Was Ron Johnson right?
Ron Johnson’s time at J.C. Penney is universally seen as an unmitigated disaster. But what if some of the ideas he had are exactly what department stores need today?
Ron Johnson’s time as CEO of J.C. Penney from 2011 to 2013 is well documented: He came. He changed. He left J.C. Penney a massive wreck after these changes turned disastrous. But what if Johnson, who helped develop Apple’s successful store aesthetic and Target’s “chic-cheap” vibe, was the prophet of department stores, a holder of prescient ideas that are just now being embraced by stores today?
It’s a lofty idea, and no one would say that all pieces of his turnaround plan were prophetic. But perhaps one was—his idea of “mini-malls,” which he introduced in 2012. Johnson’s vision called for transforming about 700 of J.C. Penney’s 1,100 stores into new shopping structures, clearing out the retailer's own private label brands in favor of rows, or “streets,” of boutiques or shops. In the middle of this mini-mall would be a “town square,” where customers could gather to grab a bite to eat, attend a free fashion show or cooking class, or enjoy a coffee with a friend.
The whole goal was to make J.C. Penney a destination for customers to not only shop, but to entertain themselves and experience retail in a different way—thus making them stay longer in the stores, and spend more.
Alas, Johnson’s vision was not meant to be. There were many mishaps that lead to Johnson’s failure as CEO of J.C. Penney, from his outsider status to his bungling of the retailer’s inventory management. But one of the biggest mistakes Johnson committed was his timeline.
“[Johnson] absolutely had the right vision, there’s no question in my mind, and to this day there’s no question in my mind. He just screwed up the execution, that’s all,” said Robin Lewis, author of “The New Rules of Retail.” “Quite frankly, it has to be the future of the department stores, and you will see those who succeed evolve to that model.”
What went wrong
A key facet of Johnson’s turnaround plan involved a total overhaul of J.C. Penney’s pricing strategy. The retailer would do away with something that continues to vex retailers today: proliferating discounts. Johnson outlined a “fair and square” pricing strategy that included cutting down promotions, hosting only 12 themed promotions a year compared to the 590 J.C. Penney saw in 2011. Johnson would instead replace this all-year-round discounting culture with prices that were 40% lower, doing away with “fake prices” that drove merchandise up only to be discounted to its true value. “Best Price Fridays,” sales on every first and third Fridays of the month, would help clear stagnant merchandise.
While a rampant discount culture is something retailers have grumbled over even in recent earnings reports, both Lewis and Lee Peterson, executive vice president of brand, strategy and design at WD Partners, agree that Johnson jumped the gun, and thusly shot himself in the foot.
Rather than choosing a couple of stores to test this “fair and square” pricing strategy, as is typical of a large retail chain like J.C. Penney, Johnson made the brash decision to roll it out nationwide all at once. Furthermore, Johnson chose to shut down discounting even before the first stores saw "town square" renovations.
These two decisions proved fatal. Johnson drove away J.C. Penney’s aging core customer base with seemingly steeper prices, while failing to attract new customers with the all-inclusive department store experience he envisioned, resulting in slow traffic and same store sales tanking 31.7% in the fourth quarter of 2012. During Johnson’s full year at the company, it posted a net loss of $985 million.
On April 8, 2013, 17 months after he joined J.C. Penney, Johnson was ousted by the company’s board, with Myron Ullman, J.C. Penney’s CEO from 2004 through 2011 (when he was replaced by Johnson), returning to the CEO spot.
“It’s an unmitigated disaster,” Hedgeye analyst Brian McGoug told MarketWatch in 2013. “The board should probably hand in their own resignation as well. It’s a wrong time to fire the guy. They are six months too early or six months too late.”
The company admitted its mistakes in an advertising campaign based on customer feedback, posted on J.C. Penney’s Facebook and YouTube pages. In it, J.C. Penney confessed to ignoring its customers, pleading to them to give the company another chance.
“We learned a very simple thing—to listen to you, hear what you need, to make your life more beautiful,” a voiceover urged. “Come back to J.C. Penney. We heard you.”
Clash of cultures
So what drives a retail veteran like Johnson to skip over the crucial testing phase of his new vision for J.C. Penney? Johnson’s time at Apple, and his time spent in the always-innovating tech world Apple calls home, may have contributed to this brazen, no-holds-barred attitude.
“I think what he learned from Apple, which he thought he could transfer to this very complex, 1,000-store-deep retailer, was ‘Go with the gut, you don’t need to do a lot of research,’” Lewis said.
Peterson agrees, also noting that Apple’s core demographic is more accepting of change than J.C. Penney’s customers.
“Instead of rolling some stuff out, which at Apple you can do all night long because you have a different customer with an acceptance of change, you should have tested it in a region,” Peterson said.
This disconnect from J.C. Penney and its customer was noted in other parts of Johnson’s leadership. Physically, he chose to live in California rather than move to J.C. Penney's headquarters in Texas, commuting via corporate jet. Mentally, Johnson surrounded himself with many executives of his choosing after taking office, creating discontent at HQ.
“What probably upset the board more than anything were some of those things,” Peterson said.
When reached by Retail Dive, Johnson declined to comment.
But would Johnson’s strategy have been successful if J.C. Penney’s board held strong through its losses, eating the costs while customers adapted to the new pricing strategy and renovated stores, as McGoug suggested in 2013? After all, change takes time, and time is money.
Lewis doesn’t think so, saying that the board was right in booting Johnson so quickly after the poor earnings results.
“They would have given him longer if he really had a logical five-year plan to get there. He didn’t have that,” Lewis said.
What we can learn from Johnson
While Johnson’s time at J.C. Penney was unilaterally deemed a failure, his ideas were, and still are, applicable to department stores and the inevitable transformation they will encounter. As mall traffic decreases, competition from big-box stores intensifies, and more customers choose to spend on experiences rather than things, department stores will need to adapt, creating new incentives for shoppers to visit their stores.
Some department stores are slowly showing signs of change, if only a little bit, that conform to Johnson’s vision of a “mini-mall.” Most noticeable is Macy’s millennial-lure, One Below. The basement in Macy’s Herald Square Manhattan flagship was recently renovated to become more of a destination for young shoppers, with additions like a selfie wall, 3D printing shop, and photo booth. Shoppers can peruse these amusements while also visiting kiosks from Benefit makeup and Mac to get their brows plucked or hair blown out. It’s Johnson’s vision, through a millennial lens.
Nordstrom’s various partnerships with Topshop, Bauble Bar and Warby Parker, along with its new mini-boutique Space, also play into this “mini-mall” vision, offering shoppers wares from rare brands and traditionally pure-play online retailers. Similarly, Barneys’ new flagship store in New York’s Chelsea neighborhood brings men’s haircuts and shaves (and beer) at a special Blind Barber.
But while these moves might be a step in the right direction, the question is whether these changes, and at their current pace, are enough to rescue the retailers. Perhaps a new way of thinking is needed, one that has a dash of Johnson while still staying realistic—a Goldilocks choice.
“Look at Amazon. Amazon says we’re going to fly drones here and we’re going to put a Dash [web-connected product reordering button] in your house so you’ll know when you’re out of stuff, and we’re going to have Uber drivers deliver your stuff within hours, and we’re going to put an Echo [smart speaker] on your kitchen counter that you can ask anything,” Peterson said. “Those are all out of the realm of normal retail but really good ideas. And even if they aren’t ideas that work, they’re good PR. Ron Johnson came out of that world. He was starting to go down a road of constant innovation, or if you don’t believe it’s innovative, it’s at least change. Basically, department stores need to start thinking about things that aren’t racks of merchandise, but are appealing in different ways.”
While not completely embracing Amazon’s penchant for radical experimentation—few retailers can, given their investors’ expectations for actual profits, unlike Amazon’s investors in the past—J.C. Penney’s new CEO, Marvin Ellison, is ready for change. As Fortune mentions in its recent profile of Ellison, he is re-tuning many parts of the business, including J.C. Penney’s hair salons, revamping them with a partnership with InStyle magazine and coordinating them with its successful Sephora boutiques. The salons are just one entry in a long laundry list that Ellison is tackling, from improving the department store’s fulfillment operations to growing its roster of in-house brands.
These ideas seem to be working—J.C. Penney was the shining star in an otherwise bleak week of department stores’ earnings recently. While Sears and Macy’s saw same-store sales fall in the fourth quarter, J.C. Penney’s same-store sales increased 2.5%, thanks to strong sales of home goods, footwear, handbags, and its Sephora concessions.
Another part of Ellison’s turnaround plan? Testing everything, even a small shift in departments—every step of the way.