This week US retailer JCPenney revealed that chief executive Ron Johnson is leaving the company after a tumultuous tenure in the top seat.
Johnson, a former Apple Stores executive, took the helm of the department store in November 2011 with the backing of activist investor and JCPenney’s largest shareholder William Ackman. Within months of his arrival Johnson unveiled a dramatic overhaul of the 110-year-old department store which had struggled in recent years against promotional department store rival Kohl’s, a resurgent Macy’s and off-pricers such as TJ Maxx.
Johnson’s strategy broadly revolved around a new price and promotional scheme and reinvigorating the merchandise assortment and presentation. The scheme was clearly very ambitious and, if successful, would have remade the antiquated traditional department store model.
Unfortunately Johnson and team sought to execute their vision essentially overnight, without even leveraging qualitative research to gauge the reaction of core shoppers to the changes. And, although JCPenney initially presented a timeline of 2015 for the reinvention, it didn’t give its loyal shopper base the opportunity to absorb the transformation or allocate the resources to attract a new shopper base for whom the refreshed assortment, revitalised stores and new promotional cadence resonated.
Johnson’s first and likely biggest mistake involved the shift, cold-turkey, to an everyday pricing model. The initiative, dubbed Fair and Square Pricing, included three tiers of pricing and was designed to offer shoppers simpler, more predictable pricing. Unfortunately, the scheme confused shoppers, and tweaks to the programme mid-year and a complete reversal in 2013 only frustrated shoppers further and diminished the retailer’s credibility.
Although the retailer was making progress on its efforts to reorganise its selling space in its 700 largest stores into roughly 100 shop-in-shops, questions remained whether JCPenney had enough capital to complete the massive remodeling effort. Further, its ongoing legal dispute with Macy’s over JCPenney’s right to sell certain Martha Stewart-branded products puts the success of its newly remade home departments at risk.
However the bigger issue with much of the revamped merchandise assortment is the design aesthetic, which heavily skews toward younger consumers rather than Middle America. Although millennials represent a large and growing share of the population, most of the segment still lacks significant buying power and is weighed down by, often eduction-related debt. Additionally, most millennials grew up as the department store channel was in decline, and the homogenized chain-store experience and the assortment of undifferentiated mass-market brands have never held much relevance for them.
The combination of pricing missteps and merchandise miscues sparked horrendous financial results, which exhausted the patience of Wall Street and ultimately led to Johnson’s downfall. In March, Vornado Realty Trust, at the time JCPenney’s second-biggest shareholder after Ackman’s Pershing Square, sold almost half its stake in JCPenney. The last straw however was Ackman’s recent criticism of Johnson. The one-time Johnson cheerleader called out the JCPenney chief executive for poor execution of the overhaul, describing it as “something very close to a disaster.”
JCPenney isn’t the first retailer to have seriously misgauged shopper reaction to management’s vision. For JCPenney to avoid sinking into obscurity, it needs to ensure that two things happen.
Firstly, it needs to win back its loyal shopper base, who were confused by the pricing overhaul and subsequent retrenchment. Secondly, it needs to better understand its loyal shoppers and their needs in order to increase its share of wallet. It is far easier to increase the basket with existing shoppers than it is to attract completely new shoppers.
Although the decision to reinstate sales should lure many formerly loyal shoppers back into stores, JCPenney risks alienating them for good with its efforts to transform the retailer into a collection of shop-in-shops featuring younger-skewing brands and merchandise.
Kelly Tackett, research director, Planet Retail