J.C. Penney’s plan to transform company backfires

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Rescuing a struggling retailer in
today’s economic climate is a challenging task, especially when a company is
trying to recover from a botched first attempt at revival that sent declining
numbers even further south. The situation gets even grimmer after factoring in
an alienated customer base, an ousted chief executive officer and an unusually
public battle between the board and the company. These are the circumstances surrounding
J.C. Penney Co., Inc., a troubled retailer that is trying to recover from the
saga of unfortunate events it has experienced over the past two years. J.C.
Penney appears to be facing an identity crisis: sales declined during its dowdy,
former state and sales declined after it was transformed into a hipper store.
Now, the company must find itself as it tries to bounce back from the recent
fallout.

In the second fiscal quarter ending Aug. 3, J.C. Penney reported an 11.9 percent decline in revenue to $2.663 billion compared to $3.022 billion in the same quarter last year. To further the damage, net losses quadrupled to $586 billion. While this decline was larger than expected, the company is in the midst of fixing the damage caused by Johnson’s failed changes. Nor was this past quarter the best for J.C. Penney’s competition, which also experienced a decline. Sales of Macy’s Inc. were down 0.8 percent from one year ago, and Kohl’s Corp. experienced a 3.5 percent decline in revenue.

J.C. Penney has experienced a decline in sales over the past six quarters, but things looked absolutely dismal when Johnson was in charge. By the end of the fiscal year Feb. 2, 2013, sales fell 24.8 percent to $12.985 billion. Even the booming e-commerce industry couldn’t help J.C. Penney from experiencing a 34.4 percent drop to $315 million in online sales during the quarter.

J.C. Penney was a fading company when it removed Myron Ullman from the chief executive officer position in Nov. 2011 and hired Ron Johnson, former head of Apple’s retail operation. William Ackman, formerly the largest shareholder of J.C. Penney, believed that Johnson was the man capable of reinventing the retailer’s frumpy image. Johnson’s efforts to re-energize the store failed to attract a new, trendier clientele and offended longtime customers. His sweeping changes included getting rid of coupons and sales in favor of everyday low prices, replacing brands favored by loyal customers with trendier labels, and redesigning store layouts. Seventeen months after he started, Johnson was out of a job after the company reported the worst numbers in decades. After removing Johnson, the company brought back Ullman as CEO: The decision may have earned back some customers but it cost the company its largest shareholder, who sold his entire 18 percent stake in August.

The decision to get rid of coupons and sales was one of the most radical changes, and one of the first to be reversed. Johnson’s notion that shoppers would appreciate “fair and square” pricing did not prove to be accurate. The move turned off the customers most likely to be shopping at J.C. Penney, those who are drawn to the thrill of bargain shopping and coupon clipping. By Feb. 2013, the coupons that Johnson vowed would never return were back in newspapers.

After many complaints, customers and employees both looked forward to J.C. Penney returning to its former state.

Nic Hohne, store manager of J.C. Penney on Skillman Street in Dallas, said that store traffic has increased since the company reinstated old pricing strategies. “We’ve gone back to promotional pricing, started using the word ‘sale’ again, and coupons are back,” he said. Customer feedback has been positive according to Hohne. “I like it too, I get to save more money,” he added.

Reverting back to the old pricing strategy was an important step in making amends with customers. Ellen Davis, a longtime J.C. Penney customer, said that she quit shopping at the retailer after the coupons stopped coming. “I was disappointed when they got rid of the coupons, but I am coming here again now that they’re back,” she said.

The attempt to become more hip by replacing brands like St. Johns Bay with trendier lines like Martha Stewart and Joe Fresh gave longtime customers yet another reason not to shop at J.C. Penney: it didn’t carry clothes they liked. After Johnson left, these brands were brought back in an attempt to win back lost customers.

“I tried shopping here but I couldn’t find anything until they brought back St. Johns Bay,” Heather Robinson, a J.C. Penney customer, said. “I just didn’t really like the new clothes.”

Not all of Johnson’s strategies were reversed. His store-within-a-store concept of introducing boutique-style shops within the larger store is still in motion, and it’s mostly geared towards kids. As the store heads into the holiday season, Disney may end up as its savior.

Recently, 565 stores, including the Dallas location, have opened the new Disney store-within-the-store. Locations are also selling exclusive brands within the baby and children’s departments, like GiggleBaby and Sally M by Sally Miller.

According to Hohne, customers are liking the changes. “The department is being reorganized to fit the way moms are used to shopping,” he says, with sections for toddlers, girls, and boys all in their own location. “We have stuff now that we never carried before- strollers, toys are on display that were only online before,” he said.

Most of the reversals to Johnson’s transformation were in effect during the second quarter, which means that the company still experienced declines after making moves to win back customers.

In the second quarter earnings conference call with investors on Aug. 20, 2013, Ullman explained that the company is still struggling to bounce back after Johnson’s changes: “It is no secret that the company’s prior merchandising and promotional strategies weren’t working…sales in the quarter continue to be negatively impacted by our failed prior merchandising and promotional strategies,” he said. While the numbers this past quarter were not good, he said, “this is…a journey. There are no quick fixes to correct the errors of the past. It is going to take time to get fully back on the right track across the Company.”

After a dramatic and difficult couple of years, J.C. Penney has learned an important lesson: do not try to be something its not. Perhaps the best move the company can make moving forward is to simply listen to what the customers want.

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