Kohl's bets on smaller stores to fuel its growth. Here's what that looks like

Source: Kohl's

Kohl's is one of many retailers today betting on smaller stores to fuel its growth.

The hope is that the smaller locations are less costly to operate, keeping only the best-selling inventory on the floor, and allowing businesses to be more nimble and open up in new markets.

Kohl's currently has 12 shops in the U.S. that are roughly 35,000 square feet, compared with a footprint of more than 80,000 square feet for some of Kohl's larger stores.

The company is meanwhile shrinking inventory and ditching fixtures in close to 500 of its largest locations, operating them like smaller stores without trimming space, before it will cherry-pick which of those stores are ripe for redevelopment with new co-tenants such as Aldi or Planet Fitness.

"An average full-size Kohl's store is doing 15 percent less business than it did five years ago," outgoing CEO Kevin Mansell told CNBC Tuesday during a tour of a small-format Kohl's store in East Windsor, New Jersey. "That was really the problem to solve for us. ... Smaller is going to be better. Bigger is not."

Open layouts, focus on select merchandise

Source: Kohl's

The smaller stores have about 60 percent less space and 60 percent less inventory than a standard Kohl's, the company has said. The build-outs are much less capital intensive, according to Mansell, and merchandise is curated to meet a local market's needs, more so than it is at bigger locations.

At the East Windsor store, for example, Kohl's had stripped out its Jennifer Lopez apparel collection and instead added more activewear for women and men, alongside a larger selection of denim. Some departments such as fine jewelry and electronics have also been removed, and the toys section is slimmed down to occupy only a few shelves.

"It's a different beast" to operate smaller stores, Mansell said. But "we think we have a big idea." And the next "natural evolution" for the 35,000-square-feet locations will be to move into more urban markets where a massive footprint wouldn't fit, he said.

Checking out becomes easier in the smaller stores, with registers and fitting rooms all situated near the entryway. The aisles are noticeably wider, empty of any in-aisle displays, and the ceilings are higher. The stores also lack dividing walls once inside, making the space feel more open and making it easier for employees to reconfigure inventory as it comes and goes.

"It's much more efficient for us. Way more efficient for us," Mansell said at the East Windsor store. Keeping decor, feature fixtures and signage "bare bones ... gives us a massive amount of flexibility," he added. Unlike at its older locations, nothing really has to be permanent in Kohl's smaller stores.

Driving traffic to stores

Lauren Thomas | CNBC

The focus in 2018 for Kohl's will be the retailer's efforts to "right-size" bigger locations, choosing from the batch of 500 stores which ones are fit for new retail partners. As many as 10 Kohl's stores are already set to be divided for Aldi to move next door, as part of a pilot program that will roll out later this year. According to Mansell, though, more partnerships will be announced before then — grocers and fitness centers remain at the top of his list.

"The idea is to drive incremental traffic," he said. Kohl's would even bring in a company such as , which sells many of the same categories of items and could be considered a competitor, so long as it lures shoppers to the center.

Opening more small stores, like the one in New Jersey, will come next on the retailer's agenda. Kohl's has already noticed a slight surge in online sales for nearby trade areas (as much as 10 percent) as it opens these locations, Mansell said.

"We're a wanted tenant," he added about Kohl's growth prospects. "There's a lot of boxes," big and small, vacant on the market now, including those of Toys R Us.

More tech coming soon

Lauren Thomas | CNBC

At the end of the day Kohl's is whittling back its physical footprint — whether by opening new stores or dividing up old ones — and finding ways to be just as productive. With more purchases moving online and sales volumes notably dropping off at some locations, Kohl's has found a way to balance bricks and mortar with e-commerce.

Like Macy's, Kohl's also has a separate pilot program at nearly 60 stores currently for new technology that could eventually span all of its locations. That includes mobile checkout, portable scanners around the store to check prices and inventory, and iPads that equip employees with more tools to assist customers.

"We're literally determining the number of devices we need ... what the most meaningful payoff will be," Mansell said about the trial, known as "Your Store," which has been live for about a year. "When we see success, then we can quickly blow it out."

Mansell, who has worked at Kohl's for more than three decades, is retiring in May. He will be succeeded by Michelle Gass, the retailer's current chief merchandising and customer officer.