Kohl’s Carves Out Brand Exclusives

Brent Felgner, March 21, 2006

Clifton, N.J. — With Kohl’s exclusive Candies bedding now in place, Nine & Company home awaiting a fourth design rollout, and the private label Apt. 9 about to debut, the first visible elements of a reset and remerchandised home department are now appearing in stores.Perhaps taking a page out of the JCPenney ‘s playbook, Kohl’s believes it is onto something good, where exclusive brands and all-out national branding of selected private labels will move to the forefront.

For years, the highly promotional, mid-tier retailer has relied on regular national brands to pull customer traffic into its stores. Today, that merchandise accounts for 75% of the $13.4 billion spread among its more than 732 stores. As Kohl’s projects more than 1,200 stores by the end of the decade, however, national brands clearly will have a less dominant share of the mix.

“Exclusive brands have been a recent introduction into Kohl’s, which is of strategic importance,” executive vp and cfo Wes McDonald said at a Bank of America investors’ conference in New York last week, “the advantage being that we are the sole destination of the brand, giving customers another reason to shop at Kohl’s.”

It’s happening now with Candies and Apt. 9 in home. Candies home launched this month with a splash of hot pink on an endcap and on the packaging, both supporting a queen-sized dressed bed. Candies debuts as two limited-sku collections, Bohemia and Ashanti, with ensembles promotionally priced at $149.99 queen ($249.99 regular). Shams, decorative pillows and valances round out the assortment.

Apt. 9 was expected in backrooms this week with the official rollout in April, featuring three collections in bedding, dec pillows and rugs. It will be supported with a national advertising campaign. “This is the first time Kohl’s has gone out and tried to have a campaign behind one of its private labels,” said chairman and ceo Larry Montgomery.

Kohl’s plans to launch the Polo Ralph Lauren-owned Chaps home lines “Only at Kohl’s” with a spring 2007 target date.

All of it — national brands, exclusives and aggressively branded private label programs — will become critical points of differentiation from other competitors, including specialty stores, he said.

The impact of Penney, however, can’t be ignored. Kohl’s enjoyed several years of relative freedom in its market segment as JCP first traded up and then retooled in a struggle to get its groove back. That floundering helped Kohl’s more than double sales and earnings since 2000 as the chain marched south, then east, then west into virgin markets to the point where today, it has a presence in 45 of the 48 contiguous states. It thrilled Wall Street during that time with compound annual growth rates of 16.9% in sales and 19.7% in net income.

The Street is still hot on the company. But Kohl’s clearly felt the impetus to find a “wider and taller customer base,” Montgomery said, perhaps with the recognition that Penney has been bounding back to the top of its merchandising game. “We pay very close attention to them and they clearly pay very close attention to us,” he explained.

The changes at Kohl’s extend beyond the chain’s advertising and marketing pitch deep into the entire store. Executives acknowledge execution is critical.

“You’re seeing new fixturing. You’re seeing changes in how we merchandise and in adjacencies in a lot of areas, just to support the new brands and the lifestyle merchandising,” Montgomery said. “We’ve changed the way we lay accessories, housewares, soft home, shoes and special sizes. But really the biggest one is how we’ve re-laid the missy floor, all about casual and career, and separated by how the customer shops.”

Displaying a nine-box grid, McDonald said the merchant is targeting three distinct customer lifestyles in terms of home and apparel, each with good, better best merchandise segments:

• Classic, whose customer is more traditional with an understated style.

• Updated, whose customer’s roots are in traditional styling but is more relaxed. “It’s classic with a twist,” he said.

• Contemporary, a more fashion-forward, trend-right customer who has no trouble mixing and matching styles.

Montgomery said Kohl’s was not raising average price points per se, but would respond to sourcing “price deflation,” looking to improve merchandise qualities where appropriate.

Kohl’s has multiple store and department sets due largely to its opportunistic acquisitions of other abandoned retail space, such as former Caldor and Bradlees locations. As a result, it’s not always easy to generalize about the merchant’s directions from random store visits.

The reset department, seen last week in this suburban New Jersey store, featured new, arguably more logical, adjacencies coupled with new, slightly narrower, mostly clear acrylic fixtures, particularly in bath. The fixtures improved both sight lines and the merchandise color statements, brightening the color-ribboned towel wall.

Rugs have been moved across the department from bedding to an area between bath and kitchen textiles, which segue into housewares. The bath area aisles appeared narrower, while bedding aisles have opened up. Eight vertical shower curtain and bath fixtures helped define the bath area’s 30-foot deep aisles of towels and bath rugs.

The queen-sized display bed was a relatively recent addition, adding a stronger feature element to the twin beds more commonly seen. Candies occupied that bed and an adjacent endcap, offset by the 12-foot run of inventory.

Nine & Company, the Nine West-branded line, appeared throughout the store. In three collections in home it traversed bed and bath, offering bed ensembles, dec pillows, sheet sets, shower curtains bath accessories, and towels. A fourth design will debut shortly. However, there was no thread pulling the bed and bath collections together, nor was there even a common branding identity, other than the style names themselves.

The executives said Kohl’s would continue to introduce new brands and labels throughout the store, including West End, aimed at the classic customer; AB Studio and the Claiborne-designed Stamp 10, targeting the contemporary; and Quiksilver-designed Tony Hawk, appearing now. They offered no guidance on which, if any, of these apparel lines might migrate to home.

Montgomery said Kohl’s is utilizing three store prototypes. The suburban store is typically 74,000 sq. ft., with first year volume ranging from $14 to $16 million. A smaller store contains 54,000 sq. ft in selling space with first year sales of $10 to $12 million. And the newer urban prototype is commonly 98,000 sq. ft. in selling space with first year sales of $20 to $25 million.

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