What do department stores and discount supermarkets have in common? Not much, really, but Kohl’s, a US department store chain with more than 1,150 stores, has launched a pilot program to find out if there is more chemistry than meets the eye.

On 1 March, Kohl’s management announced that it would shrink as many as 10 of its stores to make room for an Aldi. This is not the customary department store formula of ‘store within a store’. Rather, it is a ‘store outside of a store’, where the department store actually reduces its own floorspace and storefront and the Aldi becomes a neighbour, rather than a live-in housemate.

The background to this strategy is pretty simple. Department stores in general, including Kohl’s, are way overbuilt. They are overbuilt in two ways – too many stores, and stores that are too big. Most of the major department store chains have aggressively pruned their real estate portfolios in recent years, closing marginal locations and attempting to shift business online.

Closing stores is one thing, reducing the size of existing stores has been problematic.

One approach to reducing the footprint that is widely practiced in Asia (and is being trialled in the US) is to introduce large ‘store-in-store’ concepts. For example, the Sears department store at South Coast Plaza in Orange County, California relinquished a whopping 4,000 sqm for a Forever 21 store. That was particularly notable because South Coast Plaza is one of America’s most successful shopping centres, one in which even a struggling department store chain might be expected to do well.

Sears went on from there to lease space in seven of its stores to enable Primark’s entry to the US. When all of the seven stores are opened, the total leased space to Primark is expected to be approximately 48,000 sqm, or an average of almost 7,000 sqm per unit, which is not your average little department store concession.

Sears’ strategy seems not to be a bad one. If the space you operate directly isn’t working, then shrink it and put in something that can drive more traffic. Who knows? Maybe some of those customers will even wander over into the department store proper and buy something.

Now Kohl’s is trying to extend the same principle to its own stores, except with a tenant that is unrelated to fashion. Kohl’s stores average about 8,200 sqm and are usually single-level. Aldi stores in the US average about 25 per cent of that, so Kohl’s would be shrinking itself by about a quarter. The idea is to gain a next door neighbour with proven ability to bring shoppers. If it works out as hoped, then the program might be extended to other Kohl’s stores and other tenants with Aldi’s traffic-driving ability.

From Aldi’s standpoint, the deal works well because while Kohl’s is bloated with real estate, Aldi is hungry for it. The discount supermarket chain has more than 1,750 stores in the US but wants a lot more, and quickly, particularly with Lidl also trying to muscle in on a similar kind of real estate.

So far, Kohl’s has avoided what other department stores have been doing regularly to deal with their overspacing problem – closing stores down completely. Its main competitors in the US market – JC Penney, Macy’s and Sears – announced almost 600 store closures in 2017 alone. So for Kohl’s, with 1,150 stores of its own, to stand apart from the herd, the company needs to try some audacious alternatives.

One of the reasons Kohl’s is reluctant to go down the path of wholesale store closures is that management believes it needs the real estate to keep the brand visible to consumers and also to fulfil its omnichannel objectives (the stores come in handy for e-commerce fulfilment and returns).

With 138,000 employees and US$18.7 billion of annual sales, the retailer’s determination to avoid store closures is admirable. Its competitors have not been able to withstand the pressure to darken boxes. Only time will tell if Kohl’s can keep on swimming against the current.

Michael Baker is a Sydney-based retail consultant and former head of research at the International Council of Shopping Centers. [email protected]