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.
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.
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.
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.
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.
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
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.
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.
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.