South-Western College Publishing - Economics  
Sears Hauled Over By Kohl's
Subject Costs
Topic Production and Costs
Key Words Market share, sales, stock price, price, cost, rents.
News Story

Kohl's department store is taking market share away from rivals such as Sears and J.C. Penney which sell moderately-priced apparel, shoes, and home products. Sales have grown at Kohl's, while they been flat at the other stores. Kohl's is expanding its stores to more regions. As a result, the price of Kohl's stock has been rising this year, while the price of the other stores' stock has fallen significantly.

The opinion of market analysts is that Kohl's has a lower cost structure, which allows it to charge cheaper prices for brand-name goods. In terms of location, Kohl's prefers to avoid malls where rents can be high, parking difficult, and distractions many. Instead, they tend to locate in strip centers with high-profile retailers. The stores are only one floor and approximately 86,500 square feet. They are laid out like a racetrack with goods around the edge and in the center. Cash registers are only found at the front of the store, to save on staff, although customer service is impaired as result.

Kohl's also tends to place its stores where the population is dense and incomes are at least $35,000 a year. It keeps customers coming back through 80 percent of its goods being brand-name items.

(Updated November 1, 1999)

1. Kohl's stores are not generally found in malls, unlike Sears stores.
  a. As a result, are fixed or variable costs different? Explain your response.
  b. Does this imply that the marginal cost curve, average total cost curve, or both curves are consequently different?
2. Kohl's stores have fewer staff than Sears stores. Most are at cash registers at the front of the store rather than in the various store departments.
  a.Are variable or fixed costs different due to this? Explain.
  b. Does this cause the marginal cost curve, average total cost curve, or both curves to differ?
3. Draw two sets of axes relating dollars on the vertical axes to output on the horizontal axes.
  a. In the first diagram, draw the marginal and average total cost curves of a typical Sears store, bearing in mind your answers to the questions above. Draw a horizontal price line such that the store breaks even.
  b. In the second diagram, draw the cost curves of a typical Kohl's store, bearing in mind the news story. Draw a price line such that the store breaks even.
  c. Compare the two diagrams. Why is the Kohl's store at an advantage?
Source Lorrie Grant, "Thriving Kohl's turns up pressure on competitors," USA Today, October 14, 1999.

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