Photo: JCPenney
Can J.C. Penney make it without Sephora?
J.C. Penney has had its share of problems in recent years, but a positive constant for the chain have been the Sephora shops operating inside its stores. Now, however, Sephora wants out.
The beauty chain threatened to refuse to reopen its Sephora Inside J.C. Penney shops (SiJCP) unless the department store retailer agreed to shorten the current deal, which has about four years remaining on it, to April of next year.
Penney went to court last week to file a restraining order against Sephora. It received a temporary order issued by a state court in Texas. Sephora responded by filing its own suit against Penney in federal court.
In its suit against Sephora, Penney argued that the beauty chain has threatened immediate termination of the contract between the two parties. Doing so would cause the department store chain “irreparable” harm to its business.
Penney, which posted a 7.7 percent decline in same-store sales in the last fiscal year, was expecting sales to drop between 3.5 percent and 4.5 percent this year before it was forced to close stores across the country due to the coronavirus pandemic.
In a statement regarding its current dispute with Sephora, Penney spokesperson Brooke Buchanan said, “We remain committed to working together to drive sustainable, profitable growth, as SiJCP continues to be a beauty destination that serves millions of customers each year.”
“We have been in active discussions with J.C. Penney regarding our agreement for some time,” Sephora said in a statement. “Although this is a sudden and unfortunate development, we are hopeful of continuing discussions and reaching an amicable agreement.”
In February, Sephora announced it planned 100 new store openings in North America this year. The chain said it was focused on non-mall locations so that it could place itself closer to where its “customers live and work.”
- Sephora is threatening to pull out of J.C. Penney stores – The Dallas Morning News
- JC Penney goes to court to try to stop Sephora from pulling out of the troubled chain’s stores – CNBC
- C. Penney Company, Inc. Reports Fourth Quarter and Full Year 2019 Financial Results – J.C. Penney Company, Inc.
- Are strip centers where it’s at for Macy’s and Sephora? – RetailWire
- What will it take to fix J.C. Penney’s shrinking sales problem? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: What do you think is at the heart of the current dispute between Sephora and J.C. Penney? What would the loss of Sephora shops mean for Penney’s business?
Poll
BrainTrust
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
Ryan Mathews
Founder, CEO, Black Monk Consulting
Ultimately, Sephora has come to the realization that the J.C. Penney is hurting its brand and compromising its growth. The relationship is no longer of value to them. Sephora has been one of the few bright-spots for J.C Penney, and this will be a significant blow – compounding an already dire situation. The decision to terminate is completely understandable for Sephora; the decision to hold-on to Sephora for dear life is completely understandable for J.C. Penney.
The real question is: even with Sephora can J.C. Penney make it? Sadly, the answer to that is likely no. Without Sephora – which is a major driver of footfall to stores and a nice source of income – J.C. Penney’s task is made all the more challenging. However, the blunt truth of the matter is that the relationship is unequal: J.C. Penney needs Sephora much more than Sephora needs J.C. Penney. Indeed, there is a case to be made that Sephora has outgrown the relationship. It has enough stores of its own and a powerful digital presence that makes its operations in J.C. Penney somewhat unnecessary. It is highly likely that Sephora sees the writing on the wall and is looking for ways to pivot away from its partnership.
Yes, you took the words right out of my mouth. J.C. Penney is going to have some serious liquidity problems very soon. Sephora is wise to reduce its risk in the store. Otherwise, it could end up as a creditor in a bankruptcy.
For J.C. Penney, there are a couple of straws that could break their back. Losing Sephora would be a whole bale of hay worth of trouble at the worst possible moment.
I believe that Sephora made J.C. Penney a destination for many who went there. If they go, that leaves J.C. Penney as another mid-tier department store with no discernible attributes from the others except for mounting debt.
If having shops located inside J.C. Penney stores is hurting the Sephora brand, or is limiting its growth potential, then parting ways makes sense. The timing of this conversation is unfortunate, even though talks have been going on for a while.
Sephora made J.C. Penney a destination for many consumers, myself included. The hits keep coming for J.C. Penney at a time when it is fighting for its life.
If Sephora sales go through J.C. Penney’s registers, Sephora is an instant creditor. If that’s true, if it were my company, I’d get out too.
The loss of Sephora would be catastrophic for J.C. Penney. There is no way J.C. Penney could convert what were the Sephora shops into a new beauty department with such little capital available. Beauty is one category that is holding its own – so to lose that is the beginning of the end.
Beginning? No, sadly it’s much more like the middle of the end; the beginning was the ill-fated Johnson experiment (or really the malaise that led them into it).
This is only one such instance of many more that we should expect in the retail landscape. Lawsuits that invoke force majeure will be commonplace. In this specific case, clearly Sephora sees no value anymore – financial or otherwise — from the relationship. J.C. Penney is hurtling towards bankruptcy, which would do no good for Sephora brand. Courts have to weigh in. But it remains interesting to see if the issue will resolve itself if J.C. Penney files bankruptcy.
Nothing surprising here. J.C. Penney is an anchor around Sephora’s neck. Sephora can’t save J.C. Penney, but J.C. Penney can definitely bring down Sephora. The only mystery is why Sephora partnered with J.C. Penney in the first place.
Sephora does not need J.C. Penney. Sephora said in a statement: “Although this is a sudden and unfortunate development, we are hopeful of continuing discussions and reaching an amicable agreement.” The writing is on the wall. Now all J.C. Penney has to do is find their way out of the woods and redefine and implement their strategy to make THEIR brand stand for something, creating footsteps for themselves — not someone else that drives the sales into the store — based on their own brand strategy. J.C. Penney has to be the brand captain so they can’t get held captive by someone else.
I have always wondered what Sephora saw in that relationship in the first place, so I’m not surprised that it is coming to an end. In addition to the attraction of foot traffic to J.C. Penney, those shop-in-shops are typically very prominent in J.C. Penney stores – usually you can see them from far away in the mall itself. So there is the added issue of taking on a major remodeling project in the stores where Sephora goes away – it was very on-brand to Sephora, and J.C. Penney can’t really get away with just shuffling some racks into the empty space. This will definitely hurt in more ways than one!
Simple enough. Sephora sees its brand as viable, is pursuing a strategy that will ultimately lead it away from mall retailing, and sees J.C. Penney as a sinking ship it can’t abandon fast enough. As to the loss of Sephora, it obviously would not help but, in all fairness, Sephora isn’t strong enough to keep J.C. Penney afloat, so at most it’s the difference between bleeding to death for an hour versus bleeding to death over two.
I’m not qualified to judge how the courts will view this dispute — a contract is a contract, at least in theory. Was the length of the agreement tied to volume guarantees that J.C. Penney could no longer meet, or location exclusivity that Sephora was stuck with? Both sides will have to make their own arguments, but it may be a moot point if J.C. Penney doesn’t survive.
I can understand why the J.C. Penney shops were no longer working for Sephora given the traffic falloff and branch closures even before COVID-19. This was a consistent bright spot for J.C. Penney — one of the few, and even predating the Ron Johnson era. If J.C. Penney wants to maintain a credible cosmetics department, it will be tough without the Sephora banner.
I am sure there could be a lot of second guessing by both parties as to how “we” got in to this situation. J.C. Penney needs Sephora to at least have a chance at survival. Sephora wants to get the J.C. Penney anchor off of their neck. I can’t help but wonder if J.C. Penney is going to survive as we come out of this pandemic. What are they going to be able to do to draw us back as customers?
For Sephora, this is a simple equation. As J.C. Penney continues to hurtle towards irrelevance and likely bankruptcy, Sephora no longer sees any value in the relationship. They no longer need the J.C. Penney footprint in malls to bring their brand closer to customers. Losing J.C. Penney won’t hurt Sephora or their customer relationships.
For J.C. Penney this is nothing short of catastrophic. Sephora is essentially what brings foot traffic into their stores. Unfortunately, J.C. Penney hasn’t been able to convert that traffic into sales of their own merchandise. Losing Sephora also costs them in other ways. They’ll have to rebuild a beauty department in stores that had Sephora – and that’s no easy task given a lack of capital to invest. It also implies a store remodel for significant space Sephora uses today. It’s a lose-lose for J.C. Penney overall, but a wash for Sephora.
This always seemed like a temporary move for Sephora until they could build out more stores, which they’ve done. #SorryJCP
Frankly, I never understood why Sephora made this deal happen in the first place. To me it was/is the most one-sided deal of the century so far. On the bright side of this pandemic, things like the painful 10 year demise of retailers like J.C. Penney are being accelerated to 3 months or less, which is very good for where 21st century retail needs to go. It’s going to be painful, but like pulling a tooth by tying it to a door and slamming the door, it’s going to be quick across the board. Let’s move on to the next thing: smaller/better.
I seriously doubt that being in J.C. Penney is hurting the Sephora brand. So what I expect is going on for Sephora is they’re finding the juice isn’t worth the squeeze.
Having been involved with efforts like this in the past, relationships like this often have far less sales impact than both parties believe they will have in the beginning. (Were people having trouble finding a Sephora before they were J.C. Penney? I doubt it.)
That said, I agree with comments that logistically, J.C. Penney seems in high risk of going under and Sephora should desire to be disentangled before that happens.
Sad situation all around.
The motivations from both sides have been well presented today by fellow BrainTrust colleagues. Transcending the immediate situation, what we have is a complete reassessment of the shop-within-in-a-shop concept which was based on the department store as anchor and destination either on its own or through a series of these branded shops-within-in-a-shop.
As changing consumer shopping behavior drives malls and physical stores to quickly evolve, department stores must accelerate their own transformation as they determine if their future is managing real estate or reimagining being merchants.
I have always wondered too, Nikki, why Sephora hooked up with JCP. JCP needs to cut the cord and move on. Lawsuits are both a financial and human distraction and will not change the future of JCP. Sadly, the JCP final outcome has been on track for years, right out there in the open. Trying to drown Sephora in the JCP misery demonstrates the depth of fear, and a cheap attempt to leverage Sephora as a last gasp of relevancy. This lawsuit demonstrates a troubling insight into the how and why of the JCP decade long demise.
Adding Sephoras to J.C. Penney was a horrible branding move on Sephora’s part. How can the cosmetics company represent fun and luxury when it’s wedged inside of a retailer that represents bare bones, low cost basics, and one that’s had so much trouble to boot?
J.C. Penney has been in the midst of a decade long identity crisis and it will take more than fighting its current partners in court to resolve the issues.
JCP has about 850 stores in the US, with Sephora occupying about 660 of them. Sephora also has about 460 stores of their own in the US (2600 worldwide). More important, the deal with JCP is not a passing fancy and has lasted for 13 years. It’s a long-term commitment from both brands to share business.
LVMH (owner of Sephora brands) CFO Guiony stated in a conference call that a JCP’s bankruptcy would still allow operations under Chapter 11 and didn’t believe that bankruptcy or management change would impact Sephora. Here’s the rub — more than half of their US market presence would vanish, especially up against Ulta, a strong competitor. This would be a challenge.
If anything, this debate is about the length of their commitment to each other over the next few years, and sustainability in the event of bankruptcy. For JCP, Sephora remains the most trafficked department in their store.
Sephora must not be seeing the returns it expected from J.C. Penney stores. Yet, the Sephora brand has probably been a draw to bring customers into JCP stores, just not enough for Sephora. It is also important for Sephora signage to be visible from the street with easy access. Sephora has a brand and cachet that does not come through in a JCP store. For JCP to lose Sephora as a major brand would be devastating for JCP and likely further their decline to potential bankruptcy.
Presumably Sephora feels it could do better as a standalone business than inside a JCP, which can be seen as a sign of both the strength of their brand … and the weakness of JCP.
Their departure certainly wouldn’t help the latter; how much it would hurt I don’t know. Sephora represents more the kind of retailer Penney wants to be than what it really is.
JCP needs to think about this before wasting a lot of money on a legal battle. If JCP needs Sephora to stay profitable then they are going to go out of business. If Sephora is opening their own stores and creating an online business, they do not need JCP. Unless Sephora offers something unique inside JCP there is no collaboration and no future to the deal. It can end now or after spending a lot of money on legal costs.
I don’t think consumers see Sephora at J.C. Penney as a bad thing. But it seems the relationship has served its purpose for Sephora — helping build the brand — which I expect is doing just fine online during the current pandemic.
I see this as Sephora’s move to create more flexibility in its contract and now is the time to apply pressure. JCP is not in a good position to negotiate. They need Sephora more than Sephora needs JCP.
Is it wise to fully pull out? Maybe. Maybe not. If JCP is viable, then revenue and reach remains important to Sephora, but they may achieve that at Macy’s, too.
This is a clear and obvious sign that Sephora has recognized that J.C. Penney is not aligned with their growth strategy or future plans. Severing this relationship as quickly as possible is smart and will give Sephora the ability to better place retail stores without being stuck in retail shopping malls that are clearly dinosaurs in a retail chain that is in decline as well.