20 Aug 2013

What went wrong at JC Penney?

Rajiv Lal

After a successful stint at Target, when Ron Johnson led Apple's retail efforts from 2000 to 2011, it seemed that he could do no wrong. But the winning streak came to a well-publicized end during his two years at JCP, when everything he tried seemed to backfire. Sales last year fell by 25%, resulting in a net loss of $985 million. In a recent interview, Harvard Business School marketing expert Rajiv Lal provided some analysis.

Jim Aisner To get some perspective, what kind of situation did Ron Johnson face when he became CEO of JC 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 JC 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 JC Penney historically.

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.

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

RL: 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 JC Penney -- the store-within-a-store concept. He added services in the middle of the store where, for example, people get 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 JC Penney, fifty to seventy 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 causes 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, JC 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.

JA:I know it's impossible to predict the future, but what might lie ahead for JC Penney?

RL: 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 JC Penney?

A few years ago, it seemed to me that the best strategy that JC 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.

More on JC Penney

Is JC Penney’s Makeover the Future of Retailing?, HBS Working Knowledge, March 2012

Case Study: JCPenney: An Historical Shift toward Centralization by Rajiv Lal and Laura Winig

Case Study: J.C. Penney's "Fair and Square" Pricing Strategy by Elie Ofek and Jill Avery

Post a Comment

Comments must be on-topic and civil in tone (with no name calling or personal attacks). Any promotional language or urls will be removed immediately. Your comment may be edited for clarity and length.