J.C. Penney CEO tries to change the way we shop
By Anne D'innocenzio on November 17, 2012
http://www.businessweek.com/ap/2012-11-17/j-dot-c-dot-penney-ceo-tries-to-change-the-way-weshop
NEW YORK (AP) — J.C. Penney CEO Ron Johnson seems unfazed that the department store chain's
mounting losses and sales declines have led to growing criticism of his plan to change the way we shop.
Perhaps that's because this isn't the first time during Johnson's 30-year career that he's attempted what
seemed impossible.
People predicted he'd fail at selling high-end housewares and designer dresses at discounter Target, but
shoppers still flock there years later for cheap chic goods. Likewise, almost no one believed that the
Apple stores he designed to sell the consumer electronics giant's gadgets would make money. Yet
Apple's retail operations have become the most profitable in the industry.
At the time, both decisions seemed radical. Now, they each are viewed as strokes of genius.
But Johnson's latest gamble is shaping up to be his biggest. He's not only aiming to reverse the fortunes
of Penney, a 110-year-old chain that has had sales declines in four of the past five years as it's struggled
to adapt to changing consumer tastes and shopping habits. He's also attempting to do something no
other retailer has before: reinvent the department store from the ground up.
Since leaving Apple to become Penney's CEO in November, Johnson has been overhauling everything
from the retailer's pricing to its merchandise to its stores. He got rid of most sales. He's brought in hip
brands. And he's replacing rows of clothing racks with small shops that make the stores feel like outdoor
mini malls.
But since Penney started the changes, the chain has reported three consecutive quarters of big losses on
steep sales declines. Its stock has lost more than half its value. Its credit rating is in junk status. And
critics are beginning to doubt that Johnson has what it takes to make the chain cool.
"He's trying to start a retail revolution without an army of consumers behind him," says Burt Flickinger,
III, president of a retail consultancy. "Penney will suffer dire financial and competitive circumstances as a
result."
But Johnson, 53, a Midwest native who speaks about his vision for J.C. Penney Co. with boyish
enthusiasm, is undeterred: "Lots of people think we're crazy. But that's what it takes to get ahead."
THE BEGINNINGS: 'NO MORE JUMPING THROUGH HOOPS'
Virtually no one questioned Johnson's savvy when it was announced in June 2011 that he was leaving his
role as Apple Inc.'s senior vice president of retail to take over the top job at Penney, a chain that had
gained a reputation in recent years of having un-hip, boring stores and merchandise. To the contrary
there were lofty expectations for the man who had made Apple's stores hip places to shop and before
that, pioneered Target Corp.'s successful "cheap chic" strategy.
Johnson, who says that his biggest inspirations in life are "sunrises" and "smiles," spent several months
before becoming Penney's CEO traipsing across the globe to find ideas on how to transform the
company. On the itinerary: meetings with executives at trendy retailers and designers such as Gap, J.
Crew, Diane Von Furstenberg and Ralph Lauren.
During these trips, Johnson hatched an idea to make Penney stores appealing not only to its core of
middle-income shoppers, but also to new groups of younger and higher-income customers. Johnson
decided to focus on three areas: price, merchandise and the stores.
Johnson started as Penney's CEO in November 2011. In his first couple of months in the role, Johnson
hired big-name executives that he trusted. Among them, Michael Francis, a top Target executive that
he'd met while he worked there, was brought in as president to help redefine Penney's brand.
Johnson's boldest move came on Feb. 1 of this year when he rolled out new pricing in Penney's 1,100
stores. That's virtually unheard of in retail, where significant changes are typically tested in a few
locations for several months before being rolled out nationally.
Johnson says that Penney didn't have several months to waste. Testing would've been "impossible," he
says, because Penney needed quick results.
Johnson's plan was designed to wean customers off the markdowns they'd become accustomed to, but
that eat into profits. He ditched the nearly 600 sales Penney offered throughout the year for a threetiered strategy that permanently lowered prices on all items in the store by 40 percent, and offered
monthlong sales on select items and periodic clearance events throughout the year.
Penney, based in Plano, Texas, also stopped giving out coupons and banished the words "sale" and
"clearance" in its new "fair and square" advertising campaign. The ads were colorful and whimsical: In
one spot, a dog jumped through a hula hoop that a little girl held. The text read: "No more jumping
through hoops. No coupon clipping. No door busting. Just great prices from the start."
TEACHING SHOPPERS A 'NEW LANGUAGE'
Johnson's plan received a warm reception at first. Investors began pushing Penney's stock up after he
announced the plan in late January: It rose nearly 25 percent to peak at $43 in the days after the plan
was rolled out in February. Analysts used words like "visionary" and "revolutionary" to describe the plan.
The honeymoon didn't last. After most of Penney's coupons and sales disappeared, so did its customers.
And the ads didn't help: They were praised for being entertaining, but criticized for not explaining the
new pricing.
Walter Loeb, a New York-based retail consultant, says Johnson acted in haste and sprang the changes on
customers too soon. "The customer isn't accustomed to such drastic change," he says.
The first sign that things were falling apart came in May when rival Macy's Inc. told analysts that sales
were rising at its stores that share malls with Penney locations. A week later, Penney posted a $163
million quarterly loss. Revenue plunged 20 percent to $3.15 billion. The number of customers visiting
stores fell 10 percent.
Wall Street didn't like the changes any more than Main Street did. A day after it posted the loss,
Penney's stock fell nearly 20 percent — its biggest one-day decline in four decades — to $26.75. That
same month, Standard & Poor's Ratings Services lowered its credit rating to junk status.
Johnson asked investors to be patient and reiterated his confidence in his plan. But a few weeks later,
Johnson fired Francis, who'd been in charge of marketing the new pricing. Johnson, who wakes up at 4
a.m. without an alarm clock, took over that responsibility and brought back the word "sale" in ads. But
things kept getting worse.
So six months after he rolled out Penney's plan, Johnson tweaked pricing. On Aug. 1 — just days before
Penney posted another big loss on a second consecutive quarter of disappointing revenue — Johnson
eliminated one tier of the pricing plan: the monthlong sales. He also brought back another taboo word:
clearance.
Johnson says the original three-tier strategy was too confusing for customers. "We got too tricky,"
Johnson told the Associated Press in an interview.
Johnson also vowed to better communicate Penney's pricing to shoppers. As part of that, Penney rolled
out ads that were in stark contrast to the spots it used to introduce the plan. For instance, a TV spot
touted free haircuts for students during the back-to-school shopping period.
"We thought, 'Why are we trying to teach customers a new language to shop?" Johnson told The
Associated Press. "We're just trying to be straightforward."
But Johnson's decision to get rid of monthlong sales hurt more than it helped. On Nov. 9, the company
posted its third consecutive big quarterly loss and revenue decline. Johnson says one big factor that
dragged sales down was the elimination of the monthlong sales, which he says confused shoppers who
like to compare prices.
Johnson says Penney lost $20 million a week in sales associated with getting rid of the monthlong events
for a total sales loss of $260 million for the quarter. Penney posted a net loss of 56 cents per share, or
$123 million, in the quarter ended Oct. 27. Revenue dropped nearly 27 percent to $2.93 billion.
On the news, Standard & Poor's dropped Penney's credit rating deeper into junk status. And its stock
has fallen six straight days since the earnings report by a total of 25 percent for that period, to close at
about $16 on Friday. The stock is down 62 percent since January— its lowest price since March 2009
when the U.S. was in a recession.
Johnson, who says the company will now show the suggested price of clothing and other manufacturers
on price tags alongside Penney's price, doesn't seem to be panicking. In a meeting with analysts
following the release of the company's results, he chalked Penney's poor performance up to a learning
experience.
"This was another quarter of unbelievable learning for us at J.C. Penney," he says. "Each quarter, we
learn a lot, we adapt, we try to move forward."
THE STORE OF THE FUTURE
Some critics say Johnson's plan is falling apart because he chose to overhaul pricing before working to
improve Penney stores. Indeed, Penney stores have long been seen as unappealing and it's merchandise
as dowdy.
But Johnson says the focus on pricing was no mistake. One of the men he has admired most in his life
was Steve Jobs, co-founder of Apple and his former boss. He says Jobs taught him the importance of
doing things well "one at a time" and "not getting ahead of yourself."
Johnson, who wears khakis and jeans to the office most days, says he knew he wanted to bring in hip
names like Vivienne Tam and Joe Fresh to Penney. But those brands, Johnson reasoned, wouldn't put
their wares in stores as long as Penney offered hundreds of sales each year.
"Nobody is going to put their brand in a place (where) they'll devalue it or take 50 percent or 60 percent
off and sell it on coupons," he told investors in September.
With pricing in place, Johnson shifted his focus to Penney's stores and merchandise. This fall, Penney
began replacing nearly half of its merchandise in stores with new lines like Betsey Johnson's Betseyville,
which features trendy items such as $45 leopard print platform pumps and $24 lace rompers.
To showcase Penney's new merchandise, Johnson also reimagined its stores into mini malls of sorts. He
plans to divide stores into 100 shops that highlight different brands or types of merchandise. Each shop
will be like its own small store, with different merchandise and signage.
Surrounding the shops will be extra-wide aisles that Johnson calls "streets." Along those pathways will
be ice cream and coffee bars and wood tables with built-in iPad tablet computers that shoppers can use
to surf online. In the middle of it all, a Town Square will offer activities like Pilates.
Johnson says the stores, which will carry about 25 percent less merchandise, will be places where
shoppers can hang out. The hope is that the longer they stay, the more they'll buy.
Penney already has started the remake of its stores. In recent weeks, ten shops have been launched for
such brands as Liz Claiborne, Levi's and Penney's new JCP line of casual clothes in 700 of its 1,100 stores.
Johnson aims to have 100 shops in those 700 stores by the end of 2015. The remaining 400 stores are in
small towns and won't feature the full makeover.
In September, Johnson took 300 analysts and reporters on a tour of a 30,000-square-foot prototype of
the complete Penney store of the future, which Johnson calls the "art studio." He says he likes to stop by
the prototype, on the third floor of a Penney store in a Dallas mall minutes from Penney's headquarters,
before he goes to work each day.
Penney is starting to see some positive results from the makeover it began. The company says so far
that it has converted about 11 percent of the floor space to shops-within-stores. The shops' average
sales are more than double the sales in the rest of the store.
And some customers are beginning to come back. Michael Pelaez, a 27-year-old who rarely shopped at
Penney before the new shops opened, says he likes the retailer's new Levi's shop and its predictable
pricing. "It's forcing me to browse," says the pharmaceutical supplier worker who lives in Hialeah, Fla.
"What used to be an hour and a half at the mall has turned out to be an hour and a half at J.C. Penney."
That some customers are responding to the redo is no surprise to Johnson, who insists his plan will
work. "It's really hard to transform things," he says. "But that's what we're going to do."
Not everyone believes that's possible. Michael Exstein, an analyst at Credit Suisse, recently downgraded
Penney's stock to "underperform" from "neutral." Exstein wrote that Penney "must find a way to
significantly slow the sales decline within the next six months."
But Johnson still has supporters. During an interview with CNBC after the company's last earnings
report, William Ackman, an activist investor whose hedge fund Pershing Square Capital Management
has a 17.8 percent stake in Penney, said that he's giving the turnaround several more years to work. He
also said, however, that there is a limit to how far the board and the CEO would let sales fall.
"If it's not working, we will make changes," says Ackman, who joined Penney's board in early 2011 and
pushed other board members to choose Johnson as CEO last year. "He's not this doctrinaire guy."
THE RISKS AND REWARDS OF THE ROAD LESS TRAVELED
That Johnson is taking a risky approach with Penney is no surprise. After receiving an economics degree
from Stanford University and an MBA from Harvard Business School in 1984, he turned down a lucrative
offer from investment bank Goldman Sachs for a manager trainee job at the now-defunct Mervyns
department store chain and then worked his way up to vice president of merchandise at Target.
In 1998, when he signed a deal with architect Michael Graves to develop a line of affordable housewares
for Target, it was the first time that an upscale designer's products would be sold in a mass market
discount store. Industry watchers predicted the strategy would fail. After all, people didn't shop at a
discounter for designer brands.
"Back then, design was something for affluent people," Johnson told fashion executives recently.
But the partnership, which was followed by deals with other designers like Isaac Mizrahi, redefined
discounting. Even discount king Wal-Mart followed a variation of the strategy.
Success at Apple wasn't much easier for Johnson. When Johnson and Jobs introduced the idea of
opening retail locations, it was resisted by nearly everyone on Apple's board. Board members looked at
Gateway, a competitor that was in the midst of closing stores, as proof that the strategy wouldn't work.
Even Johnson's now-popular Genius Bar, a place within Apple stores where customers can get hands-on
technical support, was seen as radical. It ran counter to the retail industry's practice of hiding "repair"
areas in the stores.
"No one thought it would work," Johnson told analysts earlier this year. "There wasn't one positive
believer."
The first Apple store, which opened in 2001 in Tyson's Corner mall in Virginia, became a hit. Others
across the nation followed. There are now 394 stores in 13 countries. "Apple has changed the way to
buy a computer. And we did that by thinking completely differently about every aspect of the retail
business," Johnson says.
It's his "go get 'em" attitude that serves Johnson well, say those who know him. "If he believes in
something wholeheartedly, there is not a person on this planet that could sway him," says Francis, the
former Penney president who now is marketing creative adviser for Gap Inc.
Francis says he doesn't resent Johnson because he fired him. "There are no reasons to have hard
feelings," he told The Associated Press. "Life is too short."
Brian Sozzi, chief equities analyst at NBG Productions, says that the problems Johnson has had at
Penney will only add to his creative genius. "He has learned the CEO job on the fly," he says. "He's still a
visionary, but he's a bruised and more humbled visionary."
©2013 Bloomberg L.P. All Rights Reserved. Made in NYC Ad Choices
Purchase answer to see full
attachment