Human Capital Briefs

With Ron Johnson Out, What Should J.C. Penney Do Now?

May 13, 2013

J.C. Penney and its CEO Ron Johnson have parted ways. The news wasn't terribly surprising as 2012 had been a challenging year: sales were down by $4.3B, the company lost close to $1B, and its stock price dropped by more than 50%. Despite Johnson's and his supporters' pleas of "give us more time," Penney's board finally succumbed and exhaled, "No mas." In a "meet the new boss, same as the old boss" moment, Penney announced that its previous CEO, Myron E. Ullman III, is returning to the helm.

What led to Mr. Johnson's downfall? Two words: over ambition. First, he tried to wean customers off of coupons and sales in favor of everyday low prices. To be clear, Johnson was offering low prices, not the lowest prices, as Walmart does. This initiative failed miserably. A lesson for all businesses is when selling commodity-like products, unless customers believe you have the lowest prices all of the time, you routinely have to offer deep discounts. This pricing strategy failure could have been anticipated by testing the concept with customers as well as learning from similar attempts to ditch discounts. Both Macy's and American Airlines previously tried to stop discounting in favor of everyday low prices, but quickly had to retreat due to poor customer reception.

Just as important, Johnson was trying to significantly change the retailer's merchandise offerings and hence, its customer base. And while this can be done — Millard Drexler accomplished this for J. Crew — the initiative was taking too long. As a result, old customers weren't coming in (no coupons, changing merchandise) nor were new ones (not enough critical merchandise mass to attract target new customers). As a result, same store sales dropped by 31.7% in Q4/12.

So now what should J.C. Penney do? It can't revert to its past strategy because the chain was spiraling downwards before hiring Ron Johnson in late 2011. From 2007 to 2011, the chain store's operating profit dropped from $1.9B to (-$2M). Something had — and still has — to change.

Ron Johnson's overall vision was spot on. One of the biggest threats to most brick and mortar stores is the simple fact that customers can buy the same (or similar) products at a cheaper price on the web. To combat this inherent price disadvantage, several brick and mortar stores are now willing to match online prices — a practice that devalues physical stores. What Johnson was trying to do is differentiate J.C. Penney in two ways: (1) Sell boutique merchandise which is not available elsewhere (thus, customers can't buy it cheaper on the web) and (2) Provide a unique shopping experience — again, something that customers can't get from Internet retailers. The strategy was straightforward: build a retail chain that provides customers with reasons to visit a store, instead of buying on the web. The reality that all retail chains need to realize is if they are selling products which customers can purchase cheaper online, their brick and mortar future is grim.

Here's what J.C. Penney should do now: stay the course on its product differentiation strategy (i.e., building 80 to 100 boutiques) but do so at an expedited speed. And don't just go back to using sales to bring customers into stores — embrace the strategy of discounting. While Johnson was reticent to discount merchandise sold in the newly constructed boutiques (in the vein of the "no sale" policy at the Apple stores he used to oversee), I say discount these products. Big sales will effectively communicate the availability of new specialty merchandise to new target customers and provide a call to action to visit J.C. Penney.

With Johnson's departure, J.C. Penney bought itself another year before facing a Montgomery Ward-like bankruptcy. The 111-year-old chain is truly at a crossroads of either being transformational or fading into oblivion. Mr. Ullman's ability to execute quickly will be the key driver of J.C. Penney's ultimate fate.

 

This blog first appeared on Harvard Business Review on 04/09/2013.

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