The Fight For the Middle

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Penney and Kohl's, even with all their fine-tuning, stand to have a relatively merry Christmas. Indeed, sales at Kohl's stores that have been open at least a year--a key industry measurement--rose 3.7%. JCPenney reported a somewhat disappointing 1.4% increase (Wall Street was hoping for 3.7%), but its online sales rose 17.5% in November. And the portent for more good things to come is evident. Consider the results for the third quarter: Penney, which only a few years ago was in deep trouble, reported a 22.6% increase in net income, while Kohl's racked up a 45% gain. "It's the sweet spot in the market," says Marshal Cohen, a retail-industry analyst for the NPD Group. "The lower end is reaching upward."

Penney and Kohl's are taking advantage of the middle opportunity. "They're cannibalizing the market from beneath them, and they're benefiting from the trickle down from traditional department stores who are trading out of Middle America," says David Wolfe, a fashion-retail consultant for the Doneger Group in New York City. "They're getting it coming and going."

And they're expecting more. For starters, both companies are aggressively expanding and experimenting with new formats. Kohl's opened 65 stores in October on a single day, the biggest one-day opening in the company's history. Penney, based in Plano, Texas, opened 20 stores that same month, most in off-mall locales. Both companies have plans for a lot more: Penney, which operates 1,037 stores, has announced that it will open 50 stores annually through 2008, while the 817-store Kohl's intends to tack on 400 stores to the chain by 2010, some inside urban malls. The company has also said it will remodel at least 40 older stores by the end of 2007. But Robin Lewis, a retail consultant and newsletter publisher in New York City, says Kohl's will grow sales faster than Penney because its corporate structure is less bureaucratic and layered. "Kohl's has an advantage because it is leaner and meaner," says Lewis. "It can respond more quickly, and its low-cost business model gives it greater flexibility."

Yet both stores these days are looking to pull in more younger female customers. Walk into any newly remodeled JCPenney and behold a spiffy new map at the door to ease your shopping and a customer-service desk right at the entrance. Clothes are neatly grouped by lifestyle, trendy denim in one spot, work outfits in another. And they're labeled clearly, unlike in older stores. In early fall, Penney even sponsored the MTV Video Music Awards, running a series of live ads during the broadcast. It's a fairly radical move, given the store's uncool heritage.

Kohl's, on the other hand, is trying to soften its linoleum-floored, no-frills, discount image. Its new stores--and the 40 old ones on track to be remodeled--have a decidedly more feminine look. The merchandise is less cluttered and more invitingly displayed, some of it on mannequins, fixtures not previously seen in Kohl's. Fitting rooms are larger and more comfortable too. "Both chains have made a tremendous effort to freshen up their stores and their image," says Amanda Nicholson, assistant professor of retail management at Syracuse University's Whitman School of Management. "They've relaunched their private labels, reduced merchandise cycle times and introduced new lively and appealing graphics and put them front and center in their stores."