What Aldi’s pilot with Kohl’s tells us about the future of retail

Date : 03 March 2018

US clothing and homewares retailer, Kohl’s, is partnering with Aldi, which will see the hard discount retailer open stores within Kohl’s outlets. We look at the details behind the deal, whether it is a good fit and what it tells us about partnerships and alliances in the industry.

Retailers will reallocate in-store space as digital commerce grows

Kohl’s announced last year that it would look to work with other retailers to optimise space within its large format stores, as part of its ‘standard to small’ program. This is a program to right-size its stores, driven by a focus on improving store productivity and relevancy. Following the completion of two proof-of-concept stores last year, it plans to accelerate its right-sizing program this year.

Source: IGD Research

Multiple alliances will be struck to create a blended experience

As part of this plan, which frees up space within Kohl’s large format stores, Aldi will open outlets at five to ten locations as a pilot program. This will build on Kohl’s existing pilot with Amazon stores, and its newer packaging-free returns initiative which enables Amazon customers to return products at Kohl’s stores. If the pilot with Aldi is successful, there is scope to extend it across the network of around 500 stores which will have been moved to a smaller footprint by the end of the year.

The physical grocery store will change but remain an essential asset

While Walmart’s addition of a strong fresh and grocery offer through its Supercenter program has been a significant success for the retailer, pairing food and fashion has its challenges. Target continues to evolve the role of food within its business, and while it has significantly improved the offer over the last 18 months, it remains a work in progress. With the food offer unlikely to be the primary reason for visiting Kohl’s, Aldi will also need to consider the type of shopping missions it will be fulfilling and reflecting this within its ranging strategy.

Operators will get creative to reach new shopper groups

However, there are many positives to consider in this partnership. Aldi’s smaller grocery footprint is a good fit, given the space that is being released through the optimisation program, while its low-price credentials will resonate with Kohl’s family-focused shopper. It will also help expose Aldi to new shopper groups. The improvements which Aldi continues to make to its fresh offer will play an important role in driving visit frequency. With ambitious expansion plans in place, including adding over 600 new stores by the end of 2022, a roll-out at Kohl’s could significantly accelerate Aldi's progress, at a time when hard discount competition is intensifying.

Acquisitions, partnerships and alliances will be part of the new retail model

This deal also brings to life the new partnerships and alliances which are shaping grocery retailing in the US. Reflecting the shift of online to offline, we have seen deals between Amazon and Whole Foods Market and Walmart and Bonobos. In a drive to improve the supply chain and last mile fulfilment, Target acquired Shipt and HEB acquired Favor. With an eye on demographic and lifestyle trends, last month Albertsons announced plans to acquire drugstore operator Rite Aid. Last year, it acquired Plated, a leading meal kit company, helping it to build scale quickly in a key growth segment.

Deal-making will be centred on new channels and new capabilities

One of the most interesting elements of these deals is that they are not reflective of the deals of previous years. Previously, grocery retailers in the US have participated in industry consolidation to build scale within existing channels. Today, the focus is on getting a platform in growth channels and bringing new capabilities into their organisations which will better equip them for the challenges associated with the fast-evolving retail sector.

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Stewart Samuel, Program Director, IGD Canada: based in Canada, Stewart heads up all of IGD's research and coverage on the US market. He is also responsible for shaping IGD's research program across North America. Contact Stewart at [email protected] for further insight on the region's markets, channels and retailers. Follow Stewart on Twitter: @Stewart_IGD