Here is an excerpt from tbhe transcript of an interview of Michelle Gass by Sajal Kohli for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.
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Sajal Kohli: Obviously, brick-and-mortar retail has been severely hit over the past year and a half. How did Kohl’s respond and how has the unprecedented speed of change affected your organization?
Michelle Gass: We have stores across the country and on March 20 of last year, I did something I never envisioned in my wildest imagination: closing all 1,200 stores in one day, which at the time represented 75 percent of our revenue. I had been focused on growth, the P&L [profit and loss], the income statement, and in a nanosecond I had to pivot to studying cash-flow statements like a small business. It was surreal. The punchline for Kohl’s is that a year later we are a much stronger company, with more opportunities than we had ever imagined.
In terms of lessons learned, last year was a phenomenal leadership test on many levels: of vision, of resilience, of conviction, of decisiveness. We quickly landed on two priorities: maintaining the financial health of the company and ensuring the health and safety of our people and our customers. No playbook. The team came together, galvanized: nothing else mattered. It wasn’t about my area versus your area, it was give and take. At times like this, you cannot underestimate the importance of communication and transparency. We have 100,000 associates across the country and my instinct was to get in front of them. I have always prided myself on communication, doing quarterly town halls that are recorded, but within hours I thought, “I have to go live across the entire company.” So on March 16, 2020, when I frankly didn’t have a lot of the answers, I got up in front of our associates and said, “Here is what I know, and here is how we are addressing it.” It was important to demonstrate a sense of calm and clarity.
Kohli: Let’s fast-forward to the time when things became a little more stable. How did you think about your strategy then?
Gass: A big moment for us was on May 7, 2020, when we started reopening our stores. I had to ask myself, what will the world look like on the other side of this? We took a step back and considered what the consumer will be like, how marketplace dynamics will change, and where Kohl’s can carve out a reason to exist.
We used that time to tighten and focus our strategy. We had been on an incremental journey to move out of the department store space, but we saw a couple of big consumer trends. Number one, people were at home and dressing more comfortably and casually, and we saw that in our Active category, which became one of our best-performing businesses. Then we asked, who owns that space fully for the family? Kohl’s is already a casual-lifestyle destination, so let’s make that a much bigger part of our business and become known for that. We don’t want to be thought of as a department store, we want to be thought as a specialty lifestyle concept where consumers can get everything they need for their active lifestyle. That includes casual apparel and footwear, athleisure, outdoor products and, to be relevant on an everyday basis, it includes categories like wellness and beauty. So we pivoted our vision to focus and amplify those categories. We exited some brands and categories that were down-trending, so it is not only what you add but also what you delete to be more focused.
The second trend was the adoption of digital. Once people understand the ease and convenience of e-commerce, they will not go back to shopping exclusively in stores, but stores will continue to have a role in the future. So how do we set ourselves up as a winning omnichannel retailer? Turning to curbside pickup very quickly was a huge benefit for us from a capacity standpoint and kept customers familiar with going to the store. We leaned into digital while the stores were closed, but we wanted customers to shop both channels, and we learned that those customers who shop both are four to six times more productive.
I think the role of brick and mortar has been underestimated. Shopping isn’t simply transactional—it’s entertaining.
Another huge move we made over the course of the pandemic was to cement a partnership with Sephora, which will fundamentally transform the entire experience in the store. The last piece I would mention is value. It has always been part of the company’s DNA, but we saw the consumer communicating, “I want simpler value. How do I get to the end price sooner?” The gamification of Kohl’s, while fun for the experienced Kohl’s shopper, became a bit daunting for new customers. We are not swinging the pendulum back but offering value more quickly through investments in things like pricing and de-layering coupons.
Kohli: You already had a robust strategy that was getting a lot of traction in 2018 and 2019, and we see companies get wedded to their strategies all the time. How did you help people overcome their prepandemic biases to make these pivots?
Gass: The pandemic really did that. When, in an instant, the world changed around us, the company changed and people had to do things they had never done before. I think about our merchants slashing billions of dollars of receipts; asking vendors for longer payment terms. We are a $20 billion company, we are cash-generative, and we’ve never had to do that. It allows you to question everything. One silver lining was how business leaders came together—CEOs who were my direct competitors. We all talked about how we are navigating, what we are learning, and how we plan to reopen, and those relationships have continued.
Kohli: You have always been a big believer in the physical store footprint as a competitive advantage. As you look forward, how do you think the mix of brick and mortar and digital will evolve for Kohl’s, given that for many traditional retailers digital sales are less profitable than in-store sales?
Gass: In 2020, including the time when our stores were closed, our digital penetration was about 20 percent. I could see that ultimately leveling out at around 40 percent, but I think the role of brick and mortar has been underestimated. People are hungry to go back to restaurants and travel but also shopping. Shopping isn’t simply transactional; it’s entertaining—you get to touch and feel products—so we are positioned for an omnichannel future.
As important as growth is the margin-expansion strategy. We have put a lot of resources and attention into mitigating some of those margin headwinds. Cost of shipping is not the only factor; you also have wage pressures. But by looking at everything with a fresh perspective, we are identifying lots of opportunities. When we took our strategy public, we chose not to put a sales number on it. We will grow. How much? I don’t know, but I think we can hang our hat on the fact that we will get back to at least 7 to 8 percent operating margin, and we have discrete initiatives that can build that bridge. Logistics is a very complex ecosystem because we ship from all of our stores and 15 distribution centers, and people order things that may come in multiple packages. It doesn’t take a rocket scientist to see that is expensive. So how do you bundle more effectively? How do you allocate more dynamically? We are seeing opportunities left and right to make sure that, as we grow our business, we can do that in a more profitable way.
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Here is a direct link to the complete article.
Michelle Gass is the CEO of Kohl’s Corporation. Sajal Kohli is a senior partner based in McKinsey’s Chicago office.