Last fall, Kohl's (NYSE:KSS) launched a pair of interesting partnerships with Amazon.com (NASDAQ:AMZN). In 10 stores in the Chicago and Los Angeles metro areas, it opened Amazon smart-home boutiques. Meanwhile, 82 Kohl's stores (also in the Chicago and Los Angeles areas) began accepting returns for Amazon.
While some pundits predicted that these moves would backfire for Kohl's, they have contributed to its improving sales and earnings trajectory instead. As a result, the companies are expanding both pilot programs ahead of the 2018 holiday season. This could pave the way for further cooperation between Kohl's and Amazon in the coming years.
When Kohl's first announced that it would team up with Amazon last year, the department store chain was in the midst of a multiyear period of stagnant sales. The growth of e-commerce -- and particularly of Amazon.com -- had a lot to do with Kohl's struggles.
Given that Kohl's and Amazon clearly are competitors today, many industry observers found this partnership to be bizarre. By simplifying the returns process for Amazon -- customers can drop off unwanted items without having to box them up or pay for shipping -- Kohl's is removing the biggest pain point for a key rival. Kohl's is also giving Amazon a leg up by showcasing Echo devices and other Alexa-compatible hardware.
However, Amazon isn't the only one benefiting from these arrangements. For Kohl's, the point of teaming up with Amazon is to drive more traffic to its stores. (Indeed, boosting store traffic is Kohl's No. 1 priority.) Someone who comes to check out an Amazon device or to make a return can potentially be convinced to make a purchase once they're already in the store.
Good results on both sides
So far, Kohl's and Amazon both seem to be happy about working together. In August, Kohl's CEO Michelle Gass had good things to say about the partnership. She boasted that the Amazon returns process is providing a great experience for customers of both companies. Gass also noted that Kohl's had expanded the Amazon returns program to 21 stores in the Milwaukee area.
Third-party data appear to support Gass' upbeat attitude. In May, Gorkon Haskett Research Advisors estimated (based on geolocation data) that stores accepting Amazon returns had seen an 8.5% bump in customer traffic. Much of the incremental traffic consisted of new or lapsed Kohl's customers. Customers in those stores also stayed longer, on average, which suggests that many people who used the Amazon returns service shopped in the Kohl's store on the same visit.
These promising results presumably contributed to the decision to expand the returns pilot to more locations. Now, Kohl's and Amazon also plan to triple the number of Amazon smart-home shops in Kohl's stores to 30 in time for the holiday season. They will open 12 more in the Chicago and Los Angeles regions, plus eight in the Milwaukee area.
Even after the latest expansion of the Amazon-Kohl's partnership, it's still very much in trial mode. Less than 10% of Kohl's 1,100-plus stores are involved with either of the two initiatives. Kohl's in particular is still analyzing data to measure the benefits of working with Amazon.
More to come?
As Kohl's becomes more comfortable with the effect of its Amazon partnerships on its sales and earnings, it may look to roll out both the returns depots and the smart-home shops more broadly. (From Amazon's perspective, expanding to most if not all of the Kohl's store fleet would seem to be a no-brainer.)
Yet the current pilot programs with Amazon will most likely never make it to 100% of Kohl's stores. For example, Kohl's is interested in shrinking hundreds of its stores and renting out the excess space to tenants like grocery stores or convenience stores that could drive lots of traffic to the area. (It is starting with a 10-store partnership with discount grocer Aldi.) Smaller Kohl's stores might not have enough space to handle Amazon returns or to have Amazon smart-home shops.
On the other hand, Amazon's interest in physical retail has been growing rapidly. It wouldn't be remotely surprising to see Amazon Go grocery/convenience stores -- or perhaps another Amazon store format -- appear next to Kohl's stores eventually. Amazon Go seems like a perfect fit in light of Kohl's goal of partnering with retailers that will drive a lot of traffic to its stores.
Kohl's and Amazon may be moving slowly in expanding their collaboration, but it appears that they are just getting started.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levine-Weinberg owns shares of Kohl's. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.