Consensus Advisors: New CEO Facing Uphill Battle to Transform Penney
Through a special arrangement, presented here for discussion is a summary of a current article from Consensus Advisors, a boutique investment and advisory firm specializing in the retail industry.
With the NBA lockout dragging on forever, All-Star Deron Williams of the New Jersey Nets has decided to play professionally in Turkey for Besiktas. While I am sure Mr. Williams is thrilled to be playing basketball (even without his $17 million salary), there certainly will be times when he will wake up during a bus trip to Trabzonspor and long for the luxuries of the NBA.
Similarly, as Ron Johnson officially transitioned at the start of November from the head of retail at Apple to the CEO of J.C. Penney, he awoke in a cold sweat wondering how he ever gave up a situation where he was in charge of a retail chain like no other. Mr. Johnson has left a position where his stores were located in the most coveted retail locations, carried a few dozen SKU’s, had a single captive vendor, a passionate and dedicated workforce, a parent with a bottomless bank account and an obsessive customer base that accepts the fact that his products are never discounted and think nothing of sleeping out all night to buy a replacement for a product they had slept out to purchase only a few months earlier.
Great products and a fanatical customer base is a dream combination and can transform a technology company into the world’s most remarkable retailer.
Penney is everything the Apple store isn’t. A department store is predicated on the ability to attract consumers by offering a wide variety of merchandise under one roof. For decades the breadth of selection attracted affluent consumers to department stores. With an endless merchandise selection only a few clicks away, consumers are increasingly turning to the internet to locate hard to find merchandise. As e-commerce has exploded, department stores have seen their share of consumer spending deteriorate over the years, and Penney is no exception.
Penney’s sales-per-selling square foot has dropped 15 percent over the past four years. Today the company operates 1,100 stores, about the same number of stores it had in 1928. Mr. Johnson seems ready for the challenge of turning around this once proud retailer. "In the U.S., the department store has a chance to regain its status as the leader in style, the leader in excitement," he said in an interview in June with The New York Times. "It will be a period of true innovation for this company."
Discussion Questions
Discussion Questions: Has Ron Johnson set himself up for criticism by announcing he plans to transform the department store and not simply improve its performance? How do you think Mr. Johnson will or should be looking to improve J.C. Penney?
I find it interesting that on the same day we are discussing Ron Johnson’s decision to transform J.C. Penney the NRF Foundation/American Express Customers’ Choice survey lists them as one of the top ten retailers that excel on service. Admittedly I am not a Penney’s customer, so have no firsthand experience but that would seem to be a great base to build on.
Will he be able to achieve the same level of devotion from Penney’s customers that Apple has? No, but no one rationally would expect that he could. The question is can the strategy (started by his predecessor) of purchasing brands such as Liz Claiborne and offering them exclusively at Penney’s and whatever new strategies Ron has yet to announce succeed in elevating Penney’s to a higher level. I wouldn’t bet against it.
Ron Johnson and the team that he is hiring have impressive backgrounds, but turning around JCPenney won’t be easy. It’s one thing to start with a blank slate (The Apple Store) and a narrow assortment of most-wanted merchandise. It’s another thing entirely to turn around a company with an entrenched way of doing business in a very competitive space. Rather than promising to reinvent the department store experience, Mr. Johnson and his team will be smart to focus on one key improvement at a time…in particular, the over-assortment of lackluster private brands putting JCP at a competitive disadvantage vs. Macy’s and Kohl’s.
If I remember correctly, Bob Nardelli was going to “transform” Home Depot and he did, much to the delight of the folks at Lowe’s.
The department store format has always, conceptually at least, had an advantage over other formats. Prior to e-tail, it was specialty stores. Beyond the concept, however, are the realities of high payroll costs, intense price competition, and a customer base that buys only on promotions.
I admire Mr. Johnson for taking on the challenge. If nothing else, he is about to get a good lesson in humility.
J.C. Penney is clearly a retailer in severe need of transformation. They are currently in survival mode and tweaking things will not solve the problem.
While Penney’s does not have the same ingredients for success that Apple enjoys, it does possess a loyal shopper base and a strong reputation for customer service.
The recipe may be quite different, but a new focus on innovation and improving the customer shopping experience will certainly be worth a shot.
The alternative will be to follow Sears’ path.
I have no idea what he will do and how he will do it. Penney’s could have hired me for a lot less.
Just like the airline industry, the department store model is broken and it is going to need new thinking to make it work.
Mr. Johnson is an inspirational leader. He absolutely should aspire to transforming the department store experience. Evolve or die. Lead with innovation or do nothing new. Your physical store needs to be one of the 6-7 doors visited per average mall visit. For JCP, apparel is king. The female shopper will be the final judge of success or failure. Will they flock to the store like Apple fans? I doubt it. But, should their associates aspire to be as popular? Yes.
According to the NRF Foundation/American Express Customers’ Choice survey, JC Penney has created a customer friendly environment which puts them at the top with many consumers. All they need to do now is add the ‘personal’ element to their service model which will not only solidify their position as a customer favorite, but may also help them distance themselves from the discounter slugfest.
I hardly believe that Ron Johnson awoke in a cold sweat wondering why he gave up his position at Apple. He’s no fool! I believe he sees that all the pieces are in place for the transformation that he has promised. All he needs to do is add “a passionate and dedicated workforce,” which I believe based on his past performance, he is more than up to the challenge.
At RSR, we’re looking at the slow death of the category killer and wondering if the department store isn’t next. With online putting pressure on both numbers of stores and overall size of each store, and providing an endless assortment that a department store will never be able to match, I think it’s very timely to think big about the future of the format. Is Ron the right guy? I don’t know, but at least he’s trying.
It’s an interesting challenge. Department stores are very hard to shop unless you’re bullish on one brand or another. I read a stat somewhere that said the average consumer shops 1.2 departments when in a store, so there’s no particular synergy.
If JCP can change that paradigm, it would be profound…but it’s really a complicated problem. If he solves it, he’s a hero. If he just gooses sales, he’ll be a quasi-hero.
EVERYONE wants to know what Ron Johnson will do.
A quick visit to a Penney’s store reveals a riot of merchandise. Some of that merchandise is terrific!…but the overly large selection reveals a lack of focus and a desire to be all things to all people. Whatever he tries, it’s certain to be slavishly copied by his competition.
I have to admire the courage of Mr. Johnson for taking on Penney’s. It will be interesting to see what he can do to make it a frequent place to shop, instead of Kohl’s or Macy’s. Improved variety in clothing and super sharp deals that the customers actually want will determine the future success of the company.
Years ago, my mom and I always went to Penney’s, and it will take a huge campaign to make it happen again. With online clothing and aggressive competitors, Ron has his work cut out to prove any success for Penney’s. Good luck!!
J.C. Penney, like Macy’s, is a house of brands, heavily weighted toward private and proprietary brands. Unlike Macy’s, J.C. Penney hasn’t done a great job of differentiating its brands or making them relevant outside of its stores, even as it shoehorns new ones in on a regular basis. Ron Johnson’s biggest opportunity is to stop the brand procurement madness and leverage its existing brand’s equity on a massive scale and across an exploding number of touch points. Basically, apply exponential math to Apple’s mono-brand model.
Another possibility would be to take a page from Eddie Lampert at Sears and externalize its high-equity owned brands (which soon will describe Liz Claiborne).
Let’s be realistic; in it’s current state, JCP is doomed to fail. It’s an old business model with tired merchandise on lousy real estate. It may take 30 years, but they’re doomed. And in my book, Johnson saw this light (or darkness) at the end of the tunnel and was able to sell his vision to the right people.
The only way to change a behemoth of this nature is with revolutionary thinking, and that’s pretty much what he’s saying his strategy is — to change the game completely. FWIW, I agree with him and applaud his bold steps so far and those of the board who hired him in the first place.
JCP has tried just about everything you can think of on the incremental side over the last 15 years but accomplished very little. They NEED to go for it; take big shots. It’s a matter of survival. Now, with this aggressive strategy, at least they’ll have a chance.
I should add that I am a loyal JCP credit card holder and participate in their JCP Points program. At present, they are couponing me to death. We are talking about direct mail at a weekly frequency with the same tired offers week in and week out — threshold based, “bonus” rewards, shop these select days only, go online and get more savings/use this coupon code. Plus, there are email communications with similar offers. It is the most aggressive form of retail couponing and I am certain the competition sees it and is reacting with similar offers. (Sears in particular has kicked back in to direct mail after a relatively long hiatus.) The end result? Lower margin on goods sold. To engender loyalty and impact the store experience a la Apple will indeed take a long time — do they have that luxury let alone the patience at senior level management to achieve it?
It might be simpler to improve performance and bring back core consumers and increase the frequency of visits. However, this would be a short-term solution in which the retailer would constantly be playing catch-up to keep up with the competition.
Setting himself up for criticism, creating PR and excitement for a transformed J.C. Penney brand will differentiate the retailer and potentially create a long term franchise that will be more inclusive to customers currently not considering the retailer.
I think innovation for a brand that has lost definition is a long-term better solution.
It is typically an advantage to bring a leader in from outside your world to inject some “out-of-the-forest-through-the-trees” ideas. Lou Gerstner came from Amex and Nabisco and did a phenomenal job helping save IBM in the 1990’s. I say give Ron a chance to make the department store evolve into a 21st Century retailer.
I agree with a previous poster that JCPenney has too many private label brands which do not enjoy significant popularity or recognition among consumers. JCPenney needs to find a connection to a reputable brand, as Kohl’s has linked to Ralph Lauren through the Chaps brand. Otherwise, people who want lower-priced name brands will go to Kohl’s and the less brand-conscious will save money by shopping Walmart and Target.
Over the last 20 years, so much of what we held to be true about business, technology and economics has been completely shattered and rendered archaic. Can we possibly be foolish enough to believe that the concept of a department store can’t also be eradicated?
There is no safety in merely improving on Penney’s broken proposition. The only way for the company to stop being disrupted is to start being the disruptor and carve out a new and distinct market space. In short, they need to do something remarkable.
To address the first question, Mr. Johnson is doing exactly what he should be doing by discussing his vision for the transformation of J.C. Penney and not discussing the valuation.
My response is based on the findings from FTI Consulting’s recently released study on the topic, entitled “CEO Transitions and the Risk to Enterprise Value.” To frame up my response briefly, the study found that CEO reputation is nearly as important as the reputation of the company and more important that the reputation of the company’s products or services, according to comments from 358 portfolio managers and analysts.
The study found that a CEO transition presents a unique opportunity whereby the CEO has 6-month “honeymoon” period to where the investment community is looking more to the new CEO to assess the situation, create the vision/strategy and set expectations. Thy investment community begins looking at improved market and financial performance after 12 months.
Given the views expressed on this discussion string regarding JCP’s company and product reputation, partnered with a unimpressive track record of operational execution and competitive positioning, one may surmise from the data that Mr. Johnson will need to focus heavily during his 100 day “honeymoon” to build his reputation to rally the support of the investment community.