Middle-income shoppers find themselves targets

Kohl's and Penney are starting the season on a winning streak.
PLANO, Texas (AP) -- Clutching a plastic J.C. Penney bag in one hand and reaching for her 4-year-old daughter with the other, Cathy Lewis sized up the department-store options for shoppers on a budget.
"I like the quality and price of the children's clothes at Penneys," the suburban Dallas woman said. "I like Kohl's, too. Their sales are good, but I don't like their selection as much."
That's pretty much the competition, in the mind of Lewis, who works at home as a recruiter while raising two children. She said Macy's and regional chain Dillard's, both in the same mall as her Penney, are just too expensive.
As the holiday season begins, J.C. Penney and Kohl's will battle each other for the purses and wallets of moderate-income shoppers who feel left behind by Macy's and are looking a bit more cachet than they find at Wal-Mart Stores.
Both Penney and Kohl's have been posting impressive sales gains and hope to carry that momentum through December. Not coincidentally, both are also on major expansion binges, building new stores at the fastest pace in years.
The holidays, however, pose their own special challenge to these two retailers.
Being a destination for that special gift "probably wasn't one of our strengths," said Myron E. "Mike" Ullman III, Penney's chairman and chief executive.
"People want to be proud of where they shopped for the gift," Ullman said. "Penneys has changed. We are a desirable place to shop and a desirable place to get a gift from."
Made changes
To convince shoppers of that transformation, Penney has added more electronics, jewelry, toys and fancier clothes such as cashmere sweaters. It is highlighting "redbox gifts" from massaging slippers to iPod-wired jackets. And it is launching a nostalgic TV-advertising campaign filled with vintage film of families celebrating Christmas decades ago.
Kohl's holiday plans include increasing inventory in menswear and pushing watches and jewelry, from circle pendants to the diamond substitute moissanite in about 200 stores. Kevin B. Mansell, president of the Menomonee Falls, Wis.-based company, said he expects luxury home items to be big sellers.
Both chains enter the holidays on a winning streak.
Kohl's posted a stunning 16.3 percent September gain in sales at stores open at least one year although it slowed to 4.2 percent in October.
Penney put up consecutive same-store gains of 8.7 percent in September and 8.1 percent in October, better than Neiman Marcus and not far behind Saks Fifth Avenue and Nordstrom, chains whose upscale customers are less vulnerable to economic swings.
While Penney and Kohl's eye each other, they also must contend with other rivals, from discounters to other department stores.
Penney is making a determined pitch for former customers of regional May Co. stores. Those names were wiped away when Federated Department Stores bought May and converted the regional stores to the slightly more upscale Macy's or closed them.
Kohl's touts frequent sales events and is willing to cut prices to steal shoppers from other stores, said Richard Hastings, a retail analyst with Bernard Sands. That pits Kohl's against chains such as Target and Gap's Old Navy.
Making sacrifices
Hastings said Kohl's is more willing than Penney to sacrifice some of its profit margin to attract customers, "and it's working for them. They are very aggressive about getting market share."
Penney has a distinct advantage over Kohl's in at least two areas: It has a strong Web presence and big private-label brands that generate strong profit margins.
In its annual report, Penney said the Web site had 2005 sales of 1.05 billion. Internet Retailer, an industry publication, ranks jcpenney.com the 13th-largest Web retailer by sales. Kohl's does not disclose Internet sales; Internet Retailer's estimate is 29 million.
Penney is trying to transfer some of its online strength to its 1,000-plus stores by installing 5,000 terminals to let shoppers place orders through the Web site.
"I like Penney better than Kohl's because they've built out a multichannel approach," said Love Goel, a former Federated executive who heads Growth Ventures Group, a Minnesota-based investment firm. "Kohl's hardly has an Internet presence."
Upscale shoppers disdain many private-label clothing brands, but Penney has found midmarket hits with Arizona jeans, St. John's Bay clothing and JCPenney Home Collection, each of which generates more than 1 billion in annual sales. To add glamour, Penney has introduced designer brands in the last couple years, such as a home collection by Chris Madden and a moderately priced clothing line from designer Nicole Miller. Private labels account for 40 percent of Penney's sales.
Kohl's has its own brands, including Sonoma and Croft & amp; Barrow, and has announced plans to sell clothing from fashion designer Vera Wang, kitchen goods from the Food Network and home furnishings by Spanish-language TV talk-show host Cristina Saralegui. And it plans to open a design office in New York to help shape these new collaborations.
Growing quickly
Both Penney and Kohl's are expanding rapidly. Penney plans to add 50 stores a year for the next three years, giving it nearly 1,200 by 2010. Kohl's, which has more than 800 now, also aims for 1,200 in 2010.
Most of the new Penney stores will be built away from shopping malls. Kohl's, which has avoided crowded malls since its beginning in 1962, is way ahead of Penney on that score, said Marshal Cohen, a retail analyst at market researcher NPD Group.
"Shopping is a chore when you have to go to the mall," Cohen said. "Shopping used to be an impulse thing. They want to bring it back to being fun again and being convenient again."
Stripped down to their basics, however, both Penney and Kohl's are selling one thing: value to moderate-income shoppers. Analysts say there is room for both to prosper at the expense of higher-priced stores.
Taking in the array of Christmas-themed cloth napkins at a suburban Milwaukee Kohl's, Kathy Hoffman said she can count on getting a decent product at a good price. She was carrying a new winter jacket for her husband that was nearly half off the 120 price tag.
"They have basics and they have trends," Hoffman said. "They've got a place in the market that is not like everybody else."