All Retail Is Local, Requiring Stores To Localize For Maximum Penetration, Like Sephora At Kohl’s

Kohl’s just
just
announced it’s opening another 250 Sephora at Kohl’s locations this year, bringing the total number of Sephora-enhanced locations to 850 by year-end, reaching nearly 80% of Kohl’s total footprint with the ultimate goal to be present in every store.

The Sephora at Kohl’s shops are 2,500 sq. ft. full-sized stores, not just little popups, equipped with Sephora-trained beauty advisors who offer a similar level of customer experience available in Sephora free-standing stores.

It is an unlikely partnership – Kohl’s sits firmly in the mass-market, while LVMH-owned Sephora is a luxury stalwart. With the heft of LVMH ownership behind it, Sephora could blanket the U.S. with free-standing stores, but it has chosen a more prudent, strategic and cost-effective way to beautify the country.

It recognizes all retail is local and its stores must fit into the local community with offerings specific to the wants and needs of the local community. It is doing it with Kohl’s.

Win/Win

The partnership has been win/win for both companies. Kohl’s reports some eight million customers bought Sephora beauty products in its stores last year, and about half of Sephora at Kohl’s customers added additional products to their baskets.

Even its Kohls.com online customers are engaging with Sephora at Kohl’s, with the company reporting strong digital sales growth.

For Sephora, it gets access to customers who’d likely never cross the threshold of a stand-alone Sephora store.

And while the actual number of U.S. Sephora stores is a closely held LVMH secret – it only reveals there are over 2,600 Sephora stores worldwide – a back-of-the-envelop estimate puts the total around 1,000 U.S. locations, based on the share of LVMH’s selective retail revenues in the U.S.

Thus Sephora is reaching parity with arch-rival Ulta’s 1,355 locations, which includes about 350 Target
TGT
locations and those a smaller 1,000 sq. footprint.

Kohl’s has built a community of loyal, fashion-conscious, value shoppers that Sephora wants and needs but couldn’t easily get without taking a different tactic than opening cookie-cutter stores.

It is following what Nikki Baird, vice president of strategy at Aptos Retail and fellow Forbes.com contributor, calls a portfolio approach.

“A ‘one size fits all’ approach to store expansion has proved ineffective,” she said. “Instead, retailers should employ a portfolio approach to any geography where they place stores. This includes thinking about all the customers they serve within an area and then considering the right combination of store formats and product assortments to serve unique groups.”

Prioritizing Portfolio Strategy

Baird explained that within any community, each local store can and should do different things depending on the needs of the local trade area and the infrastructure available at each location.

For example, in any major market, a retailer might have a flagship store and a couple of neighborhood shops with limited assortments specific to its location, broadening its reach. In addition, one location might be better suited to serving fulfillment duties in the trade area because of easy access.

“Not every store is the same in terms of cost of location or access,” she said. “The flagship location may do limited fulfillment and pickup, but that could detract from the store experience, which is what the flagship needs to lead with. And another location, because it is cheaper real estate and may have a spot where trucks can easily pull up, should primarily serve fulfillment for the region.”

A portfolio approach looks at each local market and marries the local store footprints to the community’s needs and each location. In this way, local stores don’t cannibalize each other and it lets each store put its best foot forward for the local shopper.

Both she and I have heard anecdotally that Sephora at Kohl’s works very well even with a stand-alone Sephora store close by, and its aggressive expansion plans with Kohl’s testifies to that.

Sephora also generates excitement and traffic in Kohl’s stores through special events, allowing it to bring in higher-priced, specialized inventory that might not work on a day-to-day basis there.

To effectively deploy a portfolio strategy within each regional market, the headquarters executive team must let go of their desire to centralize everything with a cookie-cutter approach and study each location’s capabilities, strengths and weaknesses, opportunities and threats.

“You can’t automate your way out of it,” she asserted. “You’ve got to work with and invest in local talent to take advantage of ideas that can bubble up from anywhere in the organization. This localized portfolio approach takes heavy lifting, a willingness to find different solutions and getting granular at the individual store level.”

More Work To Be Done

While Baird praises Target and Walmart
WMT
for experimenting with the portfolio approach in opening smaller-footprint neighborhood shops, she believes more work needs to be done to get the model right.

“It’s particularly hard for general merchandise stores to get their assortment right in these small neighborhood stores. That’s why it’s important for retailers to do a thorough market basket analysis because if you lose carrying one thing that is critical to local shoppers, that can wipe their willingness to go to the store altogether,” she added. “I don’t think they’ve figured it all out yet.”

She also pointed to Nordstrom Local as a positive step, but it is less of a store than a fitting room, heavy on services and light on merchandise.

Bloomingdale’s took a different approach with its Bloomie’s neighborhood store. Its first Bloomie’s opened in 2021 with a larger footprint, about 22,000 sq. ft., so it can offer a wider product selection.

Following its trial store in Fairfax, VA, not far from its flagship Tyson’s Corner location, Bloomingdale’s opened a second Bloomie’s location last October, about twice the size, in Skokie, IL, outside Chicago. And a third location in the Seattle suburbs will debut later this year.

Cure For What Ails Retail

“Looking across U.S. retail real estate, we remain over-stored. The old cookie-cutter, stamp-it-out and move-on approach to opening new stores has gotten us to this point of over-saturation,” she maintained.

And based on data from Coresight Research and reported by Retail Dive, we may be headed for more cookie-cutter retail expansion this year.

Last year the number of major retail store openings topped the number that closed – 5,103 openings to 2,603 closures. That hasn’t happened since 2016, and Coresight predicts 2023 will follow the same pattern.

The preponderance of openings in 2022 – nearly 2,000 – were discount stores, owing to inflation and the tightened economy, and the largest number of closures, some 750, hit clothing, footwear and accessories stores.

Footlocker, American Eagle Outfitters
AEO
, the Children’s Place, Gap
GPS
, Burlington, Chico’s and H&M were on the store-closing train, along with CVS Health, Bed Bath & Beyond
BBBY
. These are retailers that need to adopt the portfolio strategy.

But it is even more critical for the retailers slated to open more stores, like TJ Maxx, Burlington Stores, Academy Sports, Outdoors, Uniqlo, Dollar Tree
DLTR
, Dollar General
DG
and VF
VFC
Corp with its Vans, The North Face, Timberland and Dickies banners.

“We need to think smaller, more tailored locations that actually fit into the geographic reach of your demographic,” Baird said. “It’s harder to manage than a cookie-cutter approach, but most retailers I talk to indicate the customers acquired in stores are more likely to have greater loyalty and a higher lifetime value.”

“This is one of the many reasons why retailers need to make store format innovation a top priority,” she concluded.