Kohl's taps grocer Aldi as its first partner to sublet space in downsized stores

Key Points
  • Kohl's will bring discount grocer Aldi into as many as 10 stores in a pilot test this year.
  • The retailer's right-sizing efforts have the goal of creating smaller, more profitable locations.
  • Excess space in Kohl's stores could be leased to "a whole list of partners," according to CEO Kevin Mansell.
Shoppers browse foods in the produce department at an Aldi Stores Ltd. food market in Chicago, Illinois.
Daniel Acker | Bloomberg | Getty Images

Kohl's said Thursday it would bring discount grocer Aldi into as many as 10 stores later this year in a pilot test, as the retailer aims to scale down its real estate footprint and leverage space for others.

CNBC reported in January that Kohl's would be working with grocers and convenience stores to lease space in its stores. At the time, the company didn't disclose which companies would be moving in.

The retailer's right-sizing efforts are expected to impact an additional 200 Kohl's stores this year. On a call with analysts and investors, CEO Kevin Mansell said the moves would allow the company "to achieve further inventory reductions and margin acceleration as a result."

In Kohl's latest quarter, more controlled inventory levels helped profit margins and boosted sales, as stores had a cleaner appearance overall.

At the start of this year, Mansell had told CNBC the company had readjusted the square footage of roughly 300 stores over the past several years. He said the company had "a whole list of partners" ready to fill the leftover space.

The Kohl's partnership with grocers notably threatens Target, which has struggled to make itself a strong player in the food industry.

For Target, food has often been overlooked as part of its overall strategy, as it invests more in apparel, electronics and home goods. Kohl's, though, will bring in outside industry experts to manage a food business and meet customers' evolving needs and preferences. The goal is to boost foot traffic to Kohl's stores.

For this pilot to be successful, Kohl's will need to make sure its shopper profile matches that of Aldi. From a logistics standpoint, the two companies must figure out a way to bring fresh food into stores, if that's ultimately what they decide to sell there.

Walmart is one retailer that's found success in bringing food into stores, and it's since become an integral part of the company's strategy.

Mansell said Thursday that smaller stores have a "phenomenal improvement in customer engagement, which is improved ... by ease of shopping." There's less inventory on the floors, but the inventory assortment is curated based on what people are most interested in.

Mansell explained that Kohl's stores, because of their off-mall locations, are "highly wanted from a real estate perspective."

Aside from grocers and convenience stores, the CEO said Kohl's could partner with fitness centers. "There are other sectors that I think are good pairings for us."

Meanwhile, Kohl's is looking to deepen its relationship with Amazon, which also owns Whole Foods. Kohl's currently has kiosks that sell Amazon devices in a handful of its stores.

Mansell said Thursday "we need more time to draw conclusions that could be applied more broadly" with Amazon. "We've had initial discussions with Amazon about how and where we will expand the pilot, and we'll share the details on that when they're finalized."

—CNBC's Lauren Hirsch contributed to this reporting.