In Part 1, I suggested that JCP’s recent results are not just bad, they have become quite sad, mainly due to management’s seeming inability to overcome denial, speak plainly and commit to a more realistic game plan. Part 2 focused on the key things I believe must be accepted and embraced to move forward.
As Penney’s is now in the heart of what is sure to be another disappointing quarter, here are the major steps I recommend to stem the bleeding and give the transformation the time and the momentum it so desperately needs:
- Shun contempt for your core customer. We get that Penney’s needs a younger, more affluent and more fashionable customer. Without new customers–and deeper relationships with infrequent ones–they can’t get there from here. But it takes profound, sustained change to fundamentally shift consumer behavior. And remember that growth in the moderate multi-line retail segment is basically flat. That means JCP’s growth must come through stealing share from some pretty tough competitors. Going cold turkey on the traditional pricing and promotional strategy– and ignoring the historical base in both product and marketing–is the single biggest cause of their current problems. Yes, there was way too much promotional intensity. Yes, some of the customer base was fundamentally unprofitable. But there is still a profitable base that can be retained. Product and marketing emphasis must reflect this reality.
- Blend intuition with analytics and testing. There is clearly an art and science to retail, but Ron Johnson went too far by trusting his gut and assuming what worked at Apple is appropriate for JCP. That’s been a billion $ (and growing) mistake. And the notion that none of the new strategies could have been tested is simply nonsense. Enough with the Hail Mary’s. More consumer research, more data analytics and more testing is essential.
- Build a customer data & insight asset. Re-inventing the JCP brand, rolling-out differentiated product and delivering a more compelling customer experience are incredibly important. But the ultimate competitive advantage is having more actionable consumer insight than the competition. Collecting more customer emails is a great start. But investing behind the Rewards program, the direct to consumer business and a customer insight team–things that were downsized or largely ignored in the first year of the transformation–must be come a critical focus.
- Treat different customers differently. The Penney’s transformation got horribly off track because there was zero appreciation for customer segmentation. Any basic segmentation and valuation analysis would have revealed how risky the new pricing strategy was. An actionable customer segmentation (by needs, attitudes, behaviors and value) is the key to guiding merchandising strategies, marketing plans and customer experience enhancements that can fight and win in a crowded market. An actionable customer segmentation is essential to guiding investment prioritization. An actionable customer segmentation highlights the key customer segments to acquire, retain and grow and supports customer-based metrics. It’s fine to talk about shop profitability, but how about sharing key customer segment profitability, growth, retention and Net Promoter Scores?
- Aggressively leverage the Rewards program. In retrospect it would have been far better to aggressively prune promotions and then roll-out everyday pricing in a more phased manner. But the Genie is out of the bottle. Re-introducing large-scale promotions undermines the direction of the long-term strategy. Moreover, the fundamental problem with too much reliance on un-targeted promotions is perpetuating a race to the bottom and poor ROI. Free haircuts may drive a lot of traffic, but some of those customers would have bought haircuts anyway, and many who take you up on the offer have zero potential to become profitable regular customers. Done appropriately, it’s far better to leverage customer insight to target promotions to drive desired customer activity. The Rewards program is the best place to start. Marketing dollars needed to be distorted to this area. The program needs to be better highlighted on the website. Do this. Now.
- Re-introduce promotions surgically. While the Rewards program is an important immediate term lever, not everyone will want to join, and the program is not yet big enough to make as much impact as is needed in 2013. The transformation merchandising strategy is wisely focused on more exclusive and differentiating product. Unfortunately that investment won’t pay off until at least 2014. The retail equation is simple: revenues are a function of traffic, conversion rate and average transaction value. In the coming months, while the broader strategic imperatives get rolled out and tweaked, tactics must be intensely focused on driving traffic and conversion. Now is the time to borrow from Target rather than Apple. Selectively featuring key traffic driving items at eye-catching prices–particularly on national brands carried at competitive promotional retailers–can re-ignite sales from the more price sensitive customers Penney’s so desperately needs. The Black Friday promotion is a step in the right direction. Future advertising must better balance branding and a more compelling call to action. “Sale”–used boldly yet judiciously–is not a dirty word.
- Make sure the invitation isn’t better than the party. I was at Sears when we rolled out the “Softer Side of Sears” campaign. It garnered a lot of attention, won many awards and drove a ton of incremental traffic. But the payoff in the store simply wasn’t there and, once disappointed, many consumers that tried us never came back. Penney’s dismal conversion rates and declining average transaction value suggests this is a real issue right now. Pull back a bit on the beautiful 20-something hipster types in the advertising and show more of the customers you have today. Aspirational is fine. Alienation is death.
- Upgrade the overall experience. The new shops look great. And the technology that is being rolled out is cool. But the customer experiences it all against a sea of racks, mostly scruffy fixturing, poor lighting and a lot of 90′s vintage interiors. It will be impossible to move the dial within 3 years without pushing the envelope, but a more targeted store by store investment strategy–delaying some shops in some stores, while getting high profit leverage stores “all the way to bright”–is a better use of cash and will better inform future investments.
- Re-launch “catalogs.” One of the dumbest things Penney’s did was completely exit the catalog business. It’s one of the key reasons their e-commerce business has tanked. Many of the best multi-channel retailers understand that the traditional mail order business is dead. But they also know that print catalogs done better–i.e employed as mass customized direct response vehicles–are important drivers of both the web and brick and mortar channels. This was a key strategy for us when I was at Neiman Marcus and it remains so. Williams-Sonoma and many others successfully employ sophisticated direct marketing strategies to build their brands and target key consumer segments. Penney’s needs to begin diverting marketing dollars from one size fits all television, circular and direct mail pieces to treat different customers differently and create a better omni-channel experience.
- Remember: cash is king. On the last quarterly earnings call Penney’s management was pretty sanguine about their cash position. It is true that they–like just about every retailer on the planet–will build their cash position in this quarter. And they do have a substantial credit line to draw upon. But it is also true that they are investing mightily in re-inventing the store experience and their brand. However, it’s abundantly clear that so far their marketing investments aren’t yielding the desired results. I’d also be willing to bet they will discover they need to spend more per store than currently planned. And let’s not forget that unless Penney’s starts running strong double-digit comparable stores sales increases soon, they will fall far behind their needed trajectory and the transformation risks becoming a house of cards. Moreover, dramatically increased sales require a big investment in inventory. The only thing we know right now is that a lot of investment is needed and that the near-term outlook for cash from operations is pretty scary. By early next year Penney’s needs to spell out how this all will come together.
Obviously this is far from an exhaustive list. And obviously Penney’s management has access to data and consumer research that an outsider does not.
Some wonder why I have such passion for the Penney’s turnaround. Some have suggested that I’m angry that Ron Johnson has not engaged me as a consultant, despite my experience, my location (Dallas) and the fact that we were business school classmates. Others think I want to call attention to my having predicted the disastrous results.
Could be. But having lived through the decline and near decimation of another iconic retail brand (Sears), I’d like to think it’s because I know in both my heart and my head that it could be so much better.
Of course if I’m wrong, I’m just deluding myself–and it would hardly be the first time. But if Penney’s management gets it wrong, it costs tens of thousands of jobs and destroys billions of dollars in value. And THAT would be a shame.
So this is just one guy’s opinion. Take what you like and leave the rest.