J.C. Penney’s (JCP) CEO Ron Johnson has had a tough go at it. Stock valuation is down roughly 40% since the time Johnson took over. Customer sales are down 20% from last year. Some are calling for his resignation. But before we join the “off with his head” chant with the Twitterati, let’s see if we can’t help him find a way out of his quandary.
When he took over, the retailer was in a discounting, promotional pricing, and couponing abyss with a “same but cheaper” strategy that spelled disaster since Penney had a higher cost structure than its Amazon (AMZN) or Wal-Mart (WMT) competitors.
As I have argued before, Johnson had to make a strategic change. Yet some voices still say Johnson shouldn’t have changed Penney’s couponing ways. To them, I ask “Really, then I suspect you’ve invested in the Sears Holdings (SHLD), right? No? Right. They had to change.” Other voices claim that the vision was misplaced and the path should be defined by the data and it isn’t surprising that software vendors have joined that mob. To them I ask, “Do you run your business off algorithms or leadership and vision?” Even data-analyzing software firms are guided more by vision and potential than black-box answering devices.
Johnson’s vision of turning Penney into a community center for products, service, and fair pricing wherein families could find all their dreams’ desires was a bold one, and one that aimed squarely at the center of retail nirvana. Past wonder-stories of retailing took a similar path: Nike Town (NKE)(~1992), American Girl Place (subsidiary of Mattel)(~1998), Krispy Kreme (KKD)(~2000), or his own Apple Stores (AAPL)(~2009).
So what went wrong?
If the vision is sound but the results are abysmal, then we should look at the path Johnson took to reach his the goal.
Three points of comparison may help him chart the course towards the JC Penney he set off to create, two positive and one negative. They all point at the need to transition your target market segment.
Walgreens (WAG) has proudly upgraded with a series of new flagship stores, including two in Chicago. Although I haven’t made it in yet, my friends rave about them. They love the cosmetics area, had lunch, and admired the overall beauty of the new format. Wine, sushi, and medical care all in one place.
To the best of my knowledge, Walgreens hasn’t killed its discounting, promotions, and couponing practices. They continue. But with $2,000 bottles of cognac, it is also clear that Walgreens is moving more up-market.
In other words, it is transitioning towards a more profitable market segment, which will enable Walgreens to reduce its dependence on discounting, promotions, and couponing; but they don’t have to quit cold turkey. Walgreens can build traffic with its new market segment as it weans its dependence on the hyper-price-sensitive customer segment.
I analyzed Best Buy (BBY) in my prior article. Its new stores have hit the ground and I have even shopped there. Note: I shopped there before they changed as well. Best Buy’s staff has consistently been helpful and courteous to me. The new store layout was cheery. Products I needed were available. And Best Buy has passed my ultimate individual-customer service barometer: I will be going there again.
Best Buy’s transformation wasn’t as big as Penney’s, but the two shared a common goal: to improve the in-store shopping experience, thereby enticing shoppers to visit their physical stores.
Like Walgreens, Best Buy didn’t ditch its current market to pursue this new market. Its team kept them as they transitioned the experience towards their goal.
Back in 1996, Helig-Meyers bought the Rhodes furniture chain in an effort to bring the Helig-Meyer upscale furniture format to the city. It went horribly wrong. I use it as a teaching case on corporate acquisitions that even a freshman in marketing can analyze and realize a green-field development would have made better strategic sense and better use of scarce financial resources.
Rhodes’ lower-income urban customers trained on receiving coupons and announcements of sales didn’t know what to do with a glossy fashion magazine on furniture. Rhodes’ salespeople trained on selling financing plans and discount furniture weren’t prepared to sell $3,500 leather sofas. Rhodes’ outlets in discount strip malls weren’t the right place to attract upscale urbanites. Wrong real estate, wrong employees, wrong customer set. I still can’t identify anything right about this acquisition for Helig-Meyers in terms of strategic fit.
The acquisition was abandoned several years later.
Relation to J.C. Penney and Johnson’s Next Move
All these examples drive home a similar point, perhaps best stated by Stephen Stills: Love the One You’re With.
Yes, the vision of creating a place where people can gather and find all the products they need to fulfill their dream at a fair price is solid. But the transition to wean your current customers off discounting, promotions, and coupons will take time. Alternatively, attracting the right market segment that wants a no-nonsense pleasurable shopping experience will take time.
Johnson, here is my suggestion: Make it clear you are still the right person for this job. Yes, reintroduce the coupons and such, but demand that the organization practices disciplined restraint in discounting. The Sorites paradox is in play here. If you haven’t already, send your entire pricing team in for deep retraining to change their entire thought process around pricing. Accept that the process will take time and keep pursuing your vision. Moving up rungs on the market-segment ladder is more difficult than moving down rungs, but the reward is also greater. To address your naysayers, do a mea culpa and get on with it. We live and learn.