Kohl’s and Aldi partner in a new neighbor experiment

Supercenters and hypermarkets are known for driving heavy foot traffic which is in short supply among many department stores and malls thanks to online shopping and subscription purchases.

Kohl’s, not typically located in shopping malls, has fared better than some in terms of foot traffic, but the department store chain is working to remain relevant in the changing retail sector. On the heels of partnering with Amazon to set up return centers in its stores during the recent holiday season, Kohl’s is now leasing space in some stores to discount grocer Aldi.

Kohl’s plans to carve out space in up to 10 of its stores – including a separate entrance – and lease that area to Aldi. Aldi’s average store is 20,000 square feet which equals about 23% of Kohl’s typical store size, according to Deborah Weinswig, founder of CoreSight Research.

“We believe the opportunity to leverage our real estate through this effort has benefits on both the top line with increased traffic, and the bottom line through expense offsets,” Kohl’s CEO Kevin Mansell said in a recent call with investors.

He hinted Aldi might not be the only new partner to share space with the department store saying other lessees could include fitness centers or other businesses that drive traffic. He didn’t disclose which Kohl’s locations would be involved in the Aldi pilot.

Weinswig said Kohl’s is uniquely positioned to make this move because many of its stores are located in the open-air centers Aldi prefers to locate its stores. She said this is an acknowledgement from Kohl’s its stores are over spaced as more sales are moving online for categories like apparel. She also said Kohl’s has stood apart from other retailers who have been closing stores. Weinswig said the Kohl’s experiment is a not a supercenter because there will be a division between the two retailers making them neighbors and not cohabitants.

Weinswig said Kohl’s are located in open-air centers and exist primarily as square boxes which could easily be downsized from the average of 88,000 square feet. She said Aldi also operates in smaller square boxes. If Kohl’s can do without about 23% of its space, then Aldi would have the same size store it normally operates, which is smaller than a typical grocery store of about 50,000 square feet.

Last year Aldi announced plans to have 2,500 U.S. stores by the end of 2022. Aldi opened about 150 U.S. stores during 2017, giving it 1,755 locations as far south as Texas, throughout the East and also in California. Kohl’s operates 1,158 stores in 49 states, giving Aldi access to states where it doesn’t exist.

“This looks to be a win-win for Kohl’s and Aldi. For Kohl’s, it provides a complementary, traffic-driving tenant ready to take space as it downsizes a swathe of stores. For Aldi, it provides more potential locations in a real estate market that sees high occupancy rates at in-demand open-air centers,” Weinswig said.

Carol Spieckerman, CEO of Spieckerman Retail, recently told Talk Business & Politics retailers have to “buy, bridge and build” the new platforms it will take to survive. She said doing one or two isn’t enough as they must invest in them all. Spieckerman said retailers actively engaging in innovative approaches will be the ones that have the best chance of long-term survival.