Amazon bets on Kohl’s as its own brick-and-mortar efforts falter
Amazon.com Inc. has launched many brick-and-mortar experiments in the past few years: bookstores, grocery pickup kiosks, cashierless convenience stores. Yet none of these have shown as much promise as the e-commerce giant’s unlikely partnership with Kohl’s Corp., the very definition of an old-school retailer.
Two years ago, Kohl’s agreed to let Amazon customers return packages at stores in Chicago and Los Angeles. Last month, the two companies announced the partnership would expand this summer to more than 1,150 stores. That followed a March announcement that Kohl’s would feature Amazon devices in 200 locations. Wall Street applauded, sending Kohl’s shares up sharply.
By tying up with Amazon, the department store chain gets more foot traffic from those making returns, enticing them with coupons to browse the store and buy something. For Amazon, the partnership helps solve one of thetrickiest challenges in e-commerce: letting customers return products without subjecting them to nightmarish lines at the post office. About 30 percent of all online orders are sent back, triple the rate of store purchases, and Amazon keeps looking for ways to make the process affordable for itself and easy for customers. Eventually, Amazon may add private-label groceries and apparel to the electronics it already sells at Kohl’s.
Founded by a Polish immigrant in the 1920s as a single grocery store, Kohl’s has largely side-stepped the retail apocalypse. The Menomonee Falls, Wisconsin-based chain has perfected the art of “stickiness,” keeping customers coming back for its assortment of moderately priced apparel, shoes, accessories and beauty products. The stores’ race-track layout is designed to get shoppers wandering through other departments in the hopes that even those on a mission for one item will leave with a full shopping cart. A loyalty program based around Kohl’s Cash coupons gives shoppers another reason to return.
But like many retailers dependent on selling clothes, Kohl’s has struggled to grow. The company, which reports earnings on Tuesday, expects same-store sales to remain flat or increase 2% in 2019. Kohl’s has avoided mass store closings in part by leasing space to other retailers, including the German supermarket giant Aldi and the Planet Fitness chain of gyms. Now, by expanding the partnership with Amazon, Chief Executive Officer Michelle Gass is hoping to win back online shoppers one return at a time.
“Kohl’s had nothing to lose because people are still going to buy on Amazon whether they return their product to Kohl’s or not,” says David Swartz, an analyst at Morningstar Investment Service.
Kohl’s makes it simple for Amazon customers to return a purchase. Unlike Macy’s Inc. and J.C. Penney Co., which typically locate their stores in large, indoor shopping malls, Kohl’s mostly operates detached stores that are easier to access. The company has reserved parking spots for Amazon customers at participating locations near Chicago and Los Angeles and is expected to do the same as it expands the program to all its stores. Prominent orange signs direct people to a counter, where customers show a printed return label or code on their smartphone. In another customer-friendly move, returned items need not be re-packed.
One Chicago-area Kohl’s location can accept the return of more than 1,000 Amazon packages a day, according to a store employee, who says some customers return multiple orders at a time. Most of the shoppers are handed a coupon offering 25% off of any product from Kohl’s. They may not have shopped at Kohl’s before or planned to buy anything after dropping off their Amazon package, but the coupon gets some of them to at least start browsing.
Christie Booth doesn’t consider herself a Kohl’s customer and would rather just leave her Amazon returns on the front porch. The mother of two teenagers says her family visits Kohl’s in Huntington Beach, California, about twice a month to return Amazon packages and, armed with a coupon, will occasionally buy something. Booth likes the reserved parking and frequently shops at a Sprouts Farmers Market next door, so she can consolidate trips. Without Kohl’s, she’d have to drive a few more miles to a UPS Store.
“I live not even a mile from here,” she says. “So it works out great.”
Kohl’s stores near Chicago had a 9% increase in new customers last year; by contrast locations in other parts of the country that didn’t accept Amazon returns had a paltry 1% increase in new customers, according to Earnest Research. Sales growth at Chicago-area stores also outpaced locations without an Amazon returns counter.
Returns are a considerable expense for Amazon, especially if they’re shipped one by one from UPS stores or post offices. Traditional retailers have a built-in advantage because they have thousands of locations around the U.S. that can double as distribution hubs for pickups and returns. Walmart is a 10-minute or less drive from 90% of the country. With Kohl’s, Amazon will be within 15 miles of about eight in 10 Americans. Consolidating returns in one location can reduce Amazon’s cost per package to about $2 from $10 and decreases the likelihood a package is damaged in transport, according to two people familiar with the operation. Amazon declined to comment.
Beyond curbing shipping costs, Kohl’s can help Amazon make more of its own products visible. Kohl’s has a modest electronics selection, which Amazon is helping to round out in select locations with its Kindle tablets, Fire streaming devices and Alexa-powered Echo speakers. Amazon could also use space in Kohl's to sell its private-label clothing, groceries and household products. In-store shoppers are more inclined to make impulse purchases than online shoppers, a big reason for Amazon to keep expanding its brick and mortar presence. Clothing is the main category in which Amazon and Kohl’s compete directly. Kohl’s is hoping Amazon shoppers unhappy with their clothing will find something they like that fits them at a reasonable price at Kohl’s when they return the Amazon purchase.
Amazon’s decision to deepen its relationship with Kohl’s is necessary in part because its own brick-and-mortar efforts are faltering. Sales at the company’s physical stores have barely grown since the 2017 acquisition of Whole Foods, despite highly publicized price cuts on things like organic asparagus and strawberries. With investors asking pointed questions on earnings calls, Amazon is prioritizing Whole Foods and expanding its AmazonGo cashierless stores, according to people familiar with the matter.
That leaves the earlier retail initiatives languishing. Amazon will tell you that it’s simply experimenting as it does online, where tests come and go without most customers noticing. It’s much harder to hide its misfires in physical stores.
“Every time Amazon opens one of these test stores, it’s on the front page of the local newspaper, which makes it a lot harder to quietly shut it down,” says Erik Morton, senior vice president of Commerce Hub in Albany, New York. “They’re used to doing tests all day every day online.”
Consider the book stores Amazon began opening in 2015. They get decent foot traffic because they also accept returns, but people don’t linger because the stores are a pale imitation of a Barnes & Noble, with nowhere to buy coffee and hang out. In one experiment, Amazon is stocking products bought online by customers who live in the area—a bet that that specific merchandise is popular locally. This can lead to awkward juxtapositions; at the store in hometown Seattle, Melinda Gates’s book about empowering women recently sat next to an Instant Pot Mother’s Day gift display. During a recent visit to the store, most customers hurried past the merchandise to the returns counter. Amazon vice president Jennifer Cast, who returned to the company with much fanfare to launch the bookstores, shifted to a recruiting role last year.
Having opened about 20 bookstores, Amazon is now trying another concept, Amazon 4-Star, which is stocked with products awarded at least four stars by online customers. Curating merchandise this way has inevitably resulted in a random assortment at the three 4-Star locations in in New York, Berkeley and the Denver suburb of Lone Tree. The New York store had about two dozen shoppers browsing on a recent afternoon. As with the Seattle bookstore, more people were returning packages than making purchases, and the shopping baskets by the door were going unused.
Amazon’s two drive-in grocery kiosks in Seattle—opened before the Whole Foods acquisition—are getting little use. Again, based on observations, more customers are dropping off returns than picking up groceries. A kiosk outside Starbucks headquarters attracted three people in an hour versus the almost 100 people who visited a taco truck in the same parking lot.
The AmazonGo stores are cutting-edge technologically—billing customers automatically via their smartphones. But plans to open as many as 3,000 locations—there are now 12—have been delayed by technical glitches and the high cost of equipping the stores with all the required cameras and sensors, according to people familiar with the matter.
The Kohl’s partnership provides Amazon a relatively risk-free and low-cost way to expand its physical presence and narrow the gap with Walmart. If the experiment works, who knows: Amazon could even acquire the department store chain. “Amazon is approaching $300 billion in annual sales and it knows it can only grow so much online,” says Gene Munster, a managing partner at Loup Ventures who has argued that Amazon should buy Target Corp. “A big brick-and-mortar acquisition is inevitable. If you’re an odds maker, you’d say the probability of [it being] Kohl’s has increased.”