How A Former Apple Executive Drove JC Penney to Have the Worst Quarter in the History of Retail

jc-penney

JC Penney Would Like to Say They’re Sorry

JC Penney’s is sorry, y’all. They just released a new ad, and it’s a doozy.

If you’re unable to watch the video, here’s the text.

It’s no secret, recently J.C. Penney changed. Some changes you liked and some you didn’t, but what matters with mistakes is what we learn. We learned a very simple thing: to listen to you, to hear what you need, to make your life more beautiful. Come back to J.C. Penney. We heard you.

JC Penney, in case you’re like the rest of America and haven’t been paying attention to them, just went through what Business Insider has called “the worst quarterly performance ever in the history of retail.” Sales were down 32%, customers left in droves, and investors were panicked. In early April, JC Penney fired their CEO, changed their logo, and made the above video to apologize for his corporate vision.

How did the esteemed 111 year old department store retailer end up in the position of literally begging customers to come visit their stores?

It begins, like most financial disaster stories these days, during the dark days of 2007 when the world financial markets trembled mightily and ever so briefly, considered collapsing. At that time, and in the year after, the JC Penney stock price looked like this.

JC Penney's stock price chart

The week of February 12, 2007, the stock price stuck an all-time high of $85.25 and promptly fell down a steep hill like Wesley in The Princess Bride after Sean Penn’s ex-wife didn’t believe the dude from Saw wasn’t the Dread Pirate Roberts but was really her one true love.

The stock continued to roll down the proverbial hill until hitting a rock bottom of $14.20 the week of March 2, 2009. That’s 83.34% off the high two years earlier and more than a little embarrassing. For the next two years, JC Penney’s would trade between $19.82 and $38.44.

During this period, Penney’s watched as Apple took the retail world by storm. Apple’s stock price, a relatively meager $90 in early 2009 would rise 400% to to $360 a share two years later. A significant portion of this can be attributed to Apple’s retail stores which by this time had redefined the gold standard for revenue per-square foot. In the old days (meaning, pre-Apple retail stores) The Tiffany Co. had been the gold standard with sales of $2,700 per-square foot. Apple stores exceeded $4,000 per square foot. The numbers were astonishing. In 2007, Apple made $573 million dollars on $2.4 billion dollars in retails sales from 300 stores.

By 2010, that number was up to $2.4 billion in revenue on upwards of $10 billion in sales through Apple’s retail stores.

apple retail sales chart

By any measure, Apple had proven their retail concept to be a runaway success.

The man behind this retail revolution was Ron Johnson, a former executive from Target. And in early 2011, JC Penney’s hatched a plan to make him their new CEO.

Ron Johnson Apple Store

The plan was simple. They offered him $50 million dollars and full control of the company. Who could ask for anything more?

Enter Ron Johnson

JC Penney got their man. In November 2011, Ron Johnson took over the company and promptly fired Penney’s ad agency for the previous five years, Saatchi & Saatchi, as well as their PR firm M Booth & Associates.

On January 25, 2012, Johnson held a very Steve Jobsian keynote speech where he unveiled his strategy to turn the ailing retailer around.

Ron Johnson Keynote Playing Steve Jobs

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In his keynote, Johnson first pointed out how by 2011, department stores accounted for only 31% of retail clothing sales, down 25% in the last two decades. He saw department stores as out of touch with today’s consumer. In the past decade, retail prices have risen while value has remained stagnant, and customers knew it. They were hip to the false pricing based on never ending sales, and they didn’t like it. JC Penney, in addition to having a department store problem, had a brand integrity problem.

The solution was obvious: revamp and update the brand. Make it hip and relevant again. Out with the department store vibe and in with the specialty store vibe.

He described it using the the 6 p’s.

Ron Johnson’s Plan to Revive JC Penney

Promotion: According to Johnson, the company had run 590 promotions in the prior year at a cost of more than $1 billion. For that, the average customer came into the store 4 times per year. And according to their numbers, only 1% of customers took advantage of the promotions. To Johnson, this was an incredible waste of money. His solution was to cut the number of promotions down from 590 to 12. Johnson jokingly referred to them as “months”. His idea was to use these month-long sales (which he also wouldn’t call “sales”) to get customers to visit Penney’s on a monthly basis. If successful, it would triple revenues.

He didn’t bother to explain how this math worked when by his own account, only 1% of people were reacting to their promotions. But he was banking that JC Penney customers were tired of “fake” pricing and gimmick coupons and would respond to lower, value pricing.

Price: Speaking of pricing, the monthly promotions would be folded into a three-tiered pricing structure: Everyday, Month-Long, and Best-Price. The everyday price is just that – the normal value price on the item. The month-long price is the promotional markdown on specific items. It would be accompanied by light fixtures on the outside of the building the color coordinated with the color of the sale month. The best-price is a replacement for clearance sales. Johnson didn’t like clearance sales because the product didn’t change, they just need space on the shelves for the newly arrived shipments.  Best Pricing on select items was offered on the first and third Fridays of each month. jc penny ron johnson logo

Personality: In one of the most visible changes, Johnson unveiled a new logo. Gone was JC Penney. Now, stores were known as JCP. The logo itself looked like it was assembled from old logos from The Gap. Which is ironic because at the keynote Johnson said, “As I was joining the team, they toured me through some of the ‘new’ stores. I closed my eyes and realized this is a great department store … if it was 1995.”

Presentation: In a desire to simplify and streamline the stores, each brand becomes its own “boutique”. Johnson’s plan was to upscale JC Penney to JCP and then to further upscale the store brands by turning each of them into their own boutique store.  Classic JC Penney brands such as IZOD, Arizona Jeans, and Liz Claiborne and new brands like Martha Stewart and L’Amour by Nanette Lepore all had boutiques.

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Product: In order to have customers coming in on a monthly basis, Johnson saw it necessary to expand their product line past clothing. Their partnership with Martha Stewart meant that people could come in for kitchenware, etc. Each brand had to hold its own. Presumably, each boutique would be responsible for a minimum amount of value per-sqare foot and under-performing brands would be updated or replaced.

Place: Finally, Johnson revealed the floor plan that he freely admitted he ripped off from Apple. The idea was to have the retail space divided into two spaces: the place where customers are exposed to new products and the part where customers come back for training and assistance. In the Apple store, this is known as the Red Zone and the Family Room. In Johnson’s revamped JC Penney stores, there would be a Main Street and a Town Square. Main street would be the walkway that led customers through the 100 boutique shops. The Town Square concept was essentially a space they hadn’t figured out what to do with yet and was still in the process of refinement.

Johnson ended his keynote speech by announcing that all 1,200 of JC Penney stores would be revamped to become JCP stores by the end of 2015.

In the months following his keynote, Johnson made a series of moves that can only be described as “bad for morale”. He laid off 10% of the corporate staff, fired thousands of middle managers, and replaced all of the company’s top management.

When asked about Ron Johnson’s tenure as CEO of JC Penney, Mark Cohen, a former Sears Canada CEO had this to say to the New Yorker, “There is nothing good to say about what he’s done. Penney had been run into a ditch when he took it over. But, rather than getting it back on the road, he’s essentially set it on fire.”

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Ooh, it’s orange! It must be time for the May sale!

 The Fallout

Customers reacted exactly how you’d think they would when a well known, somewhat dusty brand, tries to drastically reinvent itself into something more like Apple. They ran directly to Macy’s. As a direct result of the Penney fiasco, Macy’s saw it’s sales up over 35%.

In October 2012, less than 10 months after Johnson’s keynote, Penney’s sent their customers a $10 coupon by email, exposing an internal rift that suggested everybody wasn’t as sold on Johnson’s strategy as he was. Inexplicably, their stock price climbed for the next six weeks. But a middling holiday season left Penney’s nowhere to go but down and by early March, the company was trading only $2 dollars above the low it had achieved 4 years earlier on March 2, 2009. And that was it. Johnson was out.

His severance package mirrored Penney’s performance: it sucked. In an age where multi-million dollar payouts to ousted executives is common, Johnson walked away with only $148,924.

So What Went Wrong?

The first big failure in Ron Johnson’s plan was that he never stopped to see what his employees or his customers wanted from JC Penney. He took the Steve Jobs quote, “people don’t know what they want until you show it to them” to heart. He was a talker, not a listener. And when he talked, he said this:

All my ideas just sort of come. I don’t know how to explain it. It’s all intuitive I think. I have been immersed in the retail industry for nearly 30 years, loving it, living it every day. Whether I’m doing Apple or Target, you’re immersed in the industry–you’re reading, you’re thinking, you’re doing. Through that you’re forming your intuition. It’s not like you go out and go study something and go, What am I going to do? You just kind of have an instinct for this stuff.

So we want to use our imagination, so that’s what we do, and that’s what we’ve always done. I don’t look around and go, ‘That’s a good idea.’ I just kind of imagine what I’d like. That’s what [JCP’s] Town Square will be, it’s the kind of things I’d like and the teams would like.

Let’s break down this statement for a minute because it’s pretty mind-boggling. He’s basically saying, “I have been in retail for 30 years, I know what I’m doing. We’ll do that and it’ll be a success.”

Ron Johnson has an ego problem. From this one statement we can deduce that (a) he thinks he’s responsible for the success of Target and Apple’s retail stores, (b) he ignores the massive amount of customer sampling and research that goes on at those companies, and (c) you’ll like what he gives you.

Let me be clear here. As far as I know, JC Penney’s did no testing on the ideas that Johnson wanted to implement. It’s possible they tested elements of his vision, but on whether customers wanted his vision or literally any other vision, he did nothing.

This is THE catastrophic fundamental mistake made in the whole process.

Ron Johnson had no interest in JC Penney as a company. He wanted it as a vehicle he could use to reimagine the entire concept of what a department store is supposed to be. That’s why he ignored the existing customer base. In his mind, department stores were the equivalent of the old beige tower PCs. He wanted to give the world an iPad. He drastically misread the market that the department store serves and misremembered how Apple came to dominate the digital space.

My favorite three words in the English language are ‘In the beginning’ and that’s how I view this. This is like we’re a big $18 billion startup. And we’re going to act like a startup in how we make decisions.

We can move as fast as we’re willing to and we’re going to win shop by shop, month by month. So every month there will be something new at Penny’s and there will be new shops coming in every month. And eventually we’ll have 100 shops and we’ll just keep moving.

Apple didn’t spring fully formed from Ron Johnson’s Apple stores. His stores got their start in a small but ever-present part of our life: music. The real birth of Apple that created the current market was when Apple introduced the iPod. The iPod and iTunes combo lead to a demand for the iMac and eventually the whole Mac ecosystem including the iPhone and iPad. After building the incredibly strong brand through a series of highly desirable products, only then did Apple start installing their own stores. The stores at that point were an extension of the brand, not the foundation of it. And Ron Johnson forgot that.

He forgot the decade of careful ground work that Apple had to lay in order to open their stores and then the half-decade it took to grow the stores into huge profit centers. What Apple did in 15 years, he figured he could pull off in around three.

At the end of the day, Johnson was a terrible fit for the company. He was a man that was obsessed with dollars per square foot but not with the people that spent those dollars. He created a company that fit together like a puzzle: the sales were on regular dates, the shipments to stores were on regular dates, the brands in the stores would each have their own tiny store inside of Penney which would no doubt be measured at corporate by how well they performed on a dollars-per-square-foot basis, and all of it would be pretty easy to track, analyze, and optimize for.

If the plan had worked, we’d be talking about what a genius he is. But it didn’t because the fundamental assumptions of what his customers wanted was never factored into the equation. He did away with St. John’s Bay, a billion dollar brand because he never stopped to figure out the value of the brand to JC Penney shoppers.
St. John's Bay logo
That about sums up Ron Johnson’s strategy: it’s my way or the highway. It wasn’t about profit or revenue, it was about transforming a retail experience that didn’t need transforming. It was about the special kind of hubris that comes with the insulation of wealth and from being surrounded by people who can’t tell you ‘no’. It’s about a man who wouldn’t listen.

The UX lesson here is both simple and powerful: the “UX” part means you LISTEN. It means you realize you’re not a unit unto yourself but you’re part of a larger society. That society matters, and you matter to it. If you listen to the wants and desires of that society and act on it, society will respond favorably and incorporate you further into itself. If not, it will reject you and spit you out.

And so it is with Ron Johnson. He was spit out. In fact, he was spit out so thoroughly that the entire new ad campaign for JC Penney is a worldwide apology tour. It takes listening to such an extreme that they even announce on Twitter when they’re going home for the night so you’ll know when you can start talking to them again.

In a last sign of how little JC Penney wants to do with Ron Johnson, they immediately replaced the JCP logo with the old familiar one. St. John’s Bay is back too.

jc-penney-logo

As of May 3rd, the stock price closed at $17.26.

4 comments on “How A Former Apple Executive Drove JC Penney to Have the Worst Quarter in the History of Retail

  1. So glad to know about these JC Pennys ads and the backstory – organizational change train wreck.

    His quotes are like an inverted ux design manifesto.

    Great reporting and clear cautionary tale

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