21 Aug 2013  Research & Ideas

What Went Wrong at J.C. Penney?

J.C. Penney CEO Ron Johnson went bold in his attempted rescue of the fading retailer, but his top-to-bottom makeover failed. Marketing expert Rajiv Lal explores what went wrong and why JCP has an even more difficult road ahead.

 

After successful stints at Target (vice president of merchandising) and Apple (senior vice president of retail operations), it seemed Ron Johnson could do no wrong. But the winning streak came to a well-publicized end during his two-year run as CEO of J.C. Penney, when everything he tried seemed to backfire. Sales last year fell 25 percent, resulting in a net loss of $985 million, and the blood-letting continued in quarterly results released this week.

In a recent interview, Harvard Business School marketing expert Rajiv Lal, the Stanley Roth, Sr. Professor of Retailing, provided some analysis.

Jim Aisner To get some perspective, what kind of situation did Ron Johnson face when he became CEO of J.C. Penney in June 2011?

Rajiv Lal: At that time the economy was just barely coming out of the Great Recession. Sales had been declining for a while. In the period from 2009 to 2011, they were down from almost $18 billion to $17 billion. That comes out to sales of about $150 per square foot, which is probably in the lower third of department store sales, if not the lowest. In contrast, competitors like Macy's and Kohl's have sales of around $220 or $230 per square foot.

Most striking, if you look at J.C. Penney over the long term, it seems to me that they have lost their identity. With more than 1,000 stores and great locations in malls across the country, it used to be the department store for middle-income families, especially for men's and women's apparel, children's ware, and home goods. It was particularly well known for home goods and children's ware. And once the family went there, they also shopped for men's and women's apparel, which accounted for almost half of sales. They had a very strong private label program, and to their credit, previous management had worked hard to manage costs and shorten the supply chain. That was J.C. Penney historically.

''It was not clear why someone would go there in the face of all the other available options''

But over time, the retailer lost its identity. It was not clear why someone would go there in the face of all the other available options, from low-end Walmart and discounters like TJ Maxx to Kohl's, Macy's, and Target. Beyond that, there are plenty of specialty stores such as The Gap and Gymboree.

Aisner: That's a full plate of problems. What did Johnson do?

Lal: To fix the problem of sameness and make it appealing for customers to come into the store, he came up with the idea of unique boutiques within each J.C. Penney—the store-within-a-store concept. He added services in the middle of the store where, for example, people got their nails done. He focused more on the more affluent—something that is harder to do in a bad economy, since you're spending more money to attract a new demographic that isn't showing up fast enough. Meanwhile, your old demographic is deserting you, putting you between a rock and a hard place.

He also tried to deal with department stores' biggest problem, promotional pricing, or what we often call high-low pricing. When Johnson took over J.C. Penney, 50 to 70 percent of all sales were at discounted prices. Here's how it works. You start off pricing something at $100, but you end up selling it at, say, $50. All the actual sales take place at 50 bucks.

The problems that high-low pricing cause are tremendous. Customers come into the store, they look at the new merchandise, and they look at the prices. They like the merchandise, but don't like the price, and so they don't buy. As a result, this new merchandise sits on the shelves. The first markdown takes place after six weeks, and only then does the merchandise begin to move. So for six weeks, not much happens. You're wasting your real estate and capital. Johnson comes in and says we're not going to play this game. Why not sell at $50 right away?

Customers, on the other hand, are accustomed to shop for discounts, especially lower- and middle-income families, while the boutiques didn't want their brands diluted by discount pricing. The depths of the recession made this everyday-low-prices strategy difficult to carry out. Customer traffic dropped sharply, and without that, J.C. Penney and Johnson were clearly in trouble. If customers had had more disposable income and felt better about the future, he might have had more time to work things out—three years instead of two. But reality created a different scenario. Sales fell like a rock.

Under those circumstances, it's difficult, if not impossible, to attract vendors to carry out the store-within-a-store concept. If cash is in short supply, they're worried about getting paid, not to mention their concern about the diminished reputation of the overarching brand. Finally, the corporate governance brouhaha in the midst of the back-to-school season couldn't have come at a worse time, except for the holiday season.

Aisner: I know it's impossible to predict the future, but what might lie ahead for J.C. Penney?

Lal: They might be able to get a couple of billion dollars in loans. That way, if they can manage their cash flow, have liquidity, and if the economy is in a better place, they can stabilize the company for the next 12 months. Then they might have a shot at answering the multi-billion-dollar question: What is a viable strategy for the future of J.C. Penney?

A few years ago, it seemed to me that the best strategy that J.C. Penney could pursue was to go after the Sears customer, who is on the whole dissatisfied. The two chains have the same demographics and similar merchandise. If Penney can steal the Sears customer, then at least in the short run that might be a way to grow the business.

No matter what, someone has to articulate a new and improved strategy, but right now, amid all the distractions, that isn't happening. That is very bad news for a once significant retailer and the thousands of men and women who work there.

Comments

    • Rich Lawrence
    • Senior Director, Idelle Labs

    Yes - JC Penny's problem wasn't a broken pricing model - their problem was, and is, like every other retailer - offering product people want to buy in an atmosphere they expect and at a price the customer deems fair. The future for JC Penny? They will continue to get smaller until they fix the core problem. This is not an easy fix for any retailer.

     
     
     
    • Lawrence Yeo
    • CEO & Principal Consultant, AsiaBIZ Strategy Pte Ltd, Singapore

    Agreed, Prof. Its difficult to re-brand, raise wallet share or push sales in such economic conditions. The next guy in charge of Group Strategy Planning will inherit the hot seat.

     
     
     
    • Shawn Blain
    • CEO, Text And The City

    It is very sad what is happening to JCP. Unfortunately they do not look at what the consumer wants. Like any business you have to have a need that is fulfilled. The average female shopper between 30-60 does have special requests that the department stores and speciality stores don't fill. If they want to know the answer to how to get become successful, they just need to learn to ask. I will be more than happy to give them the answer.

     
     
     
    • Nick Symondson
    • Consultant, Private

    I see a similar situation in the UK where many stores both department stores like J.C.Penney and supermarkets price establish goods before selling them at a lower price. Consumers soon understand the strategy and wait for the inevitable price reduction. It devalues the brand full stop.

     
     
     
    • Bunny
    • Student

    I can tell you from a consumer's standpoint what happened: I'm a conservative, middle-aged woman. I used to shop at JCP a lot, but recently, all of their clothes went from well-made and well-fitting to "clubware": too see-through, too tight, too stretchy, too showy, too YUCK. I'd be embarrassed to wear the items I now find there. Furthermore, when you shopped there, it was difficult to find anyone over the age of 19 to help you (and believe me, these 19 year olds were more interested in checking out guys at the mall then helping you with your selections). Finally, their jewelry went from chic to plastic (made in China). I've switched to Kohl's where they carry Ralph Loren's Chaps line and Croft and Barrow - well-made/well-fitting clothes. They also have more mature sales clerks who really know the product lines, and their jewelry is great.

     
     
     
    • Jamal-Dubai
    • Engineering Advisor, TGT Oil

    I believe JCP should trace back their steps to where they took a wrong turn and fix it. I suggest that JCP focus on quality and bring back the stuff and style that used to sell well. More importantly, JCP should manufacture all 100% of their apparel in the States and re-align themselves as the true American retailer they were known to be. Quality and patriotism still sell well.

     
     
     
    • KS

    I was an avide fan of JCPenneys for a variety of household and clothing needs for over 30 years and then came the BIG change! JCP became a store that I could not identify with and did not like. I literally had sales personnel following me in the store with scanner telling me they could "check out my purchases" and send my receipt to my smart phone. Sorry the grey generation of baby boomers has the descretionary spending pocketbook now and scanners and smartphones are not necessarily part of them

     
     
     
    • JIm Sweeney
    • CEO, Sweeney Marketing & Public Relations

    Rajiv, I think you are ignoring the obvious point here that Ron Johnson had a strategy that simply was not given the time to develop and succeed. Instead, the clueless board of directors fired Johnson after one year and rehired the captain who took the USS JCPenney aground in the first place. This is an impatient company with a lot of history, but no current strategy and no hope of succeeding without an overhaul of its current board. http://www.sweeneypr.com/why-jcps-firing-of-johnson-is-an-unfair-unsquare-deal/ http://www.sweeneypr.com/welcome-home-jcpenney-what-took-you-so-long/

     
     
     
    • M
    • Partner, M Capital

    I think the board may have kicked Johnson out too soon. I am an affluent customer who would have never gone into a JC Penny but, I went to JC Penny this spring when I realized that they were the exclusive retailer for the Joe Fresh brand (which I discovered on Madison Avenue in NYC). I found the home goods section excellent and the Joe Fresh brand of clothing well made and attractive (think less expensive J Crew). I am saddened that Johnson is gone and the management is likely to go back to low end ugly merchandise. I found JC Penny a "fresher experience" than Target, Macy's or other retailers who have "attractive well priced home goods".

     
     
     
    • Geoff Mitchell
    • Chief Engineer

    I was a long time JC Penney customer. I am a big, tall guy & clothes options are limited. JC Penney always had a good selection and decent quality. They destroyed their BIG and TALL section during this period along with other departments. Guess what... when I shopped there, so did my wife and kids. I stopped going... so did my kids. Twice I discussed with store management who had a "what can I do?? attitude". Afterall, they sell what they are shipped. At the same time, Dillards has expanded. While Dillards is a higher price point, the quality is there. Now I am a regular Dillards customer who has what I am looking for and helpful employees.

    So... the problem with JC Penney's... pure and simple. They ignored their customers & didn't empower their employees/managers who knew who their customers were. Classic example of not listening to the "guy on the ground".

    JC Penney isn't the GAP, it isn't Old Navy, it isn't Hot Topic, it isn't (fill in the name of the latest trendy store) who want to sell junk clothes for ridiculous prices. JC Penney's used to be decent clothes for real people. They need to figure out how to do that again and convince people they are doing it. Stop the "high-low" pricing... it is a waste of everybody's time.

     
     
     
    • Christy
    • Retired

    All the hi-faultin' management theories have a time and place, but few in top management want to deal with the real consumer vs. the lovely hypothetical ones. Even fewer step into their own real stores unannounced without an entourage. Understanding unwashed reality is the first step towards appropriate change.

    To add anecdotal evidence to Mr. Lawrence's comment ... the last time I walked into a JCP, I turned around and left...it smelled and WAS less than acceptably clean. Whether consciously or unconsciously, consumers notice these things. A brand new, large and always spotless Target opened up down the street. The business is obviously there, but from this consumer's perspective, it is simply too late for JCP to recover its relevance.

     
     
     
    • Cheri Thomas

    It baffles me that the "every day low price" strategy works for Wal-Mart and wouldn't work for JCP. It seems to facile to me to say that customers don't know they are being gamed by the high-low strategy. That's why they wait. They have a sense of what the "market" price is for an item. So why wouldn't they go for the market price right out of the chute? (Especially if you post the "mark-down" on the ticket right away as well.) Blaming their troubles on the pricing strategy is the easy way out, but ultimately, if it doesn't explain the problems, changing it won't fix the problems.

     
     
     
    • Tony Farrell
    • Marketing, Lieberman Productions

    The day after Steve Jobs died, a former associate of his came into our offices and expressed dismay that "American business is likely to learn all the wrong lessons from Jobs." By that he meant being dismissive of testing and consumer research, and (somewhat) dismissive of the customer. That's the first thing. Second, unlike the Gap turnaround (by Drexler, the true hero of Apples Stores' success), Johnson never seemed to talk about "product"; he was all "process." If you have the right goods, you can sell them at the first price. Gap faced all the same issues in 1985, but fixed them by focusing on "the goods."

     
     
     
    • Steph Sharma
    • Managing Director, Faculty of Strategy, Lead The Difference, Strategy Consulting

    Thank you Professor Lal for the story. I have followed this company for years, as well as am an investor (holding on for them to figure this out...) who had great hopes for Ron! As always as student of strategy, I believe the emphasis on your notation about their identity is key: "it used to be the department store for middle-income families, especially for men's and women's apparel, children's ware, and home goods. It was particularly well known for home goods and children's ware." Trying to be all things to all people or to shift a brand from moderate to luxury are both paths of most likely failure. As a consumer, it has pained me that they have 'lost their way' from the home goods focus of the past. I can recall special trips to the nearest city to 'hit' JCP for towels, linens, and under-garmets (especially high quality bras at a good price). It wasn't a question for the women of small-town America that these things were to be bought there. I wonder if this identity of the past could/should be revived as I don't see a direct competitor that is serving all of these areas under one roof, as JCP did/has. Whether they still offer all of this or have a now reduced quality offer, they certainly have been distracted and therefore confused the consumer and over the past decade, eroded their brand. I felt like bringing in Ron was a 'call to action' to revitalize the strategy. I do believe long-standing organizations can do so but am not sure they can be a big departure from the 'core' of who they have been. If they find their way and the consumer needs can be served authentically, then maybe they will recover their brand.

     
     
     
    • Sal Ruibal
    • Observer, Private Investor

    The board panicked and lost an opportunity to steer JCP away from the dead end of perpetual discounts. Now they not only have to deal with Sears, there is also Target with similar cheap knockoff soft goods and grocery items as well. And a slightly "hipper" appeal from Target's Shaun White Collection that includes branded shoe wear, pre-teen clothing and bedroom furniture and accessories. Even chewing gum! JCP needed a star endorser to make it hip, not just a star marketer. Considering JCP's lack of a significant differentiator, it has to sign a big name with hip-hop appeal that will bring some down-market urban authenticity. They've burned all other alternatives.

     
     
     
    • MP Flinn
    • Long time JCP shopper

    Finally a true analysis of this fiasco; thank you. I grew up shopping at JCP. Grew older shopping at JCP. "...it used to be the department store for middle-income families, especially for men's and women's apparel, children's ware, and home goods." That's what I am; a middle class older woman, retired CEO of a not-for-profit, traditional dresser who continues to serve on Boards, etc. Ron Johnson absolutely dissed me and others like me with his "we're a shop for the young and hip; just move on you folks who have always shopped here."

    And here's a concept: any chain stores that would create and advertise a decent size section offering clothing for a clientele like me. There are women out there who want t-shirts with regular, not capped, sleeves, sizes that work as we get older, blouses that button above cleavage, upper arms that one can get into. Obviously I don't speak for everyone of my age, but I know there's a market out there ready to buy; I talk with them as we fruitlessly search the racks.

     
     
     
    • Michael G. McDonald
    • CEO, The McDonald Group

    Here is my original take in March 2012 in HBS Working Knowledge

    JC Penney's Makeover comment by MGM Mar 5, 2012

    MIKE MCDONALD CEO, THE MCDONALD GROUP

    NK department store in Stockholm is a major emporium attracting 12 million annual visitors to its vast collection of top brand stores within a super store in a beautiful edifice. JCP is a weak attempt to mimic NK on a micro scale but without the solid draw of top brand shops like Ralph Lauren, Nike, etc. JCP is homespun stuff with second tier face cards. The four Ps of the Marketing Mix are out of whack at the new JCP. And the department store business model is pass?. Product is not unique but a grab bag of designer shops that do not build a core brand because it's a hodge podge of others' names. Price will fail because it won't be predictable as the author states above. Apple, with its closed-loop, vertical integration and tech/design has superior brand differentiation to support a premium price. JCP won't be able to clearly stand out as low priced with so-called EDLP; someone will always have a better deal. Consequently, they will be in no man's price land at JCP. Place. A unique shopping experience may be in the offing but will be hugely expensive to execute and maintain. Will require substantial real estate investment in top locations. Promotion. Ellen DeGeneres as spokesperson creates buzz but is it broad enough to appeal to a significant market size? An attractive logo is not a strong enough platform to support a weak business model. In today's over-stored, competitive retail landscape what is JCPs USP and compelling, differentiating strategy?

    As an alum of HBS AMP '73, the lessons of the Marketing Mix per Professor Marty Marshall served me well in my career in advertising and marketing. Especially when I consulted with IKEA for nearly two decades, where the concept of the Marketing Mix is passionately lived everyday by every Ikean.

    MGM

     
     
     
    • Rich Lawrence
    • Senior Director of Sales, Idelle Labs

    I'm not sure Ron Johnson was qualified to run a department store. Apple retail stores are an island to themselves. No question they are very good - just completely different than running a department store in scope and nature. There are very few successful department store CEO's. Terry Lundgren of Macy's and Mickey Drexler at J Crew Group are two that come to mind.

     
     
     
    • Mark Chussil
    • Founder, Advanced Competitive Strategies, Inc.

    It's not clear to me whether the problem was under-performing or over-expecting. How long does it take to turn around a large company, especially when it involves rebranding, renovating, retraining, and retargeting? I know JCP was dissatisfied with the results, but that's different from saying the strategy failed.

     
     
     
    • Toni Webb
    • President, Web Marketing International

    JCPenneys got rid of so many core items, like womens hosiery, big&tall, professional work attire for 35-60 yr olds. Johnson replaced standard, mainstream, quality goods with cheap junk that appeals to teenagers and low-income twenty-somethings. That demographic is fickle and will shop at more trendy places that can put out the latest fad item that will be heavily discounted in a month. The new catalogs that Johnson put out were bright and cheery, but again they targeted the skinny teen market. JCP could be a mid-market leader again, but they'll have to find a female CEO who is in touch with the actual shoppers.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    A brief analysis of what went wrong and what might now be done to retrieve the situation is educative. The malady - unplanned marketing strategy - needs in depth examination. What are the successful competitors doing? Let JCP learn from that. We have to have properly devoted workforce to run our outlets. The directions from the headquarters must be crisp, simple and workable. Regular performance reviews and initiation of corrective measures where required is a must. Lal's suggestion to raise billion dollar of loans is to be studied as to its viability by the agency who may come forward to grant the loan. Most important is the build-up of repaying capacity.

     
     
     
    • jcponderings
    • retired blogger, jcponderings.com

    This is a very reasonably positioned analysis. Having spent some months blogging on the Johnson era, I found ONE CRITICAL ITEM always missing in such articles, and it's missing here too.

    This is what happened to JCPenney --

    1. It was a boring as hell store for years. St. John's Brown and beige hell. Fashion that never went out of style because it never was in style.

    2. The board hired Johnson and said, "Shake things up." THIS IS THE CRITICAL PART MISSING FROM ALL ARTICLES. It doesn't matter what he did AFTER this point, does it? It was THE BOARD that announced to the world that they were not satisfied with their own company. Or current customers. That means --

    3. -- you've just told every frumpy JCPenney customer they're old news. Go away. Bye-bye. We don't like you. You can't UNDO that. That's like divorcing your wife as fat and plain and frumpy, hitting the town with a Vegas babe, and then asking your wife to come back because... you're out of money.

     
     
     
    • Jeff Ridges
    • CIO, Blue River Capital

    Classic example of a builder who tries to repair a glass house with a hammer......it cant be done. in 2 years JCP will be out of money, like Buffet said, it takes years to build a reputation but only seconds to ruin it. Ackman and his merry men managed to turn lemonade back to a lemon .

     
     
     
    • Mark Goggin
    • sales, N/A

    Peter Drucker said, "the purpose of a business is to attract customers". Period.

    JCP brought in a hot shot who didn't understand how to do that...Apple is an outlier...Steve Jobs created the customers for it. Few other businesses have ever been so successful. JCP couldn't do it. They weren't that unique. They didn't get to know their customers. Everything else was inevitable because if you cannot acquire customers you have no reason to be in business.

     
     
     
    • Luis A. Rosete
    • Partner, RSM Bogar?n

    No comments were included in connection with the role played by foreign nationalities' clients of J. C. Penney's stores and the lack of efforts of the company's corporate level to diversify by operating in stronger markets abroad.

     
     
     
    • John Airola
    • Retired Manufacturing Manager

    JCP forgot who its main customer really was...it was the department store for middle-income families. What are this customer's traits? Middle American, conservative, God fearing, Patriot. They disenfranchised this customer by their advertizing personalities and messages.

     
     
     
    • Tim Wolski
    • President, Wolski Associates

    His solution was good. The problem was that he didn't have time to reeducate his customer. The awful advertising campaign wasn't enough and it didn't hit the mark. Had he had time, he could have introduced the concept of everyday value pricing to his customers in a measured and progressive way. For example, he could have introduced "always a value" collection, department or even items in every department. The always a value items could have been clearly marked and never went on sale. Had he been able to start with ten percent of the store and then progress over the next couple of yeas to 70 or 80 percent, then it would have been a different story. The discount faithful could have been catered to through offers only to JCP card holders.