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

1 comment:

  1. It's amazing how many attempts have been made over the years to revive retailers who clearly suffer from Alzheimer's. Investors in these companies somehow think that there is someone out there that can save the patient. Thinking that you can bring the Apple success formula to JC Penny or for that matter Sears and Roebuck is incredibly delusional. Hell; why not bring back Montgomery Wards or even WT Grants? In the short run,the stock will possibly get a rise! The "Peter Principal" will again be demonstrated. The problem is,that the analyst like yourselves in the retail field, are afraid to speak to the almost certain failure of saving JC Penny by bringing aboard Ron Johnson. Not to say that miracles don't happen! I think we are afraid of being disproved by them! I recommend to anyone who is interested in site selection for retail or service oriented business read the section in the book, "Steve Jobs" that specifically lays out the thought process in the design and site selection of the Apple stores. Ron Johnson contributed a very small part to the success of the Apple store concept. Without the leadership of Steve Jobs,his chief of design Ives and the support of board member Millard"Mickey Drexler" ,Ron Johnson would not have a claim to fame. He clearly lucked out by being in the right place at the right time and I doubt that he or even god can save JC Penny.

    Ted Wasserman