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With Its Amazon Deal, Kohl's Is Playing With Fire

By Jeremy Bowman - Sep 20, 2017 at 8:20AM

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Kohl's is now allowing Amazon returns at some of its stores. Cue the Trojan Horse. (AMZN 2.07%) is no friend to brick-and-mortar retailers. The e-commerce giant's breakneck growth and speedy delivery has put dozens of traditional retailers out of business and is squeezing even more. Amazon is the biggest reason for the "retail apocalypse" that is causing nearly 10,000 stores across the country to close this year, a new record.

That's why it was surprising when department store chain Kohl's (KSS 1.72%) said it would start carrying Amazon products in 10 of its stores earlier this month. Kohl's said it would launch a new "Amazon smart home" experience at 10 of its locations in Los Angeles and Chicago areas where customers can learn about and test devices like the Amazon Echo and Fire TV. 

The store-in-store spaces will also be staffed by Amazon sales associates. Shares rose 5% the day the news came out.

The partnership between the two retailers strengthened this week when Kohl's said it would accept returns on Amazon products in 82 of its stores, again in the Los Angeles and Chicago areas, a move that investors again cheered sending the stock up 2% at time of writing. 

The front of a Kohl's store

Image source: Kohl's.

Kohl's said it would pack and ship all Amazon returns at no charge to customers, essentially accepting them as if they were Kohl's items. It's unclear if Amazon is paying Kohl's for this service, or what Kohl's strategic incentive is here as it's extremely unusual for a retailer to accept a competitor's returns. Richard Schepp, Kohl's chief administrative officer, said, "This is a great example of how Kohl's and Amazon are leveraging each other's strengths -- the power of Kohl's store portfolio and omnichannel capabilities combined with the power of Amazon's reach and loyal customer base."

Kohl's shares appear to be rising as some suspect that Amazon will make a play to acquire it, but unless that's the retailer's goal, these moves seem incredibly odd, especially as there's no strength of Amazon's that Kohl's is benefiting from by allowing its returns.

The history lessons are clear 

Plenty of retailers in the past have teamed up with Amazon only to regret it later. Toys R Us declared bankruptcy this week, putting its 1,600 stores and 64,000 employees. While some see a debt hangover from a 2005 leveraged buyout is the primary reason for the company's misfortune, a deal with Amazon in 2000 may have sealed its fate. The toy giant signed a 10-year agreement with Amazon that year, stocking its goods on Amazon and becoming Amazon's exclusive toy seller. Toys R Us also agreed to give up its own website, as redirected to Amazon. 

Toys R Us sued Amazon in 2004 after Amazon began hosting other toy sellers. Toys R Us won and eventually got $51 million from Amazon and the right to terminate the deal, but it had lost valuable time in building its own online business by then. 

Similarly, Borders, which declared bankruptcy in 2011, made the foolish decision to give its online business over to Amazon, and Target (TGT 1.70%) has feuded with Amazon repeatedly over the years after making the mistake of putting Amazon in charge of its e-commerce site for a decade until 2011. 

In 2012, Target said it would stop selling Amazon's products like Kindles, and just weeks ago said it would move away from Amazon Web Services after Amazon took over Whole Foods. 

Wal-Mart (WMT 1.85%) never teamed up with Amazon in any capacity, but the world's largest retailer is doing everything to slow its rival's momentum. It's partnered with Google Express on deliveries, NVIDIA on AI, and called on its tech suppliers to ditch AWS. If even Wal-Mart is sounding the alarm on Amazon, it seems like all of brick-and-mortar retail should be doing the same.

Sears Holdings (SHLDQ) made a similar decision to Kohl's this summer when it said it would begin selling its Kenmore appliances on Amazon, but that was widely seen as a desperate move.

Is an acquisition in the cards?

Fresh off its acquisition of Whole Foods, it would be surprising for Amazon to make another blockbuster retail buyout so soon. However, Amazon has a history of moving quickly on new opportunities, and has shown increasing interest in brick-and-mortar with its expansion of its Amazon Books stores, in addition to the Whole Foods deal.

Still, Kohl's is not Whole Foods, which gave Amazon several things it badly wanted. Most importantly, Amazon gained a significant presence and a profitable piece of the $800 billion grocery industry that it had been unable to gain itself after a decade of trying. Amazon also got a well-respected brand in organic food and 450 supermarkets across the country, many of which are in high-income neighborhoods where Amazon's best customers live.

Kohl's offers none of those things. Instead, its 1,100 stores sell mostly the type of merchandise that is already available on Amazon. So an all-out acquisition would make little sense for Amazon, but a strategic partnership that allows it to sell its gadgets and for customers to make returns would be in its interest. 

For Kohl's, questions remain about why it would give up its own retail space to its fiercest and fastest-growing competitor. Investors may be cheering the move now, but as the examples above illustrate, they may eventually regret sleeping with the enemy.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.

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Stocks Mentioned, Inc. Stock Quote, Inc.
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Kohl's Corporation Stock Quote
Kohl's Corporation
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Wal-Mart Stores, Inc. Stock Quote
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NVIDIA Corporation
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Target Corporation Stock Quote
Target Corporation
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