1 DeborahWeinswig,CEOandFounder,CoresightResearchdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2018CoresightResearch.Allrightsreserved.

March 6, 2018

Kohl’s and Aldi: A Win-Win for an Overspaced Department Store and a High-Growth Grocery Chain

• Kohl’swillbecarvingoutspacefrom5–10ofitsstoresandleasingthatspacetogrocerydiscounterAldi.

• Aldi’saveragestoreis20,000grosssquarefeet,equatingto23%ofatypicalKohl’sfull-rangestore,whichmeasures88,000grosssquarefeet.

• Kohl’sisuniquelypositionedamongthetoptierofUSdepartmentstoreretailerstomakethismove,asmanyofitsstoresarelocatedinthekindofopen-aircentersinwhichAldipreferstolocateitsownstores.

• TheKohl’sinitiativefollowsitsrecentintroductionofAmazontechnologydepartmentsandAmazonreturnsservicesatsomeofitsstores.

OnMarch1,USdepartmentstoreretailerKohl’sannouncedthatitwouldbeslimmingdown12ofitsstoresandthat,aspartofapilotprogram,5–10ofthosestoreswouldcarveoutspacetohouseAldidiscountsupermarkets.Kohl’sCEOKevinMansellsaidonthecompany’sfourth-quarterconferencecallthatAldiwouldbethecompany’sinitialpartnerasitdownsizesstoresthroughcarve-outs,butthatitcouldleaseexcessspacetoothergroceryretailersorserviceproviders,suchasfitnesscenters,inthefuture.Mansellidentifiedsuchoutletsas“trafficdrivers”thatKohl’sknowsit“cancoexisttogether[with]foralongtime.”

TheannouncementthatKohl’sisseekingtorightsizeselectedstorescomesinthecontextofadepartmentstoresectorthatisincreasinglyrecognizedasoverspaced.ThesectorhasbeenmarkedbynewsofstoreclosuresbyMacy’s,JCPenney,Searsandothers,butKohl’shassofarstoodapartfromthosenamesbyannouncingnoclosureprogram.

2 DeborahWeinswig,CEOandFounder,CoresightResearchdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2018CoresightResearch.Allrightsreserved.

March 6, 2018

Space:SmallBoxinaBigBoxContrarytosomemediareports,AldiwillnotbeopeningshopsinanyKohl’sdepartmentstores.Instead,Kohl’swillbecarvingoutspaceforseparate,adjoiningstoresthatwillbeleasedtoAldior,intime,othercompanies.So,AldiandKohl’swillbeneighborsratherthancohabitants.

Kohl’shastheadvantageofbeingapredominantlyoff-malldepartmentstoreretailer;weseethisasonefactorbehinditsrecentstrongperformance.Kohl’sstoresinopen-aircentersarefundamentallysquareboxes.Thecompany’scoreestateoflargerstores(whicharethekindweexpecttoseedownsized)average88,000grosssquarefeet.

Aldi’sstoresaresmallersquareboxes.AccordingtotworecentAldiUSrealestatebrochures,thecompanylooksforstoresthatare17,000–22,000grosssquarefeetinsize.IfwesplitthedifferenceandassumethatAldiwilltakeanaverageof20,000squarefeetofspacefromeachoftheKohl’sstoresinvolvedinthepilotprogram,thentheimplicationisthatAldiwilltakeapproximately23%ofspacefromeachofthedownsizedKohl’sstores.Weprovideanapproximaterepresentationofsuchacarve-outinthegraphicbelow.

Figure1.EstimatedAldiSpaceCarve-OutataTypicalKohl’sStore

Source:GoogleStreetView/companyreports/CoresightResearch

ThisalsoimpliesthatthetypicalKohl’sstoreinvolvedintheprogramwillloseoneofitstwoentrances,whichwillbeusedtoprovidecustomerentrytothenewAldistore.

AldiHuntingforRealEstateAldiaimstooperate2,500USstoresbytheendof2022,upfromacurrent1,755(perAldi’sonlinestorelocator).WebelievethatAldiopenedapproximately150USstoresin2017,andweestimatethatitwillopen200morein2018.TheexpansionofretailerssuchasAldi,Lidl,dollarstoresandoff-pricechainsisunderpinningstrongdemandatopen-airshoppingcenters,whichwenotedinourJanuary2018reportWhatRetailApocalypse?ReviewingTrendsinUSBrick-and-MortarRetail.

BycarvingoutspaceforAldistores,Kohl’sisgivingAldiaccesstosuchopen-aircenters,includingthosewherehighoccupancylevelsmeanthattherearenoexistingretailunitsavailableforAlditomoveinto.Kohl’soperates1,158storesin49USstates,providingapotentiallywidenetworkoflocationsforAlditotap—although,ofcourse,availabilitydependsonwhichstoresKohl’siswillingtodownsize.

3 DeborahWeinswig,CEOandFounder,CoresightResearchdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2018CoresightResearch.Allrightsreserved.

March 6, 2018

Figure2.Kohl’sUSStoreMap

Source:Companywebsite

Aldi’s1,755USstoresarealllocatedintheEasternUSandCalifornia.

Figure3.AldiUSStoreMap

Source:Companywebsite

KeyTakeawaysTheKohl’spilotprogramisabouttheretailercarvingoutstand-alone,adjacentstoresforAldi—or,intime,other,asyetunspecifiedlessees.Amongthemajordepartmentstoreretailers,Kohl’sisuniquelypositionedtoundertakesuchaventure,asitsoff-mallstoresarebasedinthekindofopen-airshoppingcentersinwhichAldiseekstoopenitsownstores.

Thislookstobeawin-winforKohl’sandAldi.ForKohl’s,itprovidesacomplementary,traffic-drivingtenantreadytotakespaceasitdownsizesaswatheofstores.ForAldi,itprovidesmorepotentiallocationsinarealestatemarketthatseeshighoccupancyratesatin-demandopen-aircenters.

Finally,thismovefurtherunderlinesourviewthatKohl’sseemstobeleadingthepackintermsofout-of-the-boxthinking.Latelastyear,someKohl’sstoresbegansellingAmazontechnologydevices,suchastheEcho,andacceptingreturnsonbehalfof

4 DeborahWeinswig,CEOandFounder,CoresightResearchdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2018CoresightResearch.Allrightsreserved.

March 6, 2018

Amazon.Now,Kohl’sistacklingtheissueofexcessspacecreatively.Thisapproach,combinedwiththefactthatKohl’shaslimitedexposuretounderperformingregionalmalls,islikelytosupportthecompany’ssustainedoutperformancecomparedwithsomeofitsmajordepartmentstorepeers.

5 DeborahWeinswig,CEOandFounder,CoresightResearchdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2018CoresightResearch.Allrightsreserved.

March 6, 2018

DeborahWeinswig,CPACEOandFounderCoresightResearchNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.com

JohnMercerSeniorAnalyst

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