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Story of Kohl's, Black Friday and the $5 Toaster

$4.99 after a $10 mail-in rebate.
Before the lights had dimmed on Black Friday last year, executives at Kohl’s Corp. were already at work on the deal they would use to pull shoppers into their stores this time around: a $5 toaster.

The department-store chain’s team had spent Thanksgiving scouring rivals’ print circulars and television ads, then fanned out to stores to identify the products and prices that really seemed to bring in shoppers.

What they found was a lot of carts holding inexpensive kitchen appliances, said Ron Ota, the general merchandise manager of Kohl’s home department. The company started out hoping to match rivals’ prices around $10. But as it worked to build the perfect lure, it decided to go one better.

The yearlong effort to produce super-cheap toasters underscores the high value retailers still put on winning Black Friday. The day after Thanksgiving has been ridiculed as a mindless commercial frenzy, marred by shopper stampedes and made redundant by the Web. Still, it is a knock-down, drag-out fight for market share that retailers are loath to surrender.

The calculations and planning that go into producing a “doorbuster” sale item also show how retailers are increasingly working backward from the price they want to offer to get a product that fits.

“Based on an idea, we have a price in mind, and we build a product to the price,” Mr. Ota said, speaking about how the industry often goes about the process.

The executive got things rolling the Monday after Thanksgiving last year, as his staff worked the phones with suppliers.

The low prices are made possible in large part because manufacturers give up profits on each piece. They often are willing to work on thinner margins for such orders, because the volume is large and they can be delivered in one shot, and because they benefit from the scale.

Still, it wasn’t easy finding a manufacturer willing to make a toaster for the price Kohl’s wanted. 

The company rejected manufacturers that offered to make the goods at higher prices or with quality levels the retailer deemed too low. It also rejected manufacturers that didn’t have a national brand.

“These items plug in, so it’s important to have a national brand to give consumers confidence,” Mr. Ota said.

In March, Kohl’s executives walked the floor of the International Home and Housewares trade show in Chicago looking for ideas. Later that month, it reached an agreement with Select Brands Inc., which holds the license to Toastmaster.

Select Brands agreed to make a toaster, a coffee maker, a blender and a slow cooker, each priced at $4.99 after a $10 mail-in rebate. Kohl’s, which operates 1,163 department stores, will open at 6 p.m. on Thanksgiving Day. The items will be available until 1 p.m. on Friday, or while supplies last.

William Endres, the president of Select Brands, declined to say how his company is able to make the items so cheaply, beyond noting that because it was a large volume order for immediate delivery, Select Brands can save money on producing and storing the merchandise.

The items don’t contain many of the bells and whistles or aesthetic elements of more expensive models. The two-slice toaster has a black plastic exterior, for example, rather than being encased in stainless steel.

“Metal housing tends to signify better quality,” said Daniel DiClerico, the senior home editor of Consumer Reports.

Manufacturers have a lot of room to adjust materials to hit a desired price. Television makers can use fewer pixels to reduce screen costs, which typically account for 80% of the total, according to Vinita Jakhanwal, the senior director for displays at research and data firm IHS. Choosing a matte finish for the plastic casing instead of a glossy finish is another cost saver, said Andrew Rassweiler, a senior director of cost benchmarking for IHS.

Manufacturers of inexpensive TVs, like those advertised on Black Friday, are willing to work on low-single-digit margins, because the orders tend to be large. “This gives them volume with their supply base, so they can get lower costs on components that they can use to drive up the margins on higher priced TVs,” Mr. Rassweiler said.

The sale of accessories like TV cables, where margins can approach 80%, is another way to offset the lower profit of the cheap TVs, he said.

The use of the mail-in rebate also helps get Kohl’s to the price it wants. Many customers won’t bother mailing them in and will wind up paying the full $14.99.

John Gourville, a Harvard Business School professor, said fewer than 50% of consumers tend to mail in their rebates—and the redemption rate drops as the size of the rebate falls.

“A $50 rebate on a new consumer electronic device is much more likely to be redeemed than a $2 rebate on a box of kitty litter,” he said.

Select Brands will help cover the cost of the rebate from money it sets aside for its advertising budget.

As more people turn to the Internet for their holiday shopping, doorbuster specials for brick-and-mortar stores can help retailers attract customers to physical locations. According to the National Retail Federation, 44% of shopping over last year’s Black Friday weekend was done online, up from 32% five years ago.

Doorbusters typically are available only in stores and are sold in limited quantities at rock bottom prices. The hope is to create a sense of urgency among shoppers looking for the best deals.

Kohl’s aim was to get the price of the appliances low enough that the retailer would be the first destination for shoppers as the annual holiday scrum gets under way—even if that meant leaving some profit on the table. “For all retailers,” Mr. Ota said, “the goal on Black Friday is revenue.”

By Suzanne Kapner- Wall Street Journal

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