JC Penney Cans CEO Ron Johnson… Are Stupid Consumers To Blame?
Just 17 short months after taking the helm of retail giant JCPenney, Ron Johnson—the man whose previous claim to fame was designing the now-famous Apple Stores—has been replaced. Not only was his tenure short and tumultuous, but—to add insult to injury—Johnson’s replacement is none other than his predecessor Mike Ullman. It seems that everything thought wrong with JCPenney two years ago is now considered an improvement over the changes Johnson ushered in.
But was the problem Johnson’s changes or JCPenney’s consumer base? This was a man who could do no wrong at Apple, which he joined in 2000 after working at Target and Mervyns. During his time at Cupertino, Johnson introduced the genius bar concept into Apple’s retail stores and led its retail division through the company’s epic 10-year rise. He planned to use many of those concepts when hedge fund manager Bill Ackman—whose Pershing Square Capital Management owns 17.79 percent of JCPenney—lured him over to the retailer. Somewhere along the line something just didn’t click, however. In fact, JCPenney lost about $3 billion and saw its stock fell by more than 50 percent since Johnson first took the reins in November 2011.
So what went wrong? When Johnson was brought on board, Penney’s was known as the frumpier department store compared to competitors like Macey’s and Dillard’s. It constantly ran clearance sales, but its quality had diminished, and the customer base often resembled what one might find at Wal-Mart at about 4 a.m. The company held only 3 percent market share—a perfect challenge for Johnson since Apple held the same market share when he stepped on board back in at the millennium
Johnson wanted to redefine JCPenney’s pricing paradigm. What consumers don’t realize is there’s a huge difference—try more than 200 percent quite often—between “retail price” and actual retail value. For example, a product that is marked regular price $36 is generally sold for less than $15. Why? Because retailers generally mark items up so they can then be marked down, fooling consumers into believing they are getting a deal. So all those “clearance” sales JCPenney’s and other stores were always running? Not really clearance at all, just removing the markup. Johnson wanted to simplify the pricing model by removing the coupon, or discount, model and pricing items at competitive regular prices. And instead of running 590 promotions a year—99 percent of which consumers ignored—JCPenney would run 12—one per month, as well as “best price” discounts on the first and third Friday of each month. The simplified pricing plan makes sense. But consumers left Penney’s in hoards. Why? Because they are too stupid to realize a “sale” sign doesn’t mean they’re getting a better deal, and the lack of a “sale” sign doesn’t mean they’re paying more.
Why else did Johnson fail? He wanted to redesign the layout of JCPenney’s stores, much as he did with the Apple Stores. Each store would have its own version of a genius bar located in the center of the store. But the full layout of the stores would also change. Popular brands, such as Martha Stewart and Liz Claiborne, would have their unique spaces—boutiques—inside the store. New brands, such as Nanette Lepore and Izod, would also be brought in. This concept was actually really exciting and never really got an opportunity to take off. The boutique redesigns weren’t planned to be completed until sometime in 2015, and now it’s highly likely we’ll never see it come to fruition.
Is it possible the boutique concept would have had time to work if the pricing model wouldn’t have changed? We may never know. After all, JCPenney kind of went to shit under Ullman’s lead the first time, so chances are he won’t exactly take the good ideas Johnson left behind and use them to their full potential. But for all of us that have spent our lives shopping at Penney’s, let’s hope he doesn’t totally blow it.
Ullman may not actually sit at the helm for long, though. Some analysts believe Ullman will only serve an interim CEO as the company’s board searches for another executive who may actually wish to take JCPenney private. Firms such as Apollo Global Management and Leonard Green & Partners may already be considering a potential buyout of JCPenney. Doing so would provide the company the essential funds it needs to make a turnaround.
And as for Johnson? Apple has never found a suitable replacement for him, and his former position is currently open. Perhaps he should swallow his pride and give Tim Cook a call.
[Image via Flickr/Sam Howzit]