to keep rowing with a goal of 2,400 stores within the next couple of years?

Peter Fader:
It’s really hard to say because it’s easy to be very critical about Ross, and I will do so in a minute, but they keep surprising investors and other outsiders, that they keep beating earnings forecasts. They’ve been doing it for, I think, something like 12 or 13 quarters in a row, and that’s really hard to do. So we’re not necessarily in the right position to look at them and size them up, because they keep coming up with more than anyone would expect out of them. But having said that, that’s a lot of stores. And I got to give them credit for zigging when everyone else is zagging, but at some point, too much is too much.

Peter Fader:
And I worry about Ross, where they are in the subsector that everyone associates with them. People put them in that treasure hunt category along with with TJX and others. I don’t think they really belong there. I think you go into a Ross store … And Sandy just said it with respect to Kohl’s, but I think it’s much worse with Ross: those stores are a mess. They’re kept up very badly, there’s very few people working there. I think whatever success they’re finding is because they are truly a rock bottom discount retailer, and so people are going there for the bargains. And there’s nothing wrong with that, but that’s just a very different positioning, a very different vibe, and perhaps a very different customer than those who are looking for the more treasure hunt, experiential sort of thing. That’s not what Ross is all about.

Peter Fader:
So the the good news, the silver lining to that, is that recession that’s going to be inevitably hitting us, if they stay with that kind of positioning, then actually they’re in a good spot to do well, and maybe having more stores will be a good thing. Once the the treasure hunt bubble fades or the next fad comes along, just to say, “Look, we’re just a discount retailer. You get reasonable stuff cheap.” Maybe that’s the right position for them, but I still think it’s probably too many stores.

Julia Raymond:
So maybe they’re tipping the scale just too much, but you are noticing that they’re having some success and they continue to surprise us a little bit. Sandy, are you in agreement that they are not a treasure hunt retailer, and as long as they stick to the bottom bargain deal they’ll be all right?

Sandy Stein:
I agree with everything that Peter said, and my concern for any retailer that is price only is that’s not a good place to be any more, that the customer is increasingly recognizing the difference between price and value. And when you look at what TJX is able to do with constantly bringing in new product, getting great turns, not elegant stores by any means, but very shoppable, and they’re very appealing. I think a retailer that is only talking price, that’s a chase to the bottom that nobody wins. That’s a hard game anymore because anybody that’s doing price well is also doing value, and value goes beyond just price, and it includes the customer experience. It includes the ease of shopping. And while I agree with Peter that a recession will help a price-driven retailer, the most successful low price retailers are offering more than just a low price. They’re offering value in other areas that differentiate them.

Julia Raymond:
That’s an interesting perspective, so just along with the whole trend of retail becoming more about the experience. The one thing I will point out that … It was probably because I was reading all about the resell market to prepare for an interview the other day, but it’s growing 21 times faster than the retail or [PEL 00:16:54] market has over the past three years. It was at $24 billion last year. It’s going to reach $51 billion by 2023, is the prediction. And I’m just wondering, will some of these secondhand managed marketplaces or peer-to-peer, like Poshmark, if that will eat into some of Ross’s potential success?

Peter Fader:
Well, it has to.

Sandy Stein:
Yeah.

Peter Fader:
I mean, it can’t be good for them. And then you throw in not just the resale, but the rentals, the subscription, which is all the cool kids are doing these days with apparel. So, there are definitely issues out there that I don’t think Ross can respond very well to. But like I said, they keep surprising us amidst all kinds of other turmoil happening in the industry. So hard to count them out.

Julia Raymond:
Absolutely.

Sandy Stein:
I would agree that retail is the next big thing that’s going to disrupt, and it’s already expected to out-perform fast fashion within less than 10 years, which is an extraordinary notion, but it does play very well with a millennial consumer that’s interested in sustainability, that really is living a different belief system from the shop ’til you drop days of the past. And the resale will continue to affect companies like Ross.

Julia Raymond:
Both very good points, and I think we covered a good mix of perspectives, really, on Ross’s moves. The next retailer we’ll talk about is actually a grocery retailer. It’s Aldi. So they’re actually a European grocery retail chain. They’re a major disruptor in our local American grocery market. They’re now on track to become our third largest super chain market in the U.S. behind Walmart and Kroger, so pretty significant. And their shopping experience is sort of based on do it, find it yourself, which is much different than some of the other more boutique stores that we see in local markets. And despite their little customer service and the fact that they virtually do no coupons, they’re joining other limited assortment grocers like Trader Joe’s, which are forecasted to rise significantly through 2023 with revenue.

Julia Raymond:
So Sandy, in the retail climate that seems preoccupied with quality and service and experience, do you think Aldi’s the exception to the rule when it comes to price outweighing the experience? And this relates back to the Ross stuff we were just talking about.

Sandy Stein:
I think that Aldi is hitting on every cylinder. They’re an incredibly efficient machine and I think it’s more than just a low price that they’re leveraging. And as you suggested, that limited assortment concept in grocery is growing at 11 times that of the traditional supermarket chains. And most of the traditional supermarket chains are trying to find smaller and smaller prototypes that are more efficient. Unfortunately for them, Aldi, being the eighth-largest retailer in the world, has strengths and purchasing that is is difficult to deal with, for some of the other players. They are doing so many things that make that shopping experience efficient. They’ve got 90% of the product is private label. They only do about a single SKU of every product in the store. It’s an edited offering and you can’t overstate the fact that choice has been a problem. We have too many choices and too many stores, which has created a problem for many different retailers. And the Trader Joe’s and the Aldi’s and even the Costcos have eliminated or edited down that choice offering. That is working for them and enables them to do in the area between 708 and 1,300 products, compared to a Walmart, a grocer that has 30,000 products.

Sandy Stein:
So you can imagine just by that kind of editing and the fact that it’s a single SKU and the fact that they’re turning product faster than anybody else, that they are able to move a lot more product through those stores. And they’ve developed a level of efficiency that is really mind-boggling. They’ve got every single side of their packages have a barcode on it, and that enables-

Julia Raymond:
Wow, I didn’t know that.

Sandy Stein:
… that person to move that stuff through there really, really quickly. And-

Julia Raymond:
It’s foolproof, right?

Sandy Stein:
Well yeah, it really is. The stores are clean and fresh and open, and the product mix changes constantly. There’s a little bit of a treasure hunt going on there like Costco; not quite to that level, but it is a factor because the mix is always changing. Another thing that’s really interesting that’s been noted by some of the other commentators is that if you follow an Aldi shopper, they shop the entire store. They’re not coming in for a thing and running out. They really do make their way through the whole venue to get a feel for what’s there, and they have less hours than most of the other stores. They’re paying their managers somewhere between 25% and 75% more than most other retailers, so they really have a machine here that is going to continue to grow while conventional grocery retailing is generally in decline.

Sandy Stein:
It’s an amazing concept, and at 1,900 stores now in 36 states, they’re going to continue to grow and they’re going to continue to take share, I think, from a lot of the big ones. When you look at Kroger, which is the second-largest grocery retailer behind Walmart, Kroger has 2,800 stores, but they are in 28 different chains. Now you can just imagine the relative complexity of a company like Kroger supporting 28 different chains, and the efficiency that an Aldi has of being able with 1,900 stores to have every one of these stores pretty much identical and push that amount of product through them, even with lower margins. So they’re on a roll and they’re going to continue to disrupt grocery in the United States.

Peter Fader:
He said it well.

Julia Raymond:
Certainly.

Peter Fader:
Aldi, I couldn’t agree more. For a lot of Americans, they’re still on the periphery, because they’re still growing. They’re still not nearly as visible as, let’s say, a Kroger or a Walmart. But for those who know Aldi, they don’t even need that much experiential stuff in the store because it’s like a religious experience just going in there. That whole idea, you have to put the quarter in the slot to get the cart. I mean, that’s a hassle. That’s a terrible, stupid thing for any other store. But for Aldi, it makes the whole thing better. If they

Julia Raymond:
It’s on-brand.

Peter Fader:
Exactly. If they took that away, you’d feel worse about it. And the idea that you could then give your cart to someone else and you’ve saved them a quarter, or whatever. There’s a real community there. And Sandy said it well: it’s the alignment of strategy and tactics. We’re talking about Kohl’s and Ross and so on, where there’s some confusion there, and issues about competition, and a lot of what they’re doing is just to either follow or preempt others. Aldi is marching to their own beats, and no one else can can maintain that kind of cadence. It’s not a matter of just cutting prices. It’s not a matter of having the, whatever they call it in the middle, the aisle of dreams. These are things that only an Aldi can pull off, and they’re doing so spectacularly well. And I think the best is yet to come as they become truly ubiquitous in the minds of all Americans.

Sandy Stein:
I agree with Peter 100%.

Julia Raymond:
Absolutely, and thank you both for bringing some stats around that. Sandy, like you said, 90% of their product is private label. You also mentioned they pay their managers 25% to 75% more. And just everything that leads to the operational efficiencies you were talking about, that’s huge value prop. And then, Peter, just with their strong brand image and where they’re headed, there’s still a lot of room to grow in the eyes of our market and potentially other markets.

Peter Fader:
Yeah, there’s no doubt. We talk about a lot of retail disruption, and very often it’s some itty bitty, little digitally native company that’s nipping at the heels and maybe punching above their weight and getting more attention than they deserve. But this is a giant company, and for them to be doing this in such an agile and unique manner … This is, again, Sandy used the word, big time disruption, and one that it’s not clear that you U.S. grocers are going to be able to recover from.

Sandy Stein:
Another advantage that they have that’s really unique and places them in a wonderful position is because these stores are as small as they are, it enables them to seek out real estate that a Kroger or certainly a Walmart couldn’t even consider. They’re opening two new stores virtually at the same time in Minneapolis, and one of their newest stores is in a very dense urban area of south Minneapolis, a ground level of a new apartment building. And the demographic in the area, the walkability, everything that plays today in terms of really having a devoted, dense customer base right at the foot of that building, gives them an opportunity to go so many places that a bigger grocer retailer that has to depend on either suburban or very expensive urban real estate. These guys can take advantage and be places that just are unique to them and really profit by it.

Julia Raymond:
Definitely. That was a great example. So yeah, Aldi, big places for them to go, big disruption. I think that it aligns well with the shifts in consumer behavior: consciousness about healthier foods, and the fact that they’re able to swap their assortment relatively quickly. So good things. There’s also a lot of renovations going on. I don’t know if either of you shop at Aldi, but I have one about five minutes away from me, so I go there quite often. And they’re totally renovating it and making the backroom a bit smaller to expand refrigeration space on the retail floor.

Sandy Stein:
Yep, they’re bringing in more fresh product, they’re bringing in poultry, meat, and so they’re broadening a little bit, and they are, yes they are both doing a new prototype which is really fresh and clean, and I won’t say a bit more upscale, but certainly more pleasing. Yeah, they’re definitely a factor and the one that’s coming up behind them now, Lidl, is also going to be an interesting one to watch because they’re another behemoth from off continent that’s going to come in and start to make itself known on the heels of what Aldi has done.

Peter Fader:
Although so far, their entry into the U.S. hasn’t really gone that well. They opened a bunch of stores here on the East Coast and I think they’ve had to step back and rethink it a little bit. So it is interesting that from an American’s perspective we’re just looking at these European grocers and saying, “Eh, they’re all the same.” Watch them come on over here and start to execute, and we start to see some of those differences. And some of the tactics work, some won’t. So I think the jury’s out on Lidl, but Aldi is clearly a big success, and by no means is transient. They’re here to stay.

Sandy Stein:
Yeah, I agree.

Julia Raymond:
Absolutely. Will be interesting to see if Lidl does big things or not. I haven’t actually been to one yet, but I am seeing them come up in a few news reports. I think that wraps it up. What’d you guys think?

Sandy Stein:
This was most enjoyable, Julia. I appreciate it. And it was fun being on with Peter.

Peter Fader:
Yes, it is. Always great to share some ideas, sometimes aligned, sometimes we’ll see things a little differently. But there’s nothing better than sitting around and talking about retail. It’s just such an incredibly exciting time. And we’ll look back at these comments a few years from now and think they’re positively quaint. But yeah, looking forward … It’s a crazy world out there, it’s fun for us as experts to be able to look at it and ponder. For those in the trenches, a little bit tougher.

Sandy Stein:
That’s right.

Julia Raymond:
Absolutely. And like you said, Peter, you guys are the experts and I so much enjoy hearing your thoughts about all the changes occurring in the industry. And for our listeners out there, if you are also a retail expert, influencer, or in the space with a retail brand, please reach out and we’ll have you on the Rundown. Thanks both for joining the show.

Sandy Stein:
Great, Julia. Thanks for having us.