Is JC Penney’s Makeover the Future of Retailing?

Ron Johnson's latest undertaking has the makings of a perfect business school case study. As the new CEO of J.C. Penney he's charged with transforming an aging department store chain with lagging market share.

The sweeping plan begun February 1 to put cool back in Penney includes new designer brands, simplified pricing that replaces the retailer's constant sales and coupons, and an updated store design that promises to make one think more of Apple's high-touch emporiums than a typical department store layout.

“J.C. Penney is in a very tough spot.”

In fact, the apple does not fall far from the tree. Johnson (HBS MBA'84) comes to Penney after more than a decade of leading Apple's retail effort, where his innovations included the Genius Bar. Johnson is also credited with making Target chic. This makes his launching of the new Penney one of the most intensely watched experiments in the future of retailing, as the industry grapples with how to entice shoppers away from their keyboards and back to the sales floor.

Johnson could make his plan work, but it won't be easy, says Rajiv Lal, the Stanley Roth, Sr. Professor of Retailing at Harvard Business School.

"J.C. Penney is in a very tough spot," Lal says. "If you ask people today what J.C. Penney stands for, you don't get a particularly compelling answer."

Once a staple for everything from bed sheets to children's clothing, many shoppers now associate the 110-year-old brand with a bygone era of paper catalog shopping. Penney's sales have lagged in an increasingly fierce retail environment, with stores such as Walmart vying for customer dollars on the lower end, Kohl's and Target jockeying for the middle market, and Macy's and Nordstrom reaching for the upper-middle end. JCP reported a December-quarter loss of $87 million, with revenue falling year over year by 4.9%, to $5.42 billion.

Johnson, who took over in November, is revamping Penney's 1,000-plus stores to target "all Americans." Standing out in the crowd, making the pricing scheme work, and reinvesting in the company despite razor-small margins are all part of his challenge, Lal says.

Pricing It Right

Retail pricing is a high art, and Johnson is starting from scratch at Penney, replacing frequent sales—the company had 590 of them in 2011—with "Fair and Square everyday pricing."

When outlining the plan in January he called the company's former strategy of offering items at a high initial price and then marking them down weeks later "insulting." He also eliminated coupons, something Macy's did in 2007, only to reverse the decision after unhappy customers snubbed the store.

Nearly three-quarters of everything at Penney is usually sold at 50 percent discount from list price. The new model is based on three prices: the everyday (at least 40 percent off), which kicked off February 1; month-long values, based on themes like back-to-school and Valentine's Day; and "best prices," which are clearance sales. In addition, Johnson decided to end all prices in "00," instead of 99 cents, and exclude the suggested retail price of a product on the tag in favor of just one marked-down price.

"I think that on the consumer side this has simplified pricing, which makes a lot of sense," Lal says.

“All department stores either rise or fall on their ability to execute a strategy.”

Penney will be able to move more merchandise off the floor faster, Lal adds, quickly making room for fresh items. This strategy could bring customers into the store more frequently and buying when they find a compelling piece of merchandise, rather than waiting until the next sale.

Still, Penney's pricing plan is risky. "Every day prices will not be as low as the biggest discounts that [the company] once offered," pricing consultant Rafi Mohammed wrote in a recent Harvard Business Review blog. "Instead, its pitch to consumers is why play the 'wait for the rock-bottom price' game when Penney offers 'pretty good' prices every day?"

Aside from pricing changes, all retail stores are under intense pressure to create item assortments that cannot be found elsewhere. "We complain that every department store is the same," Lal says.

Some retailers are already fighting this perception, observed Lal and coauthor Jose B. Alvarez in Retailing Revolution: Category Killers on the Brink. TJX Companies—parent company of T.J. Maxx, Marshalls, and HomeGoods—is well positioned because it "fostered a differentiated treasure hunt that is highly productive. Macy's [has strengthened] its already wide-ranging assortment of unique items. Nordstrom's private label has always been a respected part of its offer."

Town Square

Johnson's vision is to make the shopping experience as easy and enjoyable as buying a smartphone at an Apple store or sipping a latte at Starbucks.

J.C. Penney stores will be overhauled and streamlined, adding 80 to 100 so-called brand shops, or stores-within-stores, to be located along a new "Main Street" that replaces the confusing, endless racks common in department stores.

Brands will include the ubiquitous Martha Stewart and Nanette Lepore's "l'amour nanette lepore" line, a budget-friendly teen boutique. Existing brands including IZOD, Liz Claiborne, and The Original Arizona Jean Company will receive refreshed displays. Add to the mix an American themed red, white, and blue logo, an as-yet-undefined "Town Square" space in all stores, and the naming of talk show host Ellen DeGeneres as a company spokeswoman, and the ingredients are moving into in place to create a buzz around the brand.

The store-within-a-store concept promises to provide Penney with the unique merchandise it needs to stand out and attract new customers. But it can also be tricky to execute. For example, if Penney allows too much leeway to the individual store-in-store brands on how they display and manage their merchandise, it could subtract from the overall shopping experience that Johnson is trying to create, says Lal. Overall brand control includes everything from how the merchandise is sold to the way employees interact with customers.

"If [Johnson] is able to control the shopping experience it's a much more viable strategy," Lal says.

Will It Work?

Johnson has "painted a picture that is very reasonable," Lal continues, but it will take about three years to gauge whether he's succeeding.

This August, the company will begin updating all stores with new merchandise. Two to three in-store shops will be installed monthly over the four-year plan. The Town Squares, which will likely be used to provide shoppers with complimentary services (free ice cream? haircuts?), are scheduled to debut in 2013. Johnson expects the transformation to be complete by 2015.

"All department stores either rise or fall on their ability to execute a strategy," Lal says. "These are great ideas, but the ability to execute day in and day out, and keep employees motivated in such a large organization where stores are spread over such a huge territory" will make or break the plan.