Penney CEO says stores critical to omnichannel push

Discussion
Photo: JCPenney
Jan 13, 2017
George Anderson

J.C. Penney CEO Marvin Ellison expects online sales to exceed 20 percent of the company’s total within five years. That’s why he’s reluctant to close any stores. While the idea of keeping stores open as sales migrate online may seem counterintuitive, Mr. Ellison sees physical locations as critical to the chain’s omnichannel strategy.

Speaking this week, Mr. Ellison said a store’s value is determined by measurements beyond what is sold off the floor, The Dallas Morning News reports. He identified store fulfillment of orders placed online as well as product returns as ways physical locations support top line growth while reducing costs.

About 40 percent of customers who come into a Penney store to pick up an online order or to make a return wind up making a purchase, Mr. Ellison said. He also said that customers making returns typically spend twice as much as the price of the item being brought back to a store.

“Only two companies make money from e-commerce, UPS and FedEx,” Mr. Ellison said. “There is not a pure play making money including Amazon on the retail side.”

At the conference, Penney’s CEO conceded the company is currently reviewing individual store performance and would likely have to close a small number. The department store operator has resisted calls by Wall Street to close large numbers of stores under Mr. Ellison and his predecessor Myron “Mike” Ullman. Last year, the chain closed seven stores.

Penney had a tough November and December with same-store sales down 0.8 percent. Mr. Ellison attributed the decline to a slow start in November with sales falling off the first three weeks of the month. Business from Thanksgiving through the end of December was “positive,” he said in a recent update.

Mr. Ellison said he was “encouraged by a very strong performance in our e-commerce business, evidenced by double-digit growth. This validates the strength of our omnichannel strategy as efforts to improve site functionality, expand fulfillment capabilities, offer flexible shipping options and introduce a broad assortment of new product categories were instrumental to this digital sales growth.”

DISCUSSION QUESTIONS: Do you think criticism of J.C. Penney’s slow pace in closing stores is valid or is it off the mark? Do you approve or disapprove of Marvin Ellison’s omnichannel strategy for the company?

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"Only innovative companies have a place in the retail arena today."
"The whole notion of having an omnichannel strategy implies having physical stores in the equation."
"Retailers have to stop playing catch up to Amazon, and look to leapfrog — not so simple..."

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25 Comments on "Penney CEO says stores critical to omnichannel push"

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Susan O'Neal
BrainTrust
11 months 2 days ago

Unless department stores themselves become dual stores/distribution centers, I don’t know how the model survives the need to have nearly every size and color of every item in-stock at the same (or close to same) price as online merchants.

Tom Dougherty
BrainTrust

I almost like his comments. Almost.

He is hesitant to tell the truth because retail has not yet found the solution to the permanent changes in retail shopping.

Closing stores is NOT the answer. Not until you figure out how to make your brand important and relevant beyond location, location, location.

Mark Ryski
BrainTrust

Department stores are facing an existential risk. I believe the department store bloodletting of 2016 is only the beginning of a trend that will continue and likely accelerate. Modest incremental changes and me-too strategies won’t be enough. J.C. Penney and the other department store operators need to re-think their businesses and take bold steps to ensure that they have the financial wherewithal to provide the runway they’ll need to identify, test and ultimately implement new strategies. I’d advise J.C. Penney to move faster and be more aggressive in their plans — time is not on their side.

Ori Marom
Guest

J.C. Penney has been turning losses for five years in a row. They must either get their act together or liquidate the company. Just closing stores is not good enough.

It is a rare admission by the CEO of a retail chain that online sales are not profitable. In fact, they will never be. I have a question then: what makes in-store sales profitable when online prices are usually matched? Evidently, no such ideas are reflected in J.C. Penney’s financial reports. When you mix two losing operations (in-store plus online) you do not usually get a profitable operation.

Only innovative companies have a place in the retail arena today. The ones that create little new should have the decency to return the ENTIRE surviving capital to their shareholders. They deserve nothing less for their patience and restraint from taking legal action so far.

Frank Riso
BrainTrust

Marvin Ellison believes he is on the road to recovery for J.C. Penney and lets hope he is on that road. In doing so, he knows that the stores will play a big role when he finds the right solution and/or software that joins the online/mobile experience with that of shopping at the store. Does the store have what I need? If not, what nearby store does, or do I buy online to get my item? Without the stores it becomes a pure online business and again it’s UPS and FedEx making all the profits. I do approve of the strategy and more retailers need to take the bold step of finding a way that in-store and online can both work to support each other. Something to look for and find at NRF this year!

Fool Me
Guest
11 months 1 day ago

Frank, he’s on the road, but did he take the right turn at the fork we just passed?

Jasmine Glasheen
Staff
Jasmine Glasheen
Contributing Editor
11 months 2 days ago

Marvin Ellison’s choice to keep stores open IS critical to J.C. Penney’s (and any department stores’) omnichannel strategy. Look how much editorial is devoted to forecasting the demise of department stores that are closing physical locations. It’s tough for a heritage brand to make it solely online. Customers expect brick-and-mortar and stocks plummet when a company shutters stores. Just look at Macy’s … it doesn’t look good. By bringing in Sephora (although how they got that contract I’ll never know) and refusing to close physical locations J.C. Penney is refusing to become obsolete.

Peter Sobotta
Guest

There is a reason why Amazon is considering kiosks and now physical stores. Clearly a positive omnichannel experience is a good strategy. For J.C. Penney, a better question would be framed around their product offerings and ability to drive profits from this approach.

Steve Montgomery
BrainTrust

To fully evaluate Mr. Ellison’s strategy we would have to know more about the numbers he quoted. Both the 40 percent purchase rate for BOPIS and the twice-as-large purchases for returners sound great, but what are the actual sales and gross profit numbers? Hopefully he will not slow-walk closing the location until J.C. Penney reaches the point of no return.

Paula Rosenblum
BrainTrust

I understand what he’s saying. After all, you can’t have “omnichannel” without stores. Then it’s just digital channels. And what he says about profitability is completely true — especially in the apparel business. It’s hard to make money with return rates of 25 to 30 percent, and that’s what happens in that sector. The fitting room is replaced by “let me buy it and return the stuff I don’t like.”

The bigger question is, how does J.C. Penney stand out in the noise? How do its stores become more shoppable? That’s the question for the entire industry, especially department stores.

Adrian Weidmann
BrainTrust
The physical store will always have a place in the shopping landscape. The question is — what role will it play? The physical store will certainly NOT be what it is today. I believe the physical store will be a hybrid, combining online sales and returns, endless aisle shopping, store-within-a-store concepts focusing on new introductions, how-to experiences, VR and AR experiences, communal experiences/seminars and meeting points (“treffpunkts”). They will not be rows and aisles of shelves full of products waiting for a shopper to grab them. If that were the case, then every Walmart or Amazon distribution center would have a POS terminal at the exit. There could, however, very well be a click and collect drive-thru area at these locations. I’m afraid the acceleration of digital flows driven by shopper expectations, Moore’s Law, and cloud computing are moving significantly faster than Mr. Ellison’s decisions suggest. Simply closing several stores is not addressing the problem nor facing the challenge. The answer is to design the store to address and enhance the digital reality. Why does… Read more »
Fool Me
Guest
11 months 1 day ago

Considering Moore’s Law, J.C. Penney can neither change nor convert stores fast enough to keep up with the changes in the buyer’s expectations and demands. Walmart and now Kroger are offering online ordering and local store pickup. Where does J.C. Penney fit into that picture? How do they compete with Amazon, especially as Amazon perfects the same-day delivery service?

Richard J. George, Ph.D.
BrainTrust

There’s no doubt that e-commerce has been and will continue to be a major disruptor of traditional retailing. Omnichannel, which is about customers and not channels, does represent the future. However, that being said, every brick-and-mortar retailer needs to review its current positioning in light of the jobs that customers will hire it to do. J.C. Penney needs to take a hard look at itself and assess what these stores that it will keep open will do to survive in addition to simply serving as a pickup point.

Charles Dimov
BrainTrust

Ellison’s continuation of strengthening J.C. Penney’s omnichannel strategy is the right thing for them to do. Rather than trying to become a online pure-play to compete directly with Amazon in their zone of strength, the smart thing to do is to leverage J.C. Penney’s assets.

It is important to remember that people will come in for the service, the instant gratification and for the opportunity to see/touch/feel the merchandise. That explains why J.C. Penney is seeing a 40 percent increase in sales from someone coming into the store merely to pick up an item or return one. In fact, UPS (2016) found that 60 percent of consumers prefer to return a product to a physical store rather than via mail. ICSC 2017 found that pickups resulted in 61 percent add-on sales during holiday 2016 season. Add the upsell opportunity … and the omnichannel formula might very well be the right path for J.C. Penney.

Dick Seesel
BrainTrust

Macy’s is taking one approach to omnichannel (closing stores) and Kohl’s is taking the opposite approach (keeping stores open). J.C. Penney seems to be taking the second path, and Mr. Ellison is correct that a convenience-based model trying to compete against Amazon needs as many productive brick-and-mortar distribution points as possible.

None of this means that J.C. Penney or Kohl’s should avoid regular review of locations, in order to identify potential closings and even openings. And — most of all — every brick-and-mortar retailer (J.C. Penney included) needs to take a hard look at its merchandise assortments and store experience outside of the operating demands of an omnichannel model.

Lyle Bunn (Ph.D. Hon)
BrainTrust

Omnichannel started and for many continues to be a survival strategy in the face of a more cost-effective online business model by competitors. It is also a Madison Avenue response to the crisis in their customer base that would line their pockets as well. While online presence and omnichannel are a business necessity, the heart of many retailers is still in physical stores. Serving the two masters of online and physical retail has detracted from making the in-store experience more relevant and compelling. Being a great store will always win customer loyalty. Let’s see stores become great again.

Mohamed Amer
BrainTrust

The whole notion of having an omnichannel strategy implies having physical stores in the equation. J. C. Penney’s investments in their e-commerce business make sense and while it’s important to build out the associated capabilities, it’s even more important to ensure that they create and execute on a vision centered on customer experience that includes all touchpoints. Put another way, it’s not about optimizing each touchpoint or interaction but on purposely designing a fresh, consistent shopping and ownership experience that leverage its physical and digital assets.

J.C. Penney is facing massive headwinds with the tectonic shift in how people shop and what they expect from retailers. This shift has called into question the future viability of department stores and malls as we know them today. The company has enough smart people to see the trends, identify what they need to do to survive the transition and create a new future. The challenge is in having the organizational wherewithal to pivot deeply and quickly while supporting the existing business model.

Fool Me
Guest
11 months 1 day ago

The “hard box” retailers are facing a behemoth much like Kodak faced. In 1998, Kodak had 170,000 employees and sold 85 percent of all photo paper worldwide. Within just a few years, their business model disappeared and they filed for bankruptcy. What happened to Kodak will happen in many industries in the next 10 years — and most people don’t see it coming. Did you think in 1998 that three years later you would never take pictures on paper film again? Digital cameras were invented in 1975. Will the cavernous retails stores of Kmart, Walmart, J.C. Penney, Macy’s, Dillard’s and the like become ghost towns to a computer screen or smartphone/tablet? Are there any retailers (Kodaks) making the announcement like Amazon’s looking for 100,000 new employees? Just think about it for a while. The shopping mall won’t be in existence when we hold the next presidential election!

Thomas Becker
Guest
11 months 1 day ago

I agree that the physical store is the critical factor in omnichannel marketing. The problem is that retailers struggle to remain relevant at the store level, often shrouding their problems in “the Internet of Things.” Whether you are, or are not, thriving in-store, it is not due entirely to the internet.

Peter Charness
BrainTrust
Retailers have to stop playing catch up to Amazon, and look to leapfrog — not so simple as Amazon keeps innovating and moving ahead. The assets a bricks retailer has to interact with their customers are way ahead of a pure-play retailer. A physical location within a very short delivery interval to most customers (maybe too many of them in fact) and the ability to satisfy the customers path to purchase (and return) that can’t be matched by pure play at all. There are a lot of distractions for a retailer now in this hyper competitive world as Amazon continues to eat market share for breakfast. Focusing on some priorities like having an easy to shop product assortment that customers want to buy (with more emphasis on building brand through private labels) and convenience for the customer to shop/purchase and acquire the product quickly, as well as to return wherever, is something an omnichannel retailer can do very well — and make money at. Brick and mortar done right (with online) has plenty of fundamental… Read more »
gordon arnold
Guest
The math classes in our school system(s) teach those in attendance and listening that two negatives in some formulas gives a positive result. In the real world of business and accounting, this is never going to happen. J.C. Penney’s mission critical is sales and that ain’t happening on any front to the levels necessary for the stores, e-commerce and the company. Buy online and pick up in store sales only really help with limited recovery of impulse sales lost to e-commerce. It would be foolish to set Penney as the focal point of the continuing dismal results we are seeing in retail. It is much safer to say that executive management across the board has not figured the role and design for 21st century retail market segments. The attempt to synergise components that fail to produce on their own both growth and profitability only exponentially increases financial loss. Independent market endeavors, open to cooperation and functional interactivity with total business transaction continuity, might be considered as a foundational framework in place of single-minded operations inventory… Read more »
Dave Wendland
BrainTrust

Closing stores may not be the answer since the real estate may be a very valuable asset. It’s what is done with that real estate that proves relevance. Enhance the experience, improve the assortment, make it easier for shoppers, and build from the foundation. I agree with Mr. Ellison that brick-and-mortar is a vital part of an effective omnichannel strategy.

Craig Sundstrom
Guest

My question would be “slow compared to what?” Certainly compared to Macy’s, but that’s only because the latter had way too many stores to begin with; or Sears … but let’s not go there.

It’s hard not to like someone of whom it can be said “resisted … Wall St.” but we’re reaching the point where accountability will be in order. Same-store declines will raise eyebrows — even it they’re less than peers — since JCP began so low in the post-Johnson era. And while the explanation of pickup/return synergies makes a certain amount of sense, I’m not sure how true that will remain as online orders grow to a material fraction of the total … the math may work when it’s 5-10%, but a rethinking may be necessary when or if it becomes 20-30%.

Christopher P. Ramey
BrainTrust

We’ll soon have new retail metrics that include contributions to gross revenue. At the same time, we’ll see a tipping point when physical stores are an asset rather than a liability.

We’ll also reinvent the purpose of a store. No doubt they’ll dramatically decrease in size. I see a drive-thru too.

One puzzling point, is it an incentive to make mistakes if 40% of customers who visit your store are there to pick up on online purchase or return an online purchase?

Kenneth Leung
BrainTrust

Stores are important for omnichannel — I don’t see everyone using online delivery for everything, the economics and the margins don’t sustain it. However, department stores that sell non-exclusive lines are going to have a tough time going forward as people gravitate to online for convenience and availability, and specialty for exclusivity.

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Braintrust
"Only innovative companies have a place in the retail arena today."
"The whole notion of having an omnichannel strategy implies having physical stores in the equation."
"Retailers have to stop playing catch up to Amazon, and look to leapfrog — not so simple..."

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