Commentary

How JCP’s Strategy Made A Penney Not Saved

Just about everyone by now knows the story of JC Penney, or JCP as the brand is now known. In forty characters, it is how a 110-year-old brand hires Apple exec to turn it from old and dowdy into hip and cool and crashes and burns. When the hiring of Ron Johnson was announced in 2011, JCP’s stock climbed 17% and then again when its new strategy was announced several months’ later.  It was easy to understand why. Johnson was hailed as a retail rock star – the guy who grew Apple’s retail business from zero to $18 billion in less than a decade and then before that as the maestro of Tar-jey’s transformation into a purveyor of mass chic merchandise.

Boy, what a difference a little more than a year makes.

JCP’s stock is at an all-time low, having lost 55 percent of its value. Meanwhile, JCP’s sales plummeted to its lowest since 1987. As a result, Johnson has a lot more time on his hands since he no longer has to make the weekly commute to Plano from his home in Silicon Valley.

So, quite naturally, everybody and his mother-in-law has a theory about why Johnson’s strategy was one big dud.  I have one too, and I think it is pretty simple. Johnson may have taken the concept of “creative destruction” a little too far.

Now, to be fair, Johnson didn’t exactly walk into a situation that was all wine and roses. JCP was on the wrong end of a bunch of retail and economic trends. Well before he arrived, it was regarded as a pretty dowdy brand with a boatload of undifferentiated merchandise. JCP had a tough time getting good brands into its stores for a variety of reasons and as a result, 55 percent of its merchandise carried its own private label. It seemed stuck in the middle, too. It really wasn’t a discount retailer like Target or Kohl’s or TJX — each of which had its own product and price differentiating brands and strategies — or like a Walmart which was known for rock bottom prices and a broad selection, or like mid-tier retailer Macy’s. JCP was a brand known for price and quality but one increasingly squeezed by competitors who offered more selection and better brands for less.

Then, most of its stores – 80 percent to be exact, were anchor tenants in malls that were no longer packing in the crowds. The changing nature of retail and the growth of online commerce have taken its toll on the physical retailer in spite of the fact that 90 percent-plus of commerce still happen there. But, the physical retail graveyard is filled with names that were pretty well known and thriving as recently as even two or three years ago:  take Circuit City, Borders, CompUSA, Tower Records or Blockbuster, as examples, with many more showing signs of great distress. When they leave a mall, it is increasingly more difficult to find replacements for them.  In fact, in Boston, when the Tower Records on Newbury Street (the famous shopping street in Boston) closed its 45,000 square foot storefront in 2006, a Best Buy came in right behind it to take over the space. It shut down last year and has remained vacant ever since – the future of the space is a bit uncertain. Yet that story is hauntingly familiar all over the U.S. According to commercial residential listing service CoStar, there are more than 200 malls of more than 250,000 square feet that have more than a 35 percent vacancy rate.  Tough financial times have forced  consumers to shut their leather and digital wallets and the availability of mobile phones and tablets just make it easier to shop on line and to access marketplaces like Amazon and eBay, where consumers can buy just about everything they might want and at a discount.

And, speaking of discounts, that’s where the wheels really fell off the cart at JCP.

Like it or not, American shoppers are addicted to sales and discounts. In a way, it is sort of retail’s own doing.  Consumers know that everything in retail is marked up and usually by a lot. And, so unless the item is incredibly unique (the iPhone), or a luxury item (Cartier watches), or needed urgently (birthday gift for tomorrow), or scarce (Rolling Stones concert tickets) consumers are very happy to wait for a sale. Not only do they save money, it makes them feel smart about buying a product that was once expensive, at a lower price.  And, it’s shopping’s Holy Grail when that discounted item is on a rack with a little sign that says, “Today only, take an additional 25 percent off sale prices.”  The adrenalin rush that comes with tracking down that sort of added discount is what shoppers love to brag about and organize their shopping excursions around.

Until Johnson took over, JCP was pretty well known for its deep discounts and special promotions. In fact, it ran nearly 600 such promotions a year at an average cost of $2 million a promotion.  Shoppers responded by buying, 72% of JCP’s sales came from items that were reduced 50% or more. It was sort of a Pavlovian thing – JCP ran a promotion and shoppers came into the store and brought stuff. It was what they were used to from JCP.

Johnson thought that whole promotions thing was bogus and that shoppers were smarter than JCP gave them credit for. So, rather than JCP spending nearly $1 billion on around 600 promotions that consumers would have to wait for and plan around, he would make it more predictable for customers by pricing everything in the store at 40 percent less than the retail price.  Those items could also get cheaper once or twice a month when scheduled monthly reductions were announced. That meant that a $20 shirt would be sold at $12 every day, maybe reduced to $10 on a promotional sale once a month and then maybe even reduced lower than that at some point into the future.  As you have read, it was coined “fair and square” pricing. Predictable, consistent, logical.

But JCP consumers didn’t want that. First of all, having a single price on a price tag gave them no frame of reference anymore. Well, except for one.  Before “fair and square” pricing, the great majority of JCP’s items were sold at a discount of 50 percent or more. So, existing JCP consumers walking in to the new JCP pricing strategy probably perceived that prices were a little higher than they were used to paying on merchandise that was by and large the same: anything but fair in their eyes.  Overnight, the ability to snag a sale item and the anticipation associated with being able to walk into a JCP and stumble upon an item that was on sale and maybe even with an additional percentage off had all disappeared.  Fair and square pricing made the shopping experience at JCP seem blah and boring.

So, consumers did what they always do when their expectations are dashed: they went somewhere else. And, these weren’t just any JCP customers that fled, they were their most loyal. It was as if JCP had broken up with them, and they were plenty angry about it too. One of the earliest tip offs that JCP’s strategy was failing wasn’t the dearth of customers in their stores, it was the rising fortunes of Macy’s and Target, whose revenues reported upticks just about the same time that JCP’s new strategy was rolled out.

Johnson’s mandate was to transform JCP into a more hip and happening brand – which was about as far away from JCP as you could get. JCPs core customer was far from your average hipster:  it was a 40-year-old Mom with kids and an average family income of $69k. For them, JCP was the “go-to” for quality, price and selection – not fashion forward styles but conservative, well-fitting and comfortable clothes (aka not the skinny jeans and stilettos crowd). Often, this Mom went to that store with kids in tow, kids for whom a Levi’s and a Joe Fresh and a Sephora store-in-store would have been most appealing, and potentially capable of becoming the onramp for the next generation of JCP shopper.  There was, in fact, some early evidence of that. Store sales per square foot of those store-in-store brands were well above those outside of those branded experiences in-store. But the change in pricing stopped that loyal JCP Mom from walking through the doors. And when she did, she stopped walking in with her hipster children or hipster friends or hipster siblings who might have been enamored by all of the shop-in-shop branded boutiques that Johnson was building inside of JCP’s four walls, which they never see and experience.

So, there you have it. The handwriting was on the wall in February when Johnson admitted in a CNBC interview that 2012 was harder than he thought but was still bullish on JCP’s future – and no one really leaped to his defense. It was just a month or so later that he was officially out.

Johnson made a pretty bold decision to do things at JCP the “Apple way” – that is without any consumer research or small trials. Apple, as you all know, is famous for not doing consumer research since their view is that consumers can’t articulate what they want so why bother to ask. There is some truth to that; but retail pricing is a discipline all onto itself, one made much more complicated by the difficult economic times, the rise of the discounted daily deal mentality that consumers find hard to shake and the irrationality of the consumer shopping and buying process.

There was another difference at play too.  Johnson’s alma maters, Apple and Target, could deliver a different pricing experience because their merchandise is sufficiently differentiated and is targeted to a different consumer segment – the iPad Mini at Apple, the Michael Graves teapot at Tar-jey, for example. JCP’s pricing strategy got in front of its merchandising strategy and killed not only the loyal JCP shopper’s interest in shopping at the store, but offered nothing of value to anyone new.  The big lag between when branded merchandise was to arrive resulted in JCP being stuck in the middle again: the existing customer base fled out of confusion and disappointment (and some even out of anger) over the new pricing and the new hipster crowd had no reason to give it a try.

Creative destruction is a conscious decision to cannibalize an existing business in order to reinvent it for the future.  Johnson’s mandate was to creatively destroy JCP and turn it into a new hipper brand, more in tune with how people would like to shop and what they would like to buy. His vision of creating a mall within a store was very consistent with how futurists describe the new physical shopping experience – something bigger than just shopping. He painted a picture of moms and families coming to the store, kids getting free haircuts, having their pictures taken, buying clothes, and even grabbing lunch or dinner – was all about delivering value, service and saving time-challenged families time and money.

Unfortunately, that wasn’t the experience that the loyal JCP customer got when the new strategy was launched.  The result was a strategy that has the potential to more or less kill the entire business all at once before there is any evidence that the alternative to the “old ways” would be appealing enough to enough new customers to move it in a new direction. Johnson certainly didn’t expect that the result of implementing his vision would be that customers would leave them in droves before new customers latched on or old customers caught on, but that’s the reality of where JCP is now.

Today, JCP is truly between a rock and a hard retail place having alienated many of its existing customers and having introduced a new brand that most consumers new and old don’t really understand now and see no reason to investigate.  The old CEO is now back in charge, discounts are back, and about half of the stores have some branded storefronts installed. New merchandise – ordered months ago – will be rolling in soon to stores that today lack a lot of shoppers. Management is seeking $1 billion to keep the lights, on since it is reported that JCP will run out of money come August if it doesn’t get it.

I’ve read in lots of places that JCP was unfixable from the jump and Johnson just accelerated the inevitable demise of the once iconic brand.  That may be, since the future of physical retail is changing and there are lots of brands that won’t be able to keep pace with what will be required to serve new types of customers, and to master the new opportunities that come with the convergence of on and off line retail. While it always appeared to be a hugely massive undertaking to turn JCP around, maybe there was a way to creatively destroy the business without as many casualties, including Johnson himself.

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