Former Kohl’s president Jay Baker discusses his decades-long career in retail.

The famed department store chain Kohl’s was once a struggling small-time company that floundered in the 1980s. But a team of savvy managers helped set it up to become a massive success story that is now ringing up sales of $19 billion per year.

Former Kohl’s president Jay H. Baker was part of the central management team that set the chain on its historic trajectory. In the first of a two-part interview, Baker, who along with wife Patty established Wharton’s Baker Retailing Center, talked with Knowledge at Wharton about his beginnings in retail and how he came to be a partner in Kohl’s. He also discusses the changes the new leadership team put in place to make Kohl’s stand out from the retailing pack.

Read the second part of the interview.

An edited transcript of the conversation appears below.

Knowledge at Wharton: You became president of Kohl’s in 1986 after completing a leveraged buyout of the company. Can you tell us about your career in retail before this point and how it prepared you for your leadership role at Kohl’s?

Baker: I graduated from the Wharton School in 1956 and joined the U.S. Army. After I got out, I wasn’t sure what I wanted to do, so I took some aptitude tests and everything pointed toward retailing. I have retailing in my bones because I used to help my mother in her millinery store when I was a young boy.

So I started in the Macy’s training program and I worked my way up. I stayed about nine years at Macy’s and did every type of job. This was probably the best thing. I worked in the stores, I worked on the floor, I worked in the stock room, I worked as a buyer and I worked in store management. I had the opportunity to learn a lot and it really helped me in my whole career. In those days, you moved a little slower instead of being promoted quickly, so it took a while to move up the ranks. But I had great training.

After that I went to a store called Ohrbach’s. I went in as an administrative assistant to the president, Bob Suslow. He became my mentor, which was very lucky, and I worked very hard for him. I learned an incredible amount about merchandizing and dealing with people. Then I became a merchandise manager.

Then Bob went to Famous-Barr in St. Louis. At that time, it was the premier store in St. Louis, and probably still is, but now it’s owned by Macy’s. I became a general merchandise manager and did that for a few years.

Then Bob became president of Saks Fifth Avenue and I followed him and that led me back to my home, New York.

My first job at Saks Fifth Avenue was really interesting. I was the first director of stores. But the job and system wasn’t very formalized before I came in. We regionalized Saks and what we created in 1977 exists today at Saks and most retailers. That was quite an accomplishment. It was frustrating at times because the people I worked with were not involved in merchandising, and I’m a merchant. But we helped with that and got merchants into the stores.

Then I wanted to get back in merchandising so I became a general merchandise manager and I oversaw sportswear, cosmetics and juniors. We had incredible talent in our team and a whole group of us became presidents and chairmans of companies. It was a phenomenal, fun time to be there.

“We regionalized Saks and what we created in 1977 exists today at Saks and most retailers. That was quite an accomplishment.”

The team included people like Roger Farah, who went on to become president of Ralph Lauren, and Tory Burch [Eds note: Farah is now co-CEO of Tory Burch LLC]. There was also Burt Tansky, who became head of Neiman Marcus. And I worked with Arthur Martinez, who later became head of Sears. We all worked together. It was a phenomenal thing.

Then Bob took over as head of Batus, which was the whole retail division for British American Tobacco. They owned a large number of different retail stores, including Saks. I went to work on the corporate side, which is not what I wanted to do. Then I became head of the specialty store division and corporate buying. But in 1986, Batus decided to divest themselves of retail, since they were basically a tobacco company. So at the time the only operations they kept were Saks Fifth Avenue, Marshall Field’s and Thimbles. I think they kept those because I had a three-year contract. I don’t know. Maybe they didn’t want to pay me out. But I had about 400 people reporting to me at the corporate buying office and they were all going to be let go.

It was very strange how it played out. They called us into work on a Sunday to tell us what was going to happen. Somehow Women’s Wear Daily heard about the news, so we had to tell our people … what was happening before they read it in the newspaper. But there was no severance pay set up and the company had nothing arranged. So I said to my boss, Arnold Aronson, who was also being let go, “I’m not going to fire anybody. I can keep anybody who’s essential. I’m just going to get ’em jobs.” He said, “Do whatever you have to do.” It took me six or seven months, but I got jobs for 98% of them. That’s probably one of the best things I’ve done. It was a very tough thing to do.

Then I knew I had to leave there. I saw the writing on the wall. The company eventually sold Saks and Marshall Field’s, and Thimbles was closed. So they got out of retailing.

At that point, I had three job offers. My wife was excited about the offer to be head of Ferragamo USA. But I’m not a big, tall, great-looking Italian, so I didn’t think they would make me a partner.

So I called Bob Suslow to ask his advice about the offers because he knew all three companies. He said, “Just wait a minute.” And that’s when I found out that Bill Kellogg, a man I had known since 1977, [and John Herma] were looking to create a partnership to buy Kohl’s. They were saving the third partnership for me.

But I had to be released from my contract with Batus, because Batus was a partner in Kohl’s. When we eventually bought the company from Batus, they kept a stake in it.

So while I was still under contract with Batus but looking to make this acquisition of Kohl’s, I met with Hank Frigon, the man at Batus that fired all of us. We went to dinner and I said, “Hank, I’ve got great news for you. I’m going to be your partner.” He said, “What do you mean?” I said, “I’m going to be a big partner in Kohl’s. You’re a partner in Kohl’s. We’ll work together.” He said, “You’re under contract to us. You can’t do that.” So I remember saying to him — because he wasn’t my friend — I said, “Well, you can have me as a great partner or I’m going to work in a different firm as a very tough competitor. You have your choice.” Then I left.

After plenty of calls, we bought the company in September. I started there in October. That’s how it happened.

At that time, Kohl’s was a chain of 39 stores, making about $280 million in revenue, but losing money. Kohl’s started out as a value department store, but faced competition from Gimbels. They had tried to make Kohl’s similar to a mini Target, but no one needs a mini Target. So when we came in, Kohl’s had had a couple of bad years and we were able to buy it at a relatively good price. Then Batus stayed in as a partner.

“Kohl’s was basically a supermarket chain, which gave us a low cost culture and that helped deliver great value to our customers. Our cost structure was lower than our competition, which gave us a big edge.”

Knowledge at Wharton: What was your assessment of what needed to be done to fix the problems at Kohl’s? What was the situation in retail in the 1980s and where did you see the upside for growth?

Baker: There was a company called Mervyn’s, which was a chain of value department stores. It was worth roughly $4 billion. We aspired to create a chain like Mervyn’s, but naturally hoped we could do better. We wanted to sell great brands at great prices, have a low cost structure and offer a simplistic shopping environment. We talked about this because I had known Kohl’s for years and that’s what it had been, and then it lost its way.

When we came in, Kohl’s had a lot of problems. We realized that we had to change the merchandising and get back to offering great brands. We had a mini Target on our hands that sold food and tobacco and it had a big candy department. These things didn’t fit, so we had to change it back to the merchandising we had before, but take it to a new level.

We often consulted the team at Walter K. Levy & Associates with new retail ideas. We told them about our plan, expecting that they’d suggest some tweaks. But they said, “Sounds great.” There was clearly a great need for a niche value department store and that’s what we were offering. Some people called us a discount store, but we were not. I fought that very hard. We were a department store, but we had checkout lanes. Kohl’s was basically a supermarket chain, which gave us a low cost culture and that helped deliver great value to our customers. Our cost structure was lower than our competition, which gave us a big edge.

Knowledge at Wharton: What was your strategy to take Kohl’s from a regional chain to a national one?

Baker: The first thing we had to do was fix Kohl’s. There was some luck involved, but I have to admit that we worked eight days a week. It didn’t come easy.

But what happened is that Gimbels, our main competitor, went out of business. That helped us a lot. And our other competitor, Bergner’s, wasn’t very tough to compete against.

At the same time, when Gimbels went out of business, we knew all the good people there because they had been part of Batus. So we got some excellent merchants and store people. Then a year later, Marshall Field’s combined with Dayton Hudson and we got a lot of great people from there. Within that same year, the Texas operation at Mervyn’s closed and we got people from there. So in a very short time we got people from Gimbels, Marshall Fields and Mervyn’s to join this little store in Milwaukee called Kohl’s. That was a real break. We went from having low talent to terrific talent in a very short time.

Then we came up with the strategy for Kohl’s. We wanted to make Kohl’s a value department store offering great brands at great prices. We set up the store to look like a racetrack so you came in and just walked around in a circle, and every department had frontage. Most department stores had sportswear in three locations or four locations. But we were different because we had sportswear in one location, men’s items in one location, junior items in one location and accessories in the middle. This allowed for easy shopping. We also had stores that intercepted the malls, so you got people in and out and going home. We made it easy for them to shop.

We also did a lot of high-quality advertising, which was a big improvement on our old advertising. We got new people in our advertising department and came up with an advertising look that was exciting.

“We set up the store to look like a racetrack so you came in and just walked around in a circle, and every department had frontage.”

I spent my whole life in department stores and I saw that two of the big weaknesses in those days were that the stores always ran out of basic items and they often ran out of products after putting up big promotions about them. That would frustrate people all the time. So we had a merchandising philosophy where we agreed to be 90% in stock on basics. We put in the right systems and we did a good job of that. And then when we advertised certain products, we chose products out of our assortment. It wasn’t like we brought in special purchases. We advertised what we owned. Buyers knew that if they didn’t have enough stock, they’d have to have an unpleasant meeting with me on Monday morning. We also ensured we had sharp prices and that competitors didn’t undersell us. We could beat their prices if we had to because of our cost structure.

Within two years, we paid off our debt, which was amazing.

At the time, one of our big partners was the Simons, from Simon Malls…. And do you remember when Federated Department Stores went into bankruptcy?

Knowledge at Wharton: Yes.

Baker: Federated owned a chain called MainStreet, and they were in Chicago, Detroit and Minneapolis, and it was exactly where the Simons had suggested we should go. MainStreet had similar stores to ours, but much better locations. Federated was very powerful but they were losing money because they had low prices and high expenses. So we had the chance to buy MainStreet at a very good price because nobody really wanted them. But we had to vote on it and Batus — because they still owned [Chicago-based] Marshall Field’s at the time — didn’t want us to get into places like Chicago. But between the Simons and us, we were able to buy the business because we had more than 50% of the vote. We bought it and brought Morgan Stanley in as a partner, but we owned over 50%. We wouldn’t give them the majority because the three of us were running the business. That’s how the new partnership happened.

Then we had debt again, but in a couple years we went public. The reason we went public was to have the money to expand further.

Click here for the second part of the interview.