News that Amazon (AMZN +0.20%) was planning to open its own department stores has led to speculation that it could take over Kohl's (KSS 2.18%).
While the two companies have partnered together on accepting Amazon returns and adding Amazon shop-in-stores, an outright acquisition seems unlikely. In this episode of The Five, recorded on Aug. 23, Fool contributors Jeremy Bowman, Brian Withers, and Toby Bordelon explain why.
Brian Withers: On Friday, former retail executive, Jan Rogers Kniffen, and now CNBC analyst absolutely suggested the same thing on Friday in an interview with Yahoo! Finance Live. He said they should be out buying Kohl's. They'll get a thousand of their stores in one fell swoop, they'd have a management team that could run them, they can put anything they wanted in them and the stores are probably right now on average about 25,000 square feet bigger than they need to be so they can certainly be a mini distribution center and customer service center. They are already doing business with Kohl's. If you're not familiar with that relationship, you can go into Kohl's and return stuff and I've done that. There used to be a Kohl's about a mile from my house and it was just a tremendously easy way to return stuff to Amazon. You didn't even have to package it, you just brought your barcode and the item back, and they just took it right there and put it in a big bin and shipped it off the Amazon. Question is, Toby, do you agree with Jan Rogers Kniffen, should they buy our Kohl's?
Toby Bordelon: No. [laughs] That makes no sense. Why would Amazon buy Kohl's? I get the argument that look, they have this relationship, they could use the space. I don't think Amazon wants to own Kohl's. Come on. Who wants to own Kohl's? [laughs] You have to take on that business and you've got to run that or you just shut it down or you're overpaying for something. You're just going to say, "We don't need to do this, we're just buying you for the real estate." Maybe there's a deal to be heard, maybe you can make a deal that says, "I understand your business is not all that awesome. Would you like to sell us half of your stores?" [laughs] Potentially, something like that. If Amazon obviously wants this retail presence, I think they can get there smarter, cheaper and better than just buying Kohl's. They can tech design what they want and put them exactly where they want them to be. Instead of just they're going to be where Kohl's happens to be, which might not be the ideal location for how they want to use this and what they want to do with it. When you buy a business, you're taking all the hassles and problems associated with that. Kohl's is not a winning business right now. I don't think. Why would you want that or would you want to that hassle? If I were Kohl's, I'd actually be a little bit nervous about hearing Amazon opening retail spaces, bricks-and-mortar stores, because what does that mean for that ongoing relationship? What if they don't need Kohl's anymore? Then what are you going to do if you're Kohl's? If you're going to cut your store traffic in half because you're not taking Amazon returns anymore. You have a problem. I don't want to knock Kohl's too hard, but that just doesn't make sense to me. Why would Amazon do that?
Jeremy Bowman: Toby, when's the last time you've been to Kohl's?
Toby Bordelon: To return something I ordered from Amazon. [laughs]
Jeremy Bowman: I can't remember the last time I was there.
Toby Bordelon: Honestly, I saw another person in town I knew at Kohl's in the lines to return something from Amazon. [laughs] That says something I think.
Jeremy Bowman: I don't get why Kohl's is doing that personally. There have been these rumors about Amazon buying them since they made that arrangement. I think there's Amazon shop-in-stores and Kohl's as well. But I just don't get it to build on what Toby said. Kohl's is not a great business. I think Amazon's desire to open a department stores is to provide customers something new and experiment with technology, like what we've seen with the Amazon Go stores. Their just walk out technology, which is pretty cool. There's no cashier. You just swipe your card and pick whatever you want in the shelves and walk out. I think they're expanding that to a full grocery store now too or maybe they want to test out something like a recommendation algorithm that can pick items for you. I don't know, but Amazon is a tech company first off, so I think they're going to try, if they do open a department store, they are going to try to put that spin on it or at least meld it with some of the things they are already doing. Like we see with their bookstores, 4-star stores. I also think the only other brick-and-mortar retailer they've acquired was Whole Foods and that really hasn't gone that well. They did that after trying to break into grocery retail for 10 years at Amazon Fresh, which also didn't go well. So that was a white flag, buying Whole Foods and that was 2017. You remember, grocery stocks just cratered on that news and it was like, wow, Amazon's going to take over supermarkets and all that and like that just hasn't happened. Walmart, Costco, Target, those stores have thrived, their groceries departments have done well. I don't think Whole Foods is really gaining significant market share, really the only thing Amazon seems to have done with it as just pair it with Prime. I think if the Amazon is going to open in department stores, they're going to start from scratch and put their own spin on it.
Brian Withers: It's interesting that you bring up the Whole Foods acquisition. Back then it was about $13 billion and this retail executive had said that if you put a premium on Kohl's, which sounds like neither of you would do [laughs] you would spend about 10 billion. Ten billion isn't a huge chunk of change for Amazon. I remember Jeff Bezos using a door as a desk in the first warehouse that they had. They've been very cheap from beginning and focused on cost and the customer experience. I just can't imagine. Acquisitions are hard. You got not only you have all the stores to deal with, you have their culture, you have their management, you have potentially retrofitting that you need to do. You go through all of that mess, spend 10 billion and then you find out it doesn't work like Whole Foods. I like what Amazon has done with Kohl's and providing a place for customers to return. But you know what? If it was a try and buy, that period is over. I think they passed on the option. I'm surprised the guy keeps saying, "I brought this up since 2014." Well, I don't think Amazon likes [laughs] the idea. [laughs] They would've moved on it already.
