JC Penney makeover still bloody painful
The retailer's struggles continue, and it must act fast to stop the hemorrhaging.
By Susan Aluise
"Genius is an infinite capacity for giving pains," Oscar Wilde wrote. That just about sums up how J.C. Penney (JCP) shareholders are starting to feel about CEO Ron Johnson's strategy to transform the struggling 110-year-old retailer by fusing competitors' merchandising and pricing strategies with the vibe of Apple's (AAPL) Genius Bar.
Just six months into Penney's extreme makeover, one thing is abundantly clear: Ron Johnson's experiment is not going well.
Last week's sudden departure of JCP president Michael Francis, the highly regarded former Target (TGT) executive charged with drawing up a new merchandising and pricing strategy to compete with Wal-Mart (WMT) and others, is just the latest tremor to shake the retailer since it unveiled its new strategy on Jan. 25.
In a tersely worded statement, the company said little more than that Johnson is assuming Francis' duties and will not seek a replacement.
However, Johnson was more candid about the changing of the JCP guard in an interview with Women's Wear Daily's David Moin: "The marketing I largely left" to Francis, Johnson told the fashion industry newspaper. "The fact that it hasn't resonated -- I had to get involved."
Francis' departure was the company's second high-profile executive exit in the past 70 days. CFO Michael Dastugue, a 21-year JCP veteran who had held the CFO job for only 15 months, left the company in mid-April.
So last month, it fell to his interim replacement, COO Mike Kramer, to help Johnson explain JCP's colossal first-quarter earnings miss. The company reported a $163 million loss, compared with a $64 million profit for the same quarter last year -- more than double the loss analysts had expected. The top line was ugly, too. The $3.2 billion revenue is 20% lower than last year's.
And it gets worse: Same-store sales during the quarter fell by nearly 19%. Its margins and store traffic also fell markedly.
After hitting a 52-week high of $43.13 two weeks after Johnson unveiled the new strategy, shares have hemorrhaged half their value. JCP currently is trading around $21.50, having dropped 4% since news of Francis' exit broke last Tuesday. Another pain for investors: JCP suspended its dividend.
Penney's performance was hardly what Johnson had in mind when he and Francis launched the extreme makeover at a posh party in Manhattan in January. That makeover included taking a page from Target's playbook by launching new budget collections from designers like Nanette Lepore (whose real brand graces the racks at Neiman Marcus) and featuring Martha Stewart's home collection.
Penney stores would also be revamped to look like the retail stores Johnson launched at Apple, including a variation on the tech retailer's Genius Bar concept.
But at the core of Johnson's transformation strategy was JCP's new three-pronged Fair and Square pricing scheme: everyday regular prices, "monthlong values" and "best prices" available on the first and third Fridays of every month. JCP customers traditionally have been attracted to the retailer's many sales and coupons. Johnson believes they need to be "weaned off" of those old habits and retrained to buy products at everyday prices.
JCP planned to pony up $80 million a month to advertise the new pricing scheme, the centerpiece of which were TV ads featuring comedian and talk show host Ellen DeGeneres. But many customers found the ads confusing, and the absence of sales and coupons were a good reason to shop elsewhere.
The company has since reintroduced the once-taboo word "sale" into its vocabulary, replacing "monthlong values."
Johnson remains committed to his strategy, attributing the early disappointments to a failure to "communicate pricing strategy to customers."
But here's the thing: Customers loved the sales and the coupons. Johnson admits they "were a drug" that drove traffic. But that hasn't dampened his determination to force JCP shoppers to give up their coupon addiction and go cold turkey.
Forcing change is an epic achievement, if you can accomplish it. The task is far easier if you've cornered the market on a hot tech toy like an iPod or iPad. Johnson had that advantage when he was in the fast and frenzied process of launching Apple Stores. He doesn't have that edge at Penney.
It's only logical that shareholders are getting more than a little antsy about Johnson, who was paid a whopping $53 million last year simply on the promise of turning the company around, as InvestorPlace editor Jeff Reeves discusses here.
Trying to make consumers "realize" that what they want to buy and how they want to buy it is wrong and is, at best, like herding cats. Shareholders will be better served if Penney's "genius" hits pause on his new mantra and replays that time-tested retail motto "the customer is always right."
But until that happens, I'd avoid JCP and all the pains that go with it.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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should all resign to show their distaste for Obama's decision. I will NEVER shop at JC Penny's
Platium Card holder for 15 years...will never shop there again. Kohl's has my family business now!
Better quality...nice updated stores and SALES!!!!
To bad....was a great store a couple years ago.
Right because Penny's was doing SOO well with it's old strategy. The company has seen it's brand steadily decline over the years. Yes, it's faithful customers loved the coupons, but that wasn't growing it's customer base. It was withering it. Younger people are much less likely to use coupons and we are becoming a paperless society. I'm not knocking coupons. I think Johnson made a mistake in pulling coupons entirely. However, to rely on coupons and only coupons to grow your business wasn't working and won't work going forward. There needs to be other changes, and I think modernizing and creating a more "hip" brand is essential to attracting a broader customer base. I know I'm going to offend a zillion Penny's fans, but lets face it, the store has a reputation for being a bit boring and "uncool". Penny's should shoot for the middle ground of being trendy and fashionable while also being sensible and inexpensive. It absolutely needs to update it's image to survive, but it needs to do so without alienating it's current customers.
Penney and Sears NoBucks are in a race to the bottom, only it's head-first off a cliff. Penney will outlast Sears, which will not exactly be an accomplishment.
What is the best possible outcome for Sears? For someone to buy the Craftsman product line and turn it into something similar to what DeWalt has in its service center/retail shops. It's the only thing Sears has which is worth acquiring, and has the strong selling point of being an American-made hard goods line. The biggest problem for Craftsman right now is self inflicted brand destruction by Sears; something's wrong with the picture when you can buy the Dogbone for less money at an Ace Hardware than you can a Sears. Kmart is just a lead albatross around their neck that will only serve to hasten the chain's demise; nothing positive about the stores, the merchandising, customer quality or customer flow.
Penney's new pricing scheme is an unmitigated disaster. The flyers are hideous; the layout does nothing to draw the customer's eye to the merchandise. The pricing is color-coded and confusing. Especially chaotic are the "for the whole family" genre products like t-shirts, shorts, and swimsuits. You'll typically find all departments but one on the everyday price and the one exception on the monthly special price. The problem is the customer thinks all departments on these product lines are on the same pricing scheme. I would not be shocked if a fairly high number of customers have left entire purchases at the register and walked out because the pricing was different from how they read it.
An even bigger problem was how the pricing was launched. The initial perception was that the entire store was being deep discounted, which was not the case. The initial response was an inflow of customers who had never been in a Penney's before, and only showed up because they thought they could get something for nothing. It's no surprise that they walked out and haven't been back since; this is probably the only positive to come out of the new pricing scheme.
Americans are programmed for a bargain. Yes, the item at JC Pennys now might be worth $.50. But when it was listed at $1.00 and the person brought in a coupon for 50% off, the consumer was programmed to think that they got a bargain. They bragged about it to all their friends. Their friends thought that they were a genius.
I say go back to the coupons. But, also, go back to the previous quality, previous customer service and previous way you did business.
I was a fan of the Salon in the Gaithersburg, MD store. Now, its a shadow of what it use to be.
This is indicative of a greater problem that plagues America today. My wife went to Sears yesterday to purchase a Vacuum.. She could hardly find someone to help her and when she did it was some young kid with no training, no manners and no skills what so ever.
Its almost as though the 100 year old companies jsut do not care. Any half decent President, running these firms has to know that the service levels are deplorable.. despicable.. America was built on salesmanship, working hard, serving the customer.. those days are dead...
The one company that is prospering, and dare i say knocking it out of the park is Nordstrom's... why you ask? Because they take care of their clients... The have flourished through the greatest recession of all time ( do not forget, they sell expensive items)
prices and gone to the far right. Their catalogs are terrible and focus on non Christian
They had better wake up and change back to what worked. GL movement is not popular.
Since the "change" there has been a tremendous decrease in the varity of merchandise available. I can not even get their basic SJB tees in a small because they either do not stock them or very little of them. And their prices have not been reduced, if anything I have noticed higher prices compared to the same items this time last year. I loved being a JP shopper, not no more!
JCPenney lost me a long time ago when to get the bargains I had to be at the store at 0'dark thirty. If a store is going to discount merchandise do it for the full day. Secondly, Penneys needs to realize they are competing with TJMAXX, Marshalls, Ross, Home Goods, etc. So when I shop I go to those stores first and find what I want at a better than fair price; therefore I never make it to Penneys. When they drastically reduce prices to run a sale, I question their original mark up, which appears to be extravagant. If they were more comptetitive in daily pricing, I would shop there more often.
I've stopped shopping at JCP......Sales are so important in this challenging economy...can't believe they went this route at this time. I think prices are very close to what they were before they put "best" value signs on the clothing racks. very disappointing! No reason to shop at JCP. Kohl's carries the same (some better) quality with better customer service...
The JCP here even removed the busiest customer service counter to force you back into the store...to buy more! Wrong! I saw people put items down and walk out rather than wait in a long line. It's Kohl's and Macy's for me. Sadly, JCP will go the way of Sears..and no one will notice!
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