The Weekly: JCPenney’s Rebirth

This is the first in a new series of articles called The Weekly, to be posted every Monday or so.  Each will be a long-form, original piece that dives deeply into one topic.  It may be related to business, technology, gaming, design, entrepreneurship, economics, politics or any manner of other topics.  The idea is to shed some light on something that at least a few people will find interesting. I hope that you’re one of them.

Coming from Apple, a company with one of the world’s hippest brands, Ron Johnson sure seems to like squares.  The former Apple executive, hired away from Target by Steve Jobs to launch the company’s global network of Apple Stores, became CEO of JCPenney in November 2011. Since Johnson took over at the beleaguered chain, he’s unveiled a new, square logo, “Fair and Square” pricing, reintroduced the concept of “square deals”, stood, “squarely” behind spokeswoman Ellen Degeneres and…squarely disappointed investors and analysts following his first quarterly earnings after launching a giant initiative to turn the company around.

That Mr. Johnson would go anywhere, leaving behind a job running a retail chain with higher average revenue per square foot than Tiffany’s or Louis Vuitton, was surprising enough. That he’d leave Apple for a department store, a retail concept believed by many to be in its death throes, made it even more surprising.

Despite what outsiders thought, Johnson was quite serious when he said he believed in JCPenney’s future: so serious that, rather than accepting a stock grant as part of his compensation package, he invested $50 million of his personal wealth in the company’s stock at its closing price on the day he took over as CEO.

Within a few months, Johnson unveiled the company’s new strategy and the stock soared on the news, up nearly 50% since the day he began with the company.  JCP intended to take an extremely different position from its competitors, as well as from the strategies it had employed in the past.

The New Strategy

Gone were the coupons that propped up the bottom lines of local newspapers on a nigh-daily basis.  Gone were deceptive sales schemes, the kind where retailers raise prices only to have a 60-70% off sale that brings prices slightly below their norm.  Even the digits on product pricing were felled by Ron Johnson’s sword. Whole dollar pricing is now seen on every item in the store, a departure from the classic exploitation of pricing psychology that takes place every time a TV advertisement screams a product costs only $19.95 instead of $20.

The company drastically simplified its pricing strategy, consolidating all previous sales, clearances, discounts and so on into three categories.  Most products feature an “Everyday Low Price”.  Monthly sales on select seasonal items would be known only by their month, such as the July $9 pricing on a pair of sandals.  Finally, the retailer’s “Best Price” would be placed on closeout items, which would remain at that price until the item was either sold out or removed from sale completely.  Items would only be moved to this pricing tier on “Best Price Fridays”, on the 1st and 3rd Friday of each month.

Meanwhile, the company would begin reconstructing their product offerings from the ground up.  Moving away from the traditional department store model, JC Penney would offer themed “stores”, greater than 2,000 square feet in size, “shops” of at least 500 square feet and smaller boutiques inside their top 700 department stores. Top names in fashion and homeware, including Betsey Johnson, Michael Graves and Martha Stewart are slated to headline these store-within-the-store concepts.  The company also plans to take a page from Apple’s playbook, deploying highly trained fashion and home design experts at a central location similar to the Apple Store’s Genius Bar, a service not easily replicable by online competitors.

Finally, the company threw out its old return policy and replaced it with a very simple one: Customers may return items at any time, to any JCPenney’s store, period.  If they have their receipt, they can receive cash back.  Without a receipt, they can receive store credit for the current price of the item. Due to the company’s new pricing structure, this system is unable to be abused, as prices are never lower previously than they are at that present moment. They call this system “happy returns”.

Each of these moves alone would be considered a seismic shift at any other retailer.  To try to accomplish them all, while also rebuilding the company’s patchwork of broken operational processes and ancient IT infrastructure from the ground up, would seem to be impossible for a chain with 1,107 retail locations.

While it has yet to prove impossible, the transition has unsurprisingly been more difficult than expected.  The company’s stock tanked following the company’s severe earnings miss in May 2012, the first early indicator of how JC Penney’s new policies were faring with customers. With net sales down more than 20% year over year, shares tumbled to below the levels at which Ron Johnson made his historic purchase upon taking the company’s helm.

Ron Johnson assumed the role of CEO at JC Penney’s in November 2011. The leap in the stock price seen at the end of January coincided with a major shareholder event explaining the company’s new strategy moving forward. The sharp decline in mid-May coincided with the first quarterly earnings to take place after the implementation of the new pricing and sales strategies.

Johnson and other executives stressed the long-term nature of the transition, and only stoked the flames of investor dissent all the more by suspending the company’s long-running quarterly dividend.  Many naysayers of the company’s pricing policy crowed victory when JC Penney’s held a Memorial Day Sale just months after Johnson stated the company was through with the term altogether.

Where Things Stand

On the surface, the story would seem to read just as easily as the company’s stock chart over the past eight months: Excitement built for an idea that turned out to be too big for its own good, only serving to hasten the demise of that which was already doomed. Could this really be the case? Johnson’s pedigree is perhaps the best in the business, and if he isn’t capable of turning around the department store, then is anyone up to the task? I stopped by my local JC Penney’s for a bit of perspective on this issue.

When whole dollar pricing was first announced, I applauded the move as a win for customers and a clear sign that JCP was serious about changing the way retail works. Doing away with the cruft of clearance, sale and percent-off signs would also, I imagined, lead to a simpler retail experience. I was shocked by my initial reaction when taking my initial steps through my local Penney’s. Despite my feelings about the new pricing system and the simple math of knowing that $24.99 and $25 were separated by only a cent, I was struck by a strong feeling that prices were more expensive or somehow odd. For me at least, it seems that I’d become so conditioned to decimal pricing that actually seeing whole dollar pricing in action seemed foreign and out of place, causing a subconscious feeling of suspicion. This subsided as I continued to walk through the store; by the time I made it to the lower level, I began to recognize that some of the red “Everyday Prices” did seem to represent a good value.

It seems that some calibration time may be required for customers to adjust to the company’s new pricing, and to break the terrible cycle of coupons and sales driving the vast majority of sales. According to COO Michael Kramer at the company’s May earnings conference, 40% of JCP’s sales were driven previously by coupons or sales. In the short term, JCP has suffered– and will likely continue to do so– from a backlash by customers used to taking advantage of such offers. The company hopes in the long term that customers will look at JCP as a simpler, fairer shopping experience: no need to worry if prices will suddenly drop even farther next week. They’re trading the easy psychology of time limited value for the deeper tenet of truly offering a good deal every day.

The funny thing about shoppers, though, is that they don’t really want a good deal: they want to feel like they got a good deal. Time and again pricing psychology studies have shown this to be the case, with customers often willingly paying more for something “on sale” than a similar item that was priced more affordably in the first place. JCP’s best hope to combat this lies in their color-coded pricing. While walking through the store, I quickly found my eyes had trained themselves to look for the light blue signs indicating a monthly sale and the dark blue signs indicating a “Best Price” item. Oftentimes, “Best Price” areas seemed to follow the “$5 and up” example, where maybe one item qualified for the lowest pricing and many remaining higher.

Monthly sale items represented a more immediate benefit to me than Best Price items, as the monthly features made more sense seasonally. $9 Dockers sandals, for example, seemed like a great deal, with even the normal $12 price from which it was discounted seeming reasonable. JCP can benefit greatly from these kind of seasonal features, taking advantage of the environmental biases facing customers. $9 sandals make a lot of sense when the thermometer is reaching triple digits than they would during an end-of-season sale.

Seasonal sales, changed out on a monthly basis, provide consistent, relevant value to customers.  JCP believes offering such values for a month at a time will drive more business, as customers will neither be forced to rush to the store for a one-week promotion, nor hold out for an expected better deal, thanks to more transparent pricing methods.

Construction continued on the new shops-in-a-shop strategy. While a Sephora makeup mini-store existed, much of the lower level was walled off for continuing development. It’s clear that this strategy will take much, much more time before it can be evaluated. And frankly, that remains true of nearly everything Johnson and Co. are implementing. What’s already beginning to take place is a change in the visual and aesthetic tone of the store. While the layout remains largely unchanged from a traditional department store at this point, posters and signage with a markedly higher production value now appear throughout the store, as well as takeoffs on the new JCP logo, visually framing many of the store’s best values. This clearly takes a page from Johnson’s time at Target, which similarly places a higher value on its visual arts than competing stores like Wal-Mart.

Looking Ahead

Johnson claims that JCP will be moving more boldly into the “fast fashion” market, competing more with the likes of Forever 21 to provide designer wares at low cost (by, much like Forever 21, one would assume, skimping on durability). This makes sense, but begs the question of how JCP will manage to not only meet but exceed Forever 21’s cool factor within its market, or whether the same pricing philosophy will work outside of the young women’s market.

It seems Johnson is doing his best to thread a very fine needle with his changes to JCPenney’s. Providing consistent value, quality high enough to separate it from the competition, complimentary premium design consultation and an integrated shopping experience between in-store and online is an extraordinary challenge, especially when taking into account that JCP remains an ongoing enterprise with more than 1,100 stores. Johnson is hailed for growing Apple Store sales beyond $1 billion annually within its first two years, but Penney’s already has more than $16.5 billion in revenue annually. Changing course on such a big ship simply takes longer than building a new, small one from scratch.

It’s impossible to yet measure quantitatively whether Johnson’s strategy will prove successful, but history shows that when his doubters are loudest, success is likely to follow. David Goldstein, president of Channel Marketing Corporation, told Businessweek in 2001, “I give them two years before they’re turning out the lights on a very painful and expensive mistake,” when asked about the future of Apple’s then brand new venture into retail. TheStreet’s Arne Alsin proclaimed Apple was, “Scraping the bottom of the barrel,” with their move into retail, which was “fraught with problems.”

It took Apple more than three years of development and expansion before their retail operations turned profitable, but the stores now serve as the key touchpoint for the company with its customer base and bring in billions of dollars in additional profits each year. Surely JCPenney’s board of directors realized when hiring Johnson that while change was assured and success was probable, “overnight” wasn’t part of the package. Nor should it be. Johnson and his team haven’t set out to goose revenues with outlandish sales or prop up profits through mass layoffs or accounting tricks; they’ve set out to not only save but secure and expand the role of the department store in the modern age.

I came across one demo product that still had a price tag hidden on its bottom from last year, before the pricing changes took affect. The new price tag hung off the side of the unit in view. The old tag read $24.99 in an uneven black and white with a giant barcode taking up most of the label’s surface. The new tag read $20 colorfully, with the product’s name featured prominently and the barcode hiding on the back of the tag.

Small changes add up. Progress is being made to turn around this American icon, even if progress isn’t immediate. What’s important is a sense of forward momentum, something that’s been sorely missing for a very, very long time.