J.C. Penney’s New Old CEO

JCP_Header_logoWith the company’s stock price tanking (12% yesterday), sales falling (25% for the year) and store traffic dropping off, J.C. Penney’s board decided on Monday to replace CEO Ron Johnson with former CEO Myron Ullman. Johnson, a retailing whiz at Apple before he moved to Penney, failed to get mileage out of a new strategy that eliminated coupons, cut out hundreds of brands and introduced a new boutique-type store-within-a store concept.

Was the board’s move a surprise? Long overdue? And what lies ahead for Penney given the retail sector’s ongoing challenge to persuade consumers to keep buying?

“It was clear that there were problems. The issue was how long the board’s patience would last,” says Wharton marketing professor Barbara Kahn, director of the school’s Jay H. Baker Retailing Center. “Ron Johnson asked for a full two years to test his ideas; [the board] didn’t grant him that…. He burned through money, no question. So from a business point of view, the ouster might be considered long overdue.”

If Johnson had been given more time, could he have made his new strategy work?

“That’s the big question,” says Kahn, who wrote a blog post about Penney before Johnson’s ouster. “Johnson says ‘yes’. Most in the industry say ‘no’. They say he didn’t test his strategies; he didn’t understand the customers; he didn’t understand his employee base. The margins are quite different in this business than at Apple — significantly lower at JCP – and he didn’t seem to appreciate that.”

His biggest mistake, she adds, is that he “didn’t test any of his ideas to see customers’ response and understanding. There is no question that his pricing strategy was flawed. Originally, the new pricing strategy was too confusing. The initial advertising was negative, and telling customers that they were stupid to adhere to the old price promotions is not effective or smart advertising. A few more pricing mishaps later, and finally JCP was back to coupons – which the customers demanded. And why did they demand the coupons? Because they provided a reason for the customer to come into the store. Because having a discount price provides a reference price, and we know customers base value on relative pricing strategies.”

Furthermore, in bad economic times, Kahn notes, “JCP customers needed even more incentive to go shopping. The coupons provided all of that. But by the time Johnson understood this, it was too late, and even the coupons were not effective.”

Kahn, however, also offers praise for parts of Johnson’s merchandising strategy: “It is creative and has potential. Whether there are the resources and time to implement it now is questionable.” She points to his proposal for “stores-within-stores on a ‘street’ around a ‘town center.’ The street would encourage people to linger in the store, surf the net, drink coffee. The town center would feature events. Both would increase the in-store retail experience and the initial response was good…. But there were too many stores-within-stores planned, and it was too difficult to get them implemented quickly enough. And the trouble with Martha Stewart … didn’t help at all.” Macy’s sued Penney last year after Johnson partnered with Martha Stewart Living Omnimedia to sell Stewart’s housewares in Penney stores, despite the fact that Macy’s has an exclusive contract with Stewart for certain housewares categories.

As for Ullman, “he came back out of loyalty for the store and the brand. He’s in a very tough position,” Kahn says. “There is a possibility that the store will have to go through bankruptcy to get out of the mess.” In addition, “it should be noted that some of these problems were exacerbated by a customer base that was likely hit hard by the recession. Many stores suffered during this time, although none as badly as Penney.”

Wharton marketing professor Stephen Hoch wonders why Johnson took the job in the first place. “It was a career move from hell, and I’m not sure why he wanted to leave Apple. More importantly, I never could understand his enthusiasm for ‘reinventing’ the moderate-[priced] department store,” which Hoch considers a flawed concept.

Ullman, he says, “is a seasoned retailer so he will do okay. But he was responsible for where they were when Johnson took over, and that [situation] obviously needed fixing.” Johnson’s pricing approach, Hoch adds, “was obviously not going to work, and he should have known that from his pre-Apple days.” The company has “suffered a tremendous body blow in terms of lost sales and a huge cash drain. It will not be easy for them to get back into the thick of things and succeed. The brand name is not that strong and never has been.”

Wharton management professor John R. Kimberly says Johnson’s ouster “came sooner than I expected. It was clear that his magic hadn’t transferred from Apple, but boards typically are slower to move.” And while the huge drop in sales no doubt played a role in the board’s decision, “it’s more about what was behind the drop that shook the board’s confidence, particularly the waffling on the ‘no sales’ policy and the Martha Stewart mess.”

Kimberly doesn’t think giving Johnson more time to execute his strategy would have worked. “Penney’s customers were not Apple’s customers, and it’s hard to imagine that you could really turn a JCP store into an Apple store. The whole ‘customer experience’ in the two rests on fundamentally different bases.” One of Johnson’s mistakes, he adds, is that “he may not have understood the roots of his success at Apple; he may have drawn the wrong lessons from his experience there. Certainly it wouldn’t be the first time that’s happened when a senior executive transitions from one industry to another.”

As for Penney’s chances of surviving in this increasingly difficult market, Kimberly acknowledges it will be tough. “They have some formidable competition, and they were already losing market share, which is why they [hired] Johnson in the first place. They are now even further behind. I can’t imagine investors are going to be thrilled, and it’s a stretch to imagine how they will win back customers. It will take a turnaround executive with a cast iron stomach and Teflon outerwear to rescue this one.”

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