Thursday, February 16, 2012

Ron Johnson’s Next Attempt at Retail Magic: The Transformation of JCPenney

Much has been noted in the industry media about JCPenney since February 1st, when new CEO Ron Johnson began implementing his plan for the transformation of the department store chain. Topping the list of bold initiatives is the decision to replace heavy promotional sales - 590 of them just last year – with an everyday pricing program and many fewer sales. From what I can tell so far, the industry reaction has been all positive.

Last month we wrote about Sears and its struggles to re-brand itself. Now Mr. Johnson has been hired to give new life to another aging retail establishment with a middling reputation. However, the only parallel I can draw between these two retail behemoths is that each suffers from an identity crisis.

While Sears hired Lou D'Ambrosio, a non-retail executive with a tech-oriented pedigree from IBM and Avaya, to solve its problems, JCPenney hired the man who developed the retail store division of Apple, Inc. and as Senior VP of Retailing, grew it to more than 360 locations over an 11-year span.

Prior to that, he spent 15 years at another iconic retail firm, Target Corporation, finishing up that career stop as VP of Merchandising. Quite a difference in backgrounds, don’t you think? That resume alone should boost corporate morale, and give shareholders confidence that things are indeed going to get better.

In case you missed it, the new pricing strategy at JCPenney is called “Fair and Square”. As cited by JCPenney in a January 25th press release, the three-tiered pricing program includes: “Everyday, regular prices, which are always great; Month-Long Values, even better prices on the things you need now; and Best Prices, JCPenney's lowest prices, which always happen on the 1st and 3rd Fridays of every month as JCPenney makes room for exciting new merchandise.”

Only 12 promotional events will occur each year, based on a monthly calendar. Up until now, this $4 billion company had been spending 6% of sales on promotional advertising alone; now JCP expects that millions of dollars in savings will flow to the bottom line as a result of the new program.

No matter how much creativity Johnson can instill at JCPenney, it will all be for naught if the new strategy doesn’t draw substantially more shoppers (particularly younger ones), and boost sales. But it’s a gutsy move, nonetheless, an attempt not merely to improve the company, but to reinvent it, which if successful will be no small achievement.

A new cleaner, more modern logo has been created to reflect the new image; a new spokesperson has been introduced in Ellen DeGeneres; but more importantly, a new store prototype is in the works (although a rollout is not expected until 2014). Leading up to the new store design, and following the pattern of its current Sephora displays, JCPenney will be adding 100 shop-in-shops intended to exhibit a better in-store presence of brands such as Liz Claiborne, Izod, L’amour, and Martha Stewart, which will be introduced in JC Penney stores as a result of the company’s recent $38.5 million investment in Martha Stewart Living Omnimedia.

So: let us assume for the moment that all goes well for JCPenney, its “transformation” is successful, and sales increase. With only so many GAFO expenditures in the pie, from whose slice will the incremental market share be derived? There are several likely victims – here are two:

In the 90s, when Kohl’s store expansion was in high gear and it more than tripled its number of stores, it was considering locations in regional malls, many of which were tenanted by JCPenney. Penney was quick to invoke its approval right by disapproving of any Kohl’s addition that came its way. Landlords warned Penney that Kohl’s would open either at the mall or across the street; when that came to fruition, Penney in many cases opted for the lesser of two evils. There was no question at the time that JCP considered Kohl’s its number one nemesis. If the current transformation is successful, perhaps it’s payback time for JCP.

Another potentially vulnerable candidate is Mr. Johnson’s former employer. After all, isn’t Target known as America’s fashion discounter? Let’s face it - in the mind of the consumer, it’s all about “value”, with value being some combination of price and perceived quality. Where she sees the best value is where she shops, and if Johnson can make the shopper perceive JCP as the new face of value fashion, it may mean a direct hit on Target.

The Apple store essentially redefined the retail shopping experience in ways that have already influenced other retailers and categories. And when was the last time you saw a sale at an Apple store? If Ron Johnson can bring even a measure of the same success to JCPenney, it could be a transformative not only for this venerable department store chain, but for retail in general.
Bob Sheehan, Vice President of Research
BSheehan@KeyPointPartners.com

Company News

Employee News: Sarina Fazio has been promoted to Assistant Property Manager in the Boston, Massachusetts office. Sarina joined KeyPoint Partners in 2008 as a Summer Intern doing Retail Database Research, and has worked on assorted accounting, property management, and marketing projects. Mary DeAngelis returned to the Burlington, Massachusetts office, as Accounts Payable Data Entry Clerk…...New Business: Don Mace, Vice President of Leasing, will seek Salem & Nashua, New Hampshire retail sites for new Tenant Representation client Kitchen & Company. Trader Joe’s will open at The Crossings at Fox Run, in Newington, New Hampshire. Don Mace finalized the transaction. A spring 2012 opening is planned.

Industry News: National

US comparable chain store retail sales for January rose by 4.8% year-over-year as measured by the ICSC's tally of 20 major retail chains. For the just-completed fiscal year, comparable chain store retail sales grew by 4.7%. Among merchandise categories, Wholesale Clubs led with an 8.0% gain, followed by Luxury Stores with a rise of 6.2%. Discount Stores rose by 4.9%, Department Stores gained 2.2%, Apparel gained 2.7%, and Drug Stores rose 2.2%. Among individual retailers, Gap dropped by 3.5% but Limited gained 10.1%; Costco was up 10.5%. Nordstrom was up 7.0% and Saks gained 10.2%; Target grew by 3.4% and TJX by 3.8%. Macy’s gained 5.2%, and Kohls rose by 1.1%; Rite Aid rose 1.7%.

Industry News: Accelerating

Bennigan's plans to open 12 new locations in 2012. Bennigan's currently has 33 domestic and 45 international locations…Fantastic Sams Hair Salons has been acquired by Dessange International. Fantastic Sams operates 1,200 salons in 46 states, and Dessange operates salons and beauty institutes in 45 countries…Gap’s Athleta unit will open stores in Chicago, Boston, Houston and Denver in 2012. The company plans to open over 50 stores by the end of 2013…Planet Fitness opened its 500th location last month, and plans to add more than 100 new facilities in 2012. Planet Fitness had only 4 gyms in NH when the company began franchising in 2003…The Disney Store plans 13 new and remodeled locations in North America in 2012. New locations include Denver, Salt Lake City, Orlando, and Danbury, CT…Family Dollar plans 450 to 500 new stores in the current fiscal year. The discounter also plans to continue its store renovation program, making over another 1,000 location…BJ’s Wholesale Club opened 3 locations in VA and NY. BJ’s now operates 195 locations in 15 states as well as 107 gas stations…Auto supply chain Pep Boys has been acquired by private equity firm Gores Group in a $1 billion deal…7-Eleven, Inc. entered into an agreement with Sam's Mart LLC to acquire 55 Sam's Mart stores in North and South Carolina and convert them to 7-Eleven stores this year, part of the retailer's accelerated growth plan. 7-Eleven opened some 650 stores in 2011. The chain operates, franchises or licenses more than 9,000 stores in North America…Togo's Eateries, Inc. signed 23 agreements for new restaurants and opened 7 new California restaurants in 2011. The 241-unit company launched a strategic plan for expansion, which includes remodeling options for franchisees. In 2012, 26 franchise locations and two corporate restaurants will open, and 80 existing restaurants will be remodeled…Golfsmith plans to open 10 new stores and relocate 4 existing stores in fiscal 2012. The company operates 79 stores across the US…H&M will have opened 275 new stores by the end of 2012. The chain operates 2,500 stores in 43 countries...UFood Restaurant Group Inc. has signed an agreement with Euro Café Corporation to create co-branded restaurants at airports, shopping centers, malls, colleges, hospitals, casinos, health clubs and military bases. Euro Café operates cafés in airports in partnership with Hudson News. Headquartered in Boston, UFood Grill operates restaurants airports, hospitals, shopping centers and urban storefronts…Wendy’s plans to build 20 and remodel 50 Company-operated restaurants in the US and Canada in 2012...YO!Sushi will open its first 2 US locations this year in Washington, DC. The company plans franchise agreements for about 30 units by year’s end, with 12 US locations operating by the end of 2013…Flip Flop Shops will expand from its current 50 to 90-plus shops by the end of 2012, with an additional 40-plus already in the pipeline for 2013. The brand projects 236 locations by 2013…Chipotle Mexican Grill expects to open 155–165 new locations in 2012...The Container Store will open 6 locations in 2012, bringing the company's store count to 59 by year's end...GNC will open approximately 125 new retail locations, 15 new franchise locations, and 50 new GNC-Rite Aid store-within-a-store locations.

Industry News: Decelerating

Buffets Inc. has filed for Chapter 11 bankruptcy protection and closed 81 restaurants. The company is parent to the Old Country Buffet, HomeTown Buffet and Ryan’s brands, and operates and franchises restaurants under the Country Buffet, Fire Mountain and Tahoe Joe’s Famous Steakhouse brands. The company has 494 units in 38 states...United Retail Group Inc., owner of the Avenue plus-size women’s clothing stores, filed for bankruptcy court protection citing leasing costs, and announced plans to sell the company. United has 433 Avenue stores in the US. The company plans to close 14 stores in the next month...Landry’s Inc. shuttered at least 8 Morton’s Steakhouse units in various markets as it completed its acquisition of the company. There are 58 remaining US Morton’s locations…Esprit will close all 93 stores in North America, after abandoning plans to sell the business or find an operator to run the stores. Esprit plans to find one or more license partners to maintain the brand’s presence...Abercrombie & Fitch will close 180 of US stores by 2015. Last year, Abercrombie closed 71 US stores, including 68 during the holiday season.

Industry News: New England

The Planning Board of Seabrook (NH) recently approved the expansion and renovation of South Gate Plaza on Route 1, currently home to Market Basket, TJ Maxx, Sal's Pizza and Radio Shack. Plans call for a 35,000 s/f expansion of the 128,000 s/f center, adding six or more new stores anchored by an expanded Market Basket with a café…f.y.e. (for your entertainment) closed its Downtown Crossing (Boston) store, another retail loss for the shopping district. The Washington Street store operated as Strawberries before a brand conversion by Trans World Entertainment…Burger chain b.good will launch its first franchising program in February. The chain plans 3 to 4 new company-owned stores in 2012 and franchise agreements for another 3-4 stores. b.good has eight units across metro-Boston, most recently opening in Burlington, MA…The Arcade in Providence, RI will reopen in the fall with a mix of retail and lofts that will retain much of the 1828 building's historic character. 14 new shops and restaurants will open on the first floor. The restaurants will have separate entrances so they can remain open past the retail floor's 9 p.m. closing. 48 microlofts will be built on the second and third floors to cater to young professionals. The work will be completed by summer…Panera Bread will take about 4,400 s/f of space at City Place in the State Transportation Building on Stuart Street (Boston). A restaurant is planned for Harvard Square as the company continues its expansion in Massachusetts. Panera has 64 shops in the Bay State…Rugged Bear children’s clothing brand will be resurrected this July. TRB Acquisitions, which bought the brand rights after the Norwood (MA)-based retailer filed for bankruptcy and liquidated its 30 stores, is planning a relaunch through national retailers, including Lord & Taylor, Peebles and Von Maur...Cupcake chain Crumbs Bake Shop, will open its first Boston store in the spring at 176 Federal St. Crumbs went public last year with a plan to grow to 200 locations through 2014. The firm had 43 locations as of November 2011...Notices at 2 locations  of The Picadilly Pub restaurants in Marlborough and Westborough say the restaurants are "temporarily" closed. According to the notices, a re-opening date has not been set.

January Retail Sales Report

Commerce Department Retail Sales Report

Retail sales rose 0.4% last month, the Commerce Department reported. Consumers spent more on electronics, home and garden supplies and sporting goods at department and general merchandise stores and at restaurants and bars. Excluding autos and gasoline, retail spending jumped 0.6%, the best showing in 3 months.

Treasury Yields

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had increased in December, retreated in January. The Index now stands at 61.1 (1985=100), down from 64.8 in December. The Present Situation Index declined to 38.4 from 46.5. The Expectations Index edged down to 76.2 from 77.0 in December.

Purchasing Managers Index

Manufacturing continued its growth in January as the PMI registered 54.1 percent, an increase of 1 percentage point when compared to December's seasonally adjusted reading of 53.1 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.