A Contrarian Penney to Sell Outlet Stores
While many other retailers are increasing the number of outlet stores they operate, J.C. Penney is getting out of the business altogether.
According to a Bloomberg News report, Penney has reached a deal to sell its outlet stores to SB Capital. The department store chain made the decision to get out of operating the 19 stores at the same time it is closing its print catalog business.
SB Capital will continue to operate the outlet stores under the J.C. Penney banner for 21 months before a name change is made. The company is also bringing on Penney’s outlet store management team to run the business.
Penney’s decision to close its outlet stores runs contrary to the current trend in retailing that sees many chains and designers expanding. Sales in outlet stores are capturing a greater percentage of overall sales, particularly in select categories such as apparel. According to The NPD Group, total year-over-year apparel sales increased 1.4 percent for the 52-weeks ending April 2011. By comparison, apparel sales in outlet stores grew 17.9 percent during the same period.
Marshall Cohen, chief industry analyst at NPD, said the success of outlet stores is due to value conscious consumers "looking for brands they either already have, or that they trust. They want products that are tried and trusted and they don’t mind spending money on them."
Discussion Questions
Discussion Questions: What do you make of J.C. Penney’s reported decision to sell its outlet store business? Do you expect other retailers to follow Penney’s lead?
A smart move by Penney: It’s one thing for a designer or brand to operate an outlet store in a destination center full of similar retailers, with critical mass and an increasingly upscale target customer. (And don’t forget that a lot of apparel companies develop product specifically for their outlet stores.) It’s something else entirely for JCP to operate what are typically free-standing outlet stores with very little volume-driving potential. The logistics of supplying and managing stores like these clearly don’t justify the return on investment. Penney would be much better off clearing inventory through its website and in its own bricks-and-mortar “mainline” stores.
This is a smart move by J.C. Penney because a discount outlet for a discounter just doesn’t make sense. They evidently are finally realizing who they are, and who their customer is. Now they simply need to concentrate their focus and rise above the competitive noise in the discount department store segment in which they live. Without the distraction of the outlets they can zero in on EDLP and inventory management in their full-line stores. With Ron Johnson at the helm, I think they have a pretty good chance.
One thing I learned when I was in the furniture business is that outlet stores can be a real distraction.
If I’m wanting to re-invent JCP (which I assume is the new CEO’s goal), then it’s a good idea to focus on the core value rather than also buy a slightly downmarket set of product for outlet stores.
Also, outlet stores are generally for the aspirational shopper. Who is the aspirational shopper for JCP? I’ll bet management would rather have that aspirational shopper in the main store.
It appears like Penney’s executive team has taken a hard look at the numbers and what goes into them and made the hard decision. That’s what they are paid the big bucks to do. Penney’s did not seem to be a fit for the outlet store business; at least the way they went about it.
You don’t hire Wolfgang Puck to cook hot dogs. And you don’t hire Ron Johnson (of Apple Genius Bar fame) to operate outlet stores. I think this move serves as a clear bellwether of where Mr. Johnson intends to position the new J.C. Penney. I applaud the guts it takes to do what they’re doing.
JCP needs to focus on the higher margin, core operations of its business. Running an outlet division is not easy and it’s always a mad scramble to keep the stores stocked and looking pretty. JCP could be getting out of it to concentrate on the actual J.C. Penney’s business. SB will be bringing on the old management team to run the business so I would think that the operation is doing well but JCP’s core is not.
If the stores do not supply a good enough return on investment, JCP should be closing these stores and any others that are underperforming. These are difficult decisions for any retailer to make, but demonstrate a true dedication to better managing their business. Good decision, JCP!
The J.C. Penney Outlet stores have had periods of robust profitability. And, it has served its purpose of both clearing merchandise and overrun issues over the years. The J.C. Penney Outlet stores haven’t failed. The role in the J.C. Penney family of brands has been ill-defined — it’s an operations issue, not a strategic one.
The outlet store has too often been treated as the “red-headed stepchild.” If there is not a commitment to that group of associates, then it is a wise decision to set it free, and let them fulfill their own destiny.
Outlet stores started out as a way to sell last season’s fashion. The founding idea was to control the aftermarket so as not to compete with stores. Outlet retailing has taken a different path. Many outlet retailers buy merchandise just to sell in these stores. Years ago, the idea was to sell this left-over merchandise overseas. The problem is channel control. The next thing the retailer would find is the same merchandise back in the country as direct competition. To get out of this business requires two elements. First, good control on the buying. Second is control on the disposal. Giving merchandise to charity works well.
The snarky response is “JCP had outlet stores…how could you tell the difference?” But whatever the attitude, the message is the same: there probably wasn’t enough difference in price points and merchandise between the conventional stores and the outlets to clearly separate the two.
I agree that this is a smart move by Penney. The outlet business is brand driven. When a retailer opens an outlet, it feels like a big markdown rack, which is exactly what it is. When a brand opens an outlet store, it is an extension of the brand, fully executed, and designed to further build brand equity.
30 years ago, the J.C. Penney outlet stores were relevant. The huge store in the Columbus, OH area was such a destination that you would see tour buses stopping there. But off-price shopping has changed a lot since that time.
The business of retailing needs a fresh and revolutionary rethinking in case retailers want to remain in business and remain competitive. Prior to opening new retail stores by any player, however big and financially sound they may be, one needs a honest introspection and genuine market analysis before following the herd.
This is a very interesting move on the part of J.C. Penney’s leadership. It may seem counter-intuitive to move away from a currently trending business model. However, I applaud any business that chooses to focus on its core business vs. dabbling in other areas. Despite the continuing challenges, Penney has made several good moves to strengthen its core: closing unprofitable stores and formats, adding key customer-desired elements such as Sephora cosmetics, and strengthening its web offering. A focused mid-tier department store world dominated by Kohl’s and Penney at the bottom/middle and Macy’s at the top sounds about right.
What I find really interesting is the decision of SB Capital to choose to make this purchase without the ability to keep the name. In so doing, I assume this a pure real estate play and I doubt a new name for an outlet center anchor will emerge but rather Saks Off Fifth or similar will eventually occupy the sites.
The evolution of American retail continues….