Earlier this week, Kohl's (NYSE:KSS) officially launched its recently implemented partnership with e-commerce juggernaut Amazon.com (NASDAQ:AMZN). Ten Kohl's locations in the Los Angeles and Chicago regions now feature an Amazon smart-home shop within the store. Those same 10 Kohl's stores have also begun taking returns for Amazon.com.
To many pundits, this partnership seems tantamount to suicide for Kohl's. In the past, retailers that have teamed up with Amazon have usually ended up regretting it. However, this time really could be different.
An unexpected partnership
In early September, Kohl's announced the launch of the "Amazon Smart Home Experience at Kohl's." These 1,000-square-foot zones carved out of 10 Kohl's stores will present a variety of smart home products and Amazon-branded electronic devices, with a big focus on Alexa-enabled products.
These mini-shops will be staffed by Amazon employees who can help customers figure out what products work best for them. Customers will also have the option of scheduling an Amazon expert to visit their home for a consultation.
Just two weeks later, Kohl's disclosed a second area of cooperation with Amazon. Eighty-two stores in the Los Angeles and Chicago areas will begin accepting returns for Amazon. Customers will be able to park in designated spaces near the store entrance and drop off the items they want to return, and Kohl's will pack and ship them back to Amazon for free. (Today, Amazon customers must pay for their own return shipping in many cases.)
The overarching goal of both initiatives is to drive more traffic to Kohl's stores. (Declining store traffic has been a big barrier to sales growth for many retailers in recent years.) Kohl's executives hope that some of the customers who walk into a Kohl's store to return an Amazon purchase or try out an Amazon Echo will also buy something else while they're there.
Is Kohl's letting Amazon steal its customers?
Many commentators think Kohl's is making a huge mistake by partnering up with Amazon, including two of my colleagues here at the Fool.
As my colleague Rich Duprey notes, many of the products that Kohl's will be helping Amazon to sell, such as the Echo, can in turn be used to buy more Amazon products. The risk here is that loyal Kohl's customers may wander into the Amazon area during a regular shopping trip, buy an Amazon device, and discover that it's easier to shop with Alexa than to trek back to Kohl's.
Meanwhile, my colleague Jeremy Bowman pointed out that partnering with Amazon eventually led to bankruptcy for Borders and Toys R Us. Both outsourced their e-commerce operations to Amazon in the 2000-2001 period, with disastrous long-term results.
Indeed, the companies that teamed up with Amazon in the early 2000s made a huge mistake. Borders, Toys R Us, and Target undoubtedly sent lots of customers to Amazon who had never shopped on the e-commerce site previously. At the very least, these three companies enabled Amazon's growth.
However, the situation today is completely different. Amazon is the biggest force in the retail world, and nothing Kohl's does (or doesn't do) will change that. Furthermore, it seems likely that the vast majority of Kohl's shoppers are Amazon customers as well.
Thus, the availability of the Echo at Kohl's isn't likely to have a meaningful impact on who ends up having one; there are plenty of other places for consumers to be exposed to Amazon's hit product. And while it's true that Kohl's would remove a major pain point for Amazon customers by accepting returns in its stores, the e-commerce giant could surely find somewhere else -- Whole Foods, perhaps? -- to set up an Amazon Returns operation.
Fifteen years ago, it would have been worthwhile for retailers to avoid doing business with Amazon at all costs. But given what Amazon has become, there's not much to lose anymore.
It all depends on the economics
Attempting to keep Amazon away from your customers may be a hopeless strategy these days, but that doesn't necessarily mean Kohl's made a smart move here. The economics of the two deals -- along with operational execution at Kohl's -- will be critical to making the partnership a success.
First, Kohl's hasn't revealed if Amazon will be paying a meaningful amount of rent for its smart-home shops. If not, then the profitability of the arrangement will hinge on bringing in a lot of incremental traffic and then getting those customers to shop the rest of the store.
Second, the returns operation could easily become an expensive logistical nightmare. Amazon is presumably compensating Kohl's for the labor involved in processing returns. Even so, if the volume of returns overwhelms staffing at Kohl's, there's a risk that this arrangement could lead to long wait times for regular customers, ultimately hurting sales. (I saw a similar issue with Lands' End returns at a Sears store this summer.)
So it's true that there are plenty of risks for Kohl's as it ramps up its new partnership with Amazon.com. But these are risks worth taking as Kohl's tries to bolster traffic to its stores.