Store of the Future   //   May 13, 2024

Kohl’s new brand partnerships with Babies R Us and Instacart feel like déjà vu

Over the last few years, embattled department store chain Kohl’s has launched a slew of unlikely partnerships to spark growth at its roughly 1,100 retail locations across the U.S. 

First, Kohl’s agreed in 2019 to let Amazon customers return packages to its stores, expanding a pilot program both companies started two years prior. In 2021, Kohl’s said trendy beauty retailer Sephora would set up hundreds of shop-in-shop locations within its stores. Both times, investors cheered, pushing Kohl’s shares higher. Neither strategy has paid off yet.

Despite this, Kohl’s is still pinning its latest turnaround hopes on two recently announced partnerships with Instacart and Babies R Us.

Same-store sales at the Wisconsin-based retailer have declined for eight straight quarters, according to company filings. On its most recent earnings call, Kohl’s CEO Tom Kingsbury said, “store comparable sales were flat in 2023, our best performance since 2010.” In other words, neither Sephora nor Amazon have been enough to drive sales growth at Kohl’s overall.

Kohl’s announced its shop-in-shop agreement with WHP Global-owned Babies R Us in March. The first Babies R Us shops will hit Kohl’s stores in August, and continue to open throughout the fall, with 200 stores open in time for holiday shopping, the company said on Wednesday.

The retailer is also offering same-day delivery through Instacart’s app, according to a Thursday news release. It’s a sign the retailer is leveraging its massive national footprint as retailers increasingly turn their stores into fulfillment centers to keep up with Amazon. The question is whether Kohl’s offerings are enticing enough to get Instacart’s user base of 109 million U.S. households to actually take advantage of faster delivery speeds. 

Kohl’s is betting the tie-ups will drive customer growth. Analysts, however, believe Kohl’s should work on beefing up its own brand rather than overly relying on others to revive the business. 

“It’s essentially an admission by Kohl’s that the brand isn’t strong enough on its own, that they need to partner with others to draw in shoppers,” said Morningstar analyst David Swartz. “It’s a bit of an embarrassment to some degree.” 

It’s a stark contrast from when Kohl’s tie-ups with Amazon and Sephora were first announced. Retail insiders at the time praised the partnerships as a smart way to boost foot traffic and gain new customers. Indeed, in interviews and earnings calls, Kohl’s has generally pointed to key success metrics related to both programs. The company has said it has gained 2 million new customers from its Amazon partnership. Similarly, Sephora has also helped boost sales at Kohl’s to some extent. In 2023, Kohl’s Sephora shop-in-shops generated $1.4 billion in sales, according to filings.

But here’s the rub: Neither has been enough to give the overall business a boost, and that’s reflected in the lackluster earnings numbers.

“The reality is that Kohl’s may have greatly increased their beauty sales, but the impact on the rest of the store is quite unclear,” said Morningstar’s Swartz. “It doesn’t seem to be generating overall growth, which suggests there’s a lot of people going into Kohl’s, stopping in at Sephora and then leaving.”

The crux of the problem is that Kohl’s hasn’t properly invested in its core business, according to Neil Saunders, managing director of GlobalData, including its product assortment and ability to compete with fast-fashion rivals. 

“These partnerships Kohl’s has are sensible. They don’t hurt Kohl’s in any way. But they don’t fix the core problem with the business,” said Saunders. 

The Kohl’s stores themselves need to be appealing so that shoppers who step in to buy a onesie at Babies R Us or lipstick at Sephora will want to browse the rest of the store. To do that, Kohl’s will need to make pricing more competitive and adapt quickly to apparel trends, said Saunders.

Kohl’s new tie-ups come at a time when the broader retail industry is struggling. The past couple of years have been tough on department stores thanks to stubborn inflation that has weighed on consumer spending, pushing shoppers to seek out cheaper goods or simply cut back on discretionary items like apparel. In April, mall stalwart Express filed for bankruptcy as sales lagged. 

On top of that, Kohl’s, in particular, has faced unique struggles of its own. Investors previously urged the company to sell itself amid languishing sales growth. But acquisition offers dried up after a series of dismal earnings reports scared buyers away, said Swartz. “The stock price has never recovered,” he said.

With Babies R Us, Kohl’s is hoping to expand into untapped categories, including baby products. Kohl’s Kingsbury has also been laser-focused on home goods, gifts and impulse purchases. “Collectively, we see these underpenetrated categories as more than $2 billion sales opportunity over the next several years,” said Kingsbury during the retailer’s most recent earnings call. 

As for Instacart, Kohl’s partnership with the grocery-delivery app builds on the retailer’s ongoing efforts to transform stores into fulfillment centers to compete with e-commerce. Kohl’s fulfills more than a third of its online orders in stores, according to The Wall Street Journal. 

Still, data suggests the power of Instacart’s same-day delivery capabilities may not be a big lure for shoppers. Nearly half of U.S. shoppers surveyed in a December report by research firm Forrester said the option of same-day delivery had no impact on which retailer or brand they would buy, Retail Dive reported at the time. 

“It’s very hard to see why anyone would need anything delivered that fast from Kohl’s,” said Swartz.

Time will tell if Kohl’s new partnerships will go the distance, but Kohl’s may be up against a ticking clock.

In interviews and earnings calls, Kohl’s has frequently touted its real estate portfolio as one of its distinct advantages as mall-based retailers languish. But Kohl’s competitors are increasingly pivoting to off-mall locations situated near movie theaters, grocery stores and restaurants. Macy’s, for example, just opened its fourth small-format store as part of a broader strategy to move away from old-school shopping malls. 

“Over the next five years, Kohl’s could see competition in the places it trades,” said Saunders. “Its advantage could become its Achilles heel if it doesn’t improve.”