New CEO at J.C. Penney stays course on changes at century-old chain
It isn’t the first time retail veteran Ron Johnson has faced long odds, but observers increasingly wonder if he can repeat the success he had at Target and Apple.
The Associated Press AP Retail Writer
CEO of J.C. Penney
Previous posts: Senior vice president at Apple; vice president of merchandising for Target Stores.
Education: B.A. in Economics from Stanford, M.B.A. from Harvard
Compensation: $375,000 in salary; received restricted stock award of nearly $53 million upon hiring.
Commitment: Johnson invested $50 million for a 7-½ year warrant on Penney stock that can’t be exercised until 2017.
AP, Bloomberg, company filings
J.C. Penney CEO Ron Johnson seems unfazed that the department store chain’s mounting losses and sales declines have led to growing criticism of his plan to change the way we shop. Perhaps that’s because this isn’t the first time during Johnson’s 30-year career that he’s attempted what seemed impossible.
People predicted he’d fail at selling high-end housewares and designer dresses at discounter Target, but shoppers still flock there years later for cheap chic goods.
Likewise, almost no one believed that the Apple stores he designed to sell the consumer electronics giant’s gadgets would make money. Yet Apple’s retail operations have become the most profitable in the industry.
At the time, both decisions seemed radical. Now, they are viewed as strokes of genius.
But Johnson’s latest gamble is shaping up to be his biggest. He’s not only aiming to reverse the fortunes of Penney, a 110-year-old chain that has had sales declines in four of the past five years as it’s struggled to adapt to changing consumer tastes and shopping habits. He’s also attempting to do something no other retailer has before: reinvent the department store from the ground up.
Since leaving Apple to become Penney’s CEO last November, Johnson has been overhauling everything from the retailer’s pricing to its merchandise to its stores. He got rid of most sales. He’s brought in hip brands. And he’s replacing rows of clothing racks with small shops that make the stores feel like outdoor mini malls.
But since Penney started the changes, the chain has reported three consecutive quarters of big losses on steep sales declines. Its stock has lost more than half its value. Its credit rating is in junk status. And critics are beginning to doubt that Johnson has what it takes to make the chain cool.
“He’s trying to start a retail revolution without an army of consumers behind him,” says Burt Flickinger, III, president of a retail consultancy. “Penney will suffer dire financial and competitive circumstances as a result.”
But Johnson, 53, a Midwest native who speaks about his vision for J.C. Penney Co. with boyish enthusiasm, is undeterred: “Lots of people think we’re crazy. But that’s what it takes to get ahead.”
Johnson’s boldest move came on Feb. 1 of this year when he rolled out new pricing in Penney’s 1,100 stores.
He ditched the nearly 600 sales Penney offered throughout the year for a three-tiered strategy that permanently lowered prices on all items in the store by 40 percent, and offered monthlong sales on select items and periodic clearance events throughout the year.
The first sign that things were falling apart came in May when rival Macy’s told analysts that sales were rising at its stores that share malls with Penney locations. A week later, Penney posted a $163 million quarterly loss. Revenue plunged 20 percent to $3.15 billion. The number of customers visiting stores fell 10 percent.
Wall Street didn’t like the changes any more than Main Street did. A day after it posted the loss, Penney’s stock fell nearly 20 percent — its biggest one-day decline in four decades — to $26.75. That same month, Standard & Poor’s Ratings Services lowered its credit rating to junk status.
On Aug. 1 — just days before Penney posted another big loss on a second consecutive quarter of disappointing revenue — Johnson eliminated one tier of the pricing plan: the monthlong sales. He also brought back another taboo word: clearance. Johnson says the original three-tier strategy was too confusing for customers.
But his decision to get rid of monthlong sales hurt more than it helped. On Nov. 9, the company posted its third consecutive big quarterly loss and a revenue decline of nearly 27 percent.
Johnson doesn’t seem to be panicking. “This was another quarter of unbelievable learning for us at J.C. Penney,” he says. “Each quarter, we learn a lot, we adapt, we try to move forward.”
This fall, Penney began replacing nearly half of its merchandise with new lines like Betsey Johnson’s Betseyville, which features trendy items such as $45 leopard print platform pumps and $24 lace rompers.
Johnson also plans to divide stores into 100 shops that highlight different brands or types of merchandise. Each shop will be like its own small store.
Surrounding the shops will be wide aisles that Johnson calls “streets.” Along those pathways will be ice cream and coffee bars and wood tables with built-in iPad tablet computers that shoppers can use to surf online.
Penney is starting to see some positive results from the makeover it began. The company says so far that it has converted about 11 percent of the floor space to shops-within-stores. The shops’ average sales are more than double the sales in the rest of the store.
And some customers are beginning to come back. Michael Pelaez, a 27-year-old who rarely shopped at Penney before the new shops opened, says he likes the retailer’s new Levi’s shop and its predictable pricing. “It’s forcing me to browse,” says the pharmaceutical supplier worker who lives in Hialeah, Fla. “What used to be an hour and a half at the mall has turned out to be an hour and a half at J.C. Penney.”
After receiving an economics degree from Stanford University and an M.B.A. from Harvard Business School in 1984, Johnson turned down a lucrative offer from investment bank Goldman Sachs for a manager trainee job at the now-defunct Mervyns department-store chain and then worked his way up to vice president of merchandise at Target.
Success at Apple wasn’t much easier for Johnson. When Johnson and Steve Jobs introduced the idea of opening retail locations, it was resisted by nearly everyone on Apple’s board.
Even Johnson’s now-popular Genius Bar, a place within Apple stores where customers can get hands-on technical support, was seen as radical.
“No one thought it would work,” Johnson told analysts earlier this year.
It’s his “go get ’em” attitude that serves Johnson well, say those who know him. “If he believes in something wholeheartedly, there is not a person on this planet that could sway him,” says Michael Francis, the former Penney president who now is marketing creative adviser for Gap.