Here’s Why Amazon Should Buy Kohl’s—With One Big Caveat.

By the time you read this, Kohl’s may have new owners. I hope it’s Amazon because, under the right circumstances, real strategic value can be created. The other rumored suitors bring little or nothing to the table that will make much of a difference for the struggling retailer.

While a few folks have told me they love this idea, most have told me it’s nuts. Here’s my rationale.

Amazon Needs Much Greater Physical Presence.

I got a lot of pushback when I wrote a 2018 Forbes piece—and doubled-down in my book—opining that Amazon’s future growth will be increasingly tied to brick-and-mortar retail. And while I think most of Amazon’s physical retail efforts have ranged between mediocre (Whole Foods, Amazon Books) and terrible (Amazon 4-Star), it seemed obvious to me that at some point a strong physical presence would be essential to garner meaningful, profitable share in large under-penetrated categories (e.g. fashion apparel & accessories, grocery, convenience stores) where brick-and-mortar adds real customer value (and profitability can be far better).

As we’ve seen Amazon struggle with both top-line growth and profitability of late, it’s not the least bit surprising to see Amazon shutter under-performing concepts that were decidedly unremarkable—and that would never amount to much even if eventually rolled-out—to focus on those sectors where they can unlock significant value that’s difficult to access through an online-only model. Hence their more recent dialed up efforts with Amazon Fresh, Amazon Go and the just opened, seemingly oxymoronically named, Amazon Style.

Kohl’s Addresses the Crux of Amazon’s Apparel Limitations

While Amazon is probably the largest purveyor of apparel and accessories on the planet today, they have continue to fall short in the more fashionable, upscale side of the market, as can be seen from the recent Coresight Report on Amazon’s Apparel Business. According to the survey, Amazon’s top product categories are footwear, casual wear, underwear & socks and athletic wear, while the two retailers it has garnered the most share from in the last two years are WalmartWMT
and Target. Importantly, all of the other most competitive apparel retailers have a substantial physical presence.

While Amazon Style may prove to be a winner, capable of scaling to the (minimally) several hundred locations that Amazon would need to be a national force, it will take many years and quite a lot of capital to get there. And they’ll need to steal share from plenty of strong, entrenched competitors.

A Kohl’s acquisition instantly gets them:

• $20 billion in incremental revenue
• 1,110 locations with excellent national coverage
• A platform to showcase and grow awareness for their more upscale national brands, as well as their growing roster of private brands that can easily get lost on a search dominant website. Overtime, this could give Kohl’s a critical point of differentiation.
• The ability to execute an expanded and more cohesive buy online pickup in store (BOPIS) and buy online return in store (BORIS) offering, as well as enhanced same day delivery, by repurposing excess store space (similar to what TargetTGT
  is so effectively doing).
• The opportunity to add Amazon Go to the front of many Kohl’s stores, which could be a great traffic driver and add meaningful incremental growth. Amazon would immediately have a huge number of stores that could be retro-fitted far more quickly than the typical stand-alone site selection process.

Moreover, an acquisition price in the vicinity of $7 billion is a pretty much a rounding error for Amazon.

It Spins the Retail Flywheel

The pushback I’ve heard—including on a recent episode of my podcast—is that in buying Kohl’s, Amazon would be catching a falling knife.

To be sure, despite many new initiatives and direct competitors shuttering hundreds of locations, Kohl’s has basically gone nowhere the past few years. Their most recent quarter was very weak, as was their full year outlook. But this view neglects two potentially important considerations.

First, the initiatives I suggest above could meaningfully improve both Amazon and Kohl’s margins. The addition of new brands, expanded store fulfillment options and Amazon Go outlets could turn around Kohl’s revenue trajectory quickly.

Second, we make a mistake when we think of Amazon as a conventional retailer. Retail has essentially become a loss leader for its growing and incredibly lucrative advertising business. Simply stated, even at breakeven on a conventional retail P&L, the millions of customers buying different stuff than they typically buy online at Amazon can create substantial upside for the ad business. Accessing that shopping data sooner rather than later provides a lot of upside even if Kohl’s continues to largely swim in a sea of sameness.

One Big Caveat: The Fault In Amazon’s Stores

The one but—and it’s a big one—is that Amazon has proven to be pretty bad at physical retail. And this is because their mindset appears fundamentally flawed. The core Amazon online business is about “buying”—that is, they win primarily at helping customers get things off their to-do-list; essentially running online errands. It’s rational, convenience dominant, search driven, etc. The best, more upscale physical retail is about “shopping”—namely engaging in a more involved, emotional and discovery driven experience. It’s more about effectiveness and story telling. Buying is fast. Shopping is slow(er).

Amazon’s relentlessly left-brained, technology first, efficiency-centric way of thinking fights with what makes certain types of retail successful. Look no further than how Whole Foods has been set adrift by Amazon’s taking their particular hammers to a very particular set of nails. Their mindset works pretty well for Amazon Go, but not so well with the other concepts they’ve tried.

Acquiring Kohl’s will require that they have a major mindset shift and allow the current Kohl’s team (with likely enhancements) to take the lead on executing an updated merchandising and harmonized retail strategy. The core Amazon capabilities must come as support to that. Without that, it will just be Whole Foods: The Sequel.

Having seen some of the things that Amazon continues to struggle with in their Amazon Fresh execution, I’m honestly not especially optimistic. But for them to win big on the more fashion side of apparel, home and accessories, they need a radical shift in their approach to physical retail.

Whether an old dog can learn new tricks remains to be seen. But then again, isn’t it always Day One?