Michelle Gass of Kohl’s on shifting from survival to growth

For Michelle Gass, the CEO of US retail chain Kohl’s, the pandemic delivered an education in the importance of decisive and inclusive leadership. But preparing the company for growth in the recovery, starting with a major partnership with cosmetics brand Sephora, is where her true passion lies. In this episode of the Inside the Strategy Room podcast, she speaks with Sajal Kohli, leader of McKinsey’s global retail and consumer-packaged-goods work, about using the crisis to reposition the retailer for a new era. This is an edited transcript of their discussion. You can listen to the full episode on your preferred podcast platform.

Sajal Kohli: Obviously, brick-and-mortar retail has been severely hit over the past year and a half. How did Kohl’s respond and how has the unprecedented speed of change affected your organization?

Michelle Gass: We have stores across the country and on March 20 of last year, I did something I never envisioned in my wildest imagination: closing all 1,200 stores in one day, which at the time represented 75 percent of our revenue. I had been focused on growth, the P&L [profit and loss], the income statement, and in a nanosecond I had to pivot to studying cash-flow statements like a small business. It was surreal. The punchline for Kohl’s is that a year later we are a much stronger company, with more opportunities than we had ever imagined.

In terms of lessons learned, last year was a phenomenal leadership test on many levels: of vision, of resilience, of conviction, of decisiveness. We quickly landed on two priorities: maintaining the financial health of the company and ensuring the health and safety of our people and our customers. No playbook. The team came together, galvanized: nothing else mattered. It wasn’t about my area versus your area, it was give and take. At times like this, you cannot underestimate the importance of communication and transparency. We have 100,000 associates across the country and my instinct was to get in front of them. I have always prided myself on communication, doing quarterly town halls that are recorded, but within hours I thought, “I have to go live across the entire company.” So on March 16, 2020, when I frankly didn’t have a lot of the answers, I got up in front of our associates and said, “Here is what I know, and here is how we are addressing it.” It was important to demonstrate a sense of calm and clarity.

Sajal Kohli: Let’s fast-forward to the time when things became a little more stable. How did you think about your strategy then?

Michelle Gass: A big moment for us was on May 7, 2020, when we started reopening our stores. I had to ask myself, what will the world look like on the other side of this? We took a step back and considered what the consumer will be like, how marketplace dynamics will change, and where Kohl’s can carve out a reason to exist.

We used that time to tighten and focus our strategy. We had been on an incremental journey to move out of the department store space, but we saw a couple of big consumer trends. Number one, people were at home and dressing more comfortably and casually, and we saw that in our Active category, which became one of our best-performing businesses. Then we asked, who owns that space fully for the family? Kohl’s is already a casual-lifestyle destination, so let’s make that a much bigger part of our business and become known for that. We don’t want to be thought of as a department store, we want to be thought as a specialty lifestyle concept where consumers can get everything they need for their active lifestyle. That includes casual apparel and footwear, athleisure, outdoor products and, to be relevant on an everyday basis, it includes categories like wellness and beauty. So we pivoted our vision to focus and amplify those categories. We exited some brands and categories that were down-trending, so it is not only what you add but also what you delete to be more focused.

The second trend was the adoption of digital. Once people understand the ease and convenience of e-commerce, they will not go back to shopping exclusively in stores, but stores will continue to have a role in the future. So how do we set ourselves up as a winning omnichannel retailer? Turning to curbside pickup very quickly was a huge benefit for us from a capacity standpoint and kept customers familiar with going to the store. We leaned into digital while the stores were closed, but we wanted customers to shop both channels, and we learned that those customers who shop both are four to six times more productive.

I think the role of brick and mortar has been underestimated. Shopping isn’t simply transactional—it’s entertaining.

Another huge move we made over the course of the pandemic was to cement a partnership with Sephora, which will fundamentally transform the entire experience in the store. The last piece I would mention is value. It has always been part of the company’s DNA, but we saw the consumer communicating, “I want simpler value. How do I get to the end price sooner?” The gamification of Kohl’s, while fun for the experienced Kohl’s shopper, became a bit daunting for new customers. We are not swinging the pendulum back but offering value more quickly through investments in things like pricing and de-layering coupons.

Sajal Kohli: You already had a robust strategy that was getting a lot of traction in 2018 and 2019, and we see companies get wedded to their strategies all the time. How did you help people overcome their prepandemic biases to make these pivots?

Michelle Gass: The pandemic really did that. When, in an instant, the world changed around us, the company changed and people had to do things they had never done before. I think about our merchants slashing billions of dollars of receipts; asking vendors for longer payment terms. We are a $20 billion company, we are cash-generative, and we’ve never had to do that. It allows you to question everything. One silver lining was how business leaders came together—CEOs who were my direct competitors. We all talked about how we are navigating, what we are learning, and how we plan to reopen, and those relationships have continued.

Sajal Kohli: You have always been a big believer in the physical store footprint as a competitive advantage. As you look forward, how do you think the mix of brick and mortar and digital will evolve for Kohl’s, given that for many traditional retailers digital sales are less profitable than in-store sales?

Michelle Gass: In 2020, including the time when our stores were closed, our digital penetration was about 20 percent. I could see that ultimately leveling out at around 40 percent, but I think the role of brick and mortar has been underestimated. People are hungry to go back to restaurants and travel but also shopping. Shopping isn’t simply transactional; it’s entertaining—you get to touch and feel products—so we are positioned for an omnichannel future.

As important as growth is the margin-expansion strategy. We have put a lot of resources and attention into mitigating some of those margin headwinds. Cost of shipping is not the only factor; you also have wage pressures. But by looking at everything with a fresh perspective, we are identifying lots of opportunities. When we took our strategy public, we chose not to put a sales number on it. We will grow. How much? I don’t know, but I think we can hang our hat on the fact that we will get back to at least 7 to 8 percent operating margin, and we have discrete initiatives that can build that bridge. Logistics is a very complex ecosystem because we ship from all of our stores and 15 distribution centers, and people order things that may come in multiple packages. It doesn’t take a rocket scientist to see that is expensive. So how do you bundle more effectively? How do you allocate more dynamically? We are seeing opportunities left and right to make sure that, as we grow our business, we can do that in a more profitable way.

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Sajal Kohli: It’s one thing to be resilient and adapt, but a big part of what enables these shifts is talent and culture. How has the Kohl’s culture changed?

Michelle Gass: This is something I am very passionate about because you can have bold visions of transforming stores and categories, but it is ultimately our associates who will get the job done, from curating and developing products to getting them to stores or homes to serving customers. Everybody has to believe in the mission. I go back to what I said earlier: communication is so critical, whether it is during times of crisis or times of optimism, when you are pointing to the future. A CEO needs to show a level of confidence, because if you are showing the glass half full, why would anyone want to follow you? There is a part for me to play, but I am only one piece in this ecosystem. Our associate base and store managers also have to believe.

I was already proud of our culture, but the pandemic has changed us for the better. We are a much more decisive culture. Teams get frustrated when they leave a meeting with no decision. “We’ll get that piece of data and come back.” You know what? Ninety percent of the time, that next piece of data isn’t going to change the decision. Most great decisions are informed by facts, but there needs to be a willingness to take a risk. It’s a balance between the bright light, the intuition about the white space, and facts and data. The biggest gift I can give a team is make a decision when they are in the room. You also have to ensure that if a mistake is made or a risk does not play out as expected, the team is celebrated, not penalized. As the saying goes, “If you’re not failing, you are not pushing hard enough.” The pandemic has given our leaders that experience of being forced to make big decisions in the moment, because in the middle of the crisis, if you are not making the decision, something bad will happen.

Sajal Kohli: You are one of only 41 female CEOs in Fortune 500 companies, but your CFO and chief security officer [CSO] are women. What has it been like for you as a female leader, and how have you translated that experience into instilling diversity and inclusion at Kohl’s?

Michelle Gass: I don’t feel that I have encountered unique barriers in my career. I believe that you have to get the job done and throw your passion into it, and if you find things are not aligning, then it is time to move on. What’s really important is to learn from others and seek out mentors. I think of them as coaches or advisers, and a lot of that is peer to peer. I learn a lot from store managers. I met a manager in South Carolina who started interviewing me. What is it like to be a CEO? What have been my most memorable moments? I said, “I’m living it right now.” Then I flipped the question to him, and he said, “One was the evening of March 19, 2020, when I shut the store and I did not know when I was going to reopen. Another was on May 7 when I unlocked the door and welcomed my team back.”

You have to ensure that if a mistake is made or a risk does not play out as expected, the team is celebrated, not penalized. As the saying goes, ‘If you’re not failing, you are not pushing hard enough.’

That said, I do recognize that there are unconscious biases. Last year was a wake-up call for the country and for me personally, recognizing that we have to make equity a bigger priority. As I have gotten more educated, I see where the gaps are, and I am in an incredibly privileged role as a CEO to help drive change. I start with my own team. I’m very proud that I was able to promote a female into the CFO job in fall of 2019. When you look at the number of CEO–CFO female pairs, it’s a very low number. I also brought in a woman of color to lead our strategy efforts. It feels a little clichéd to say it, but people do look at the top. You have to role-model it. Organizations go after what we tell them is important, so we turned the diversity and inclusion strategy into an initiative because we are good at launching initiatives. We created a task force that I chair which meets every other week, and we have a set of goals and key performance indicators that cover our people and talent, our customers, and our communities. People often think about diversity in relation to the employee base, but we also need to be more relevant to a diverse set of customers, so we are changing our product assortments and advertising. One of the biggest things we can do is change how we buy products, so we have set goals to double our pool of minority and diverse vendors.

Sajal Kohli: What do you most enjoy about being a CEO?

Michelle Gass: There is no question: it’s the people, the energy, the possibility. It’s seeing associates at all levels rise to the occasion and do things they never thought possible. From the business standpoint, I love growth. I am a growth junkie, and spending last year figuring out how to block and tackle to survive, I learned so many things. Now that we are back on the front foot and have momentum, I feel like many of the dreams I had for this role, and this company, are coming together.