JC Penney swings for the fences (Part 1)

New CEO Ron Johnson’s first big move to re-invent JC Penney was to eliminate their intensely promotional high/low pricing strategy. The key elements are:

  • Moving most products to “fair and square” every day pricing
  • Establishing month-long themed value pricing for certain key items
  • Simplifying and creating regular break dates for permanent markdowns.

To break-through the sea of sameness that envelops the slow growth moderate department stores space, Penney’s clearly needs to take bold action. And any student of retail knows that other needed changes to product assortments, in-store experience and digital strategy will take multiple years to fully implement. So what should we make of this “radical” new pricing initiative?

First, anyone who knows retail knows how foolish a high/low pricing strategy seems. The amount of money spent advertising events in weekly circulars and various broadcast media is enormous (and increasingly ineffective). The payroll and collateral costs of constantly changing in-store signing is a major line item. And “forcing” consumers to wait for a sale or have a coupon or get your store credit card to obtain the best price is seemingly a big customer dissatisfier.

So going to “fair and square” everyday pricing would seem to be a win for the consumer and a major improvement to any retailer’s earnings. Why not emulate Nordstrom and get both great Net Promoter scores and have an advertising to sales ratio that is the envy of the competition? It’s a slam dunk, right?

Well, not so fast Skippy.

First of all, unlike Nordstrom, every promotional retailer like Penney’s (and Sears and Macy’s and Bed, Bath & Beyond, etc.) has taught their customers–over many, many years–that their “regular” price is a sucker price. Reversing this perception will not happen quickly, no matter how creative your new ad campaign is and no matter how much money you throw at it in the first few months.

Second, every retailer has a customer segment that is intensely deal driven. This group refuses to buy unless they are convinced they have gotten the best possible price. And they believe they can ferret that out. They love the thrill of the hunt. Buying something without some special incentive is an anathema to them.

History shows–whether you are Sears, Macy’s or Saks–that when you pull back on promotions this segment’s business drops like a rock. If they are a tiny fraction (or an unprofitable piece) of your sales, it’s not a big issue. If, as I suspect is the case at JCP, they are a meaningful profit contributor, the short-term hit is significant and they will be hard to win back.

Third, like it or not, promotional marketing creates urgency to buy. Major events with limited time offers drive traffic. In-store messages that shout a great deal increase conversion. Over time hopefully Penney’s can teach their consumers that every day is a good day to check out their store and that there is no reason to shop around for a better deal. In the immediate term sales will suffer.

Lastly, and perhaps most importantly, the math on everyday pricing is tough. While it is true that most consumers buy at the lowest promotional price, it is also true that there are plenty of customers who pay full price (or receive a lesser discount). To achieve the same gross margin percentage would mean setting an everyday “fair and square” price that is above the lowest historical promotional price. But by doing that, you will be uncompetitive with your direct competitors.

An informal price check I did yesterday (at the mall closest to Penney’s corporate headquarters) revealed that Penney’s price on several key national brands was several dollars higher than Macy’s and Sears. For consumers that pay attention to such things, this will undermine JCP’s pricing integrity and cost them business. This also creates an opportunity for Penney’s competitors to attack them directly on the one major initial plank of their new strategy.

The other alternative is to set prices to be consistently competitive day in and day out. Doing so will drive Penney’s gross margin rates down, which will require a very significant increase in sales just to maintain the gross margin dollar productivity at last year’s levels–which weren’t at all impressive.

Penney’s has acknowledged that they expect to take a near-term sales hit as they implement their new pricing strategy. And everyone recognizes that pricing is just one piece of a multi-faceted, multi-year transformation.

My fear is that this pricing change is much more of a swing for the fences move then the new management team realizes and that the first few innings of this new game will be far more brutal than expected.

While unconfirmed, initial reports are that sales having taken a bigger hit than management anticipated, which could lead to inventory issues and a huge loss of momentum for the new leadership at Penney’s.

I applaud Ron Johnson’s willingness to go big and bold. However, I expect his credibility and tenacity will soon be tested.

***********

In Part 2 I explore what else Penney’s new strategy must entail.

 

Why wasn’t Jeff Bezos on your Board?

Ultimately a company’s success is determined by a sound strategy that is well executed by strong leadership and a passionate, highly capable team.

But don’t underestimate the role of the Board of Directors in distinguishing winners and losers.

If your business is established but struggling, you need a remarkable Board to help guide craft a re-imagined and remarkable turnaround strategy. If you are a rapidly growing brand, you need a Board that can challenge your growth assumptions and navigate make or break scaling issues.

Every Board should have outside members who are well versed on the critical strategic issues that face that company. Every Board should have several members who are willing to aggressively challenge the status quo and are willing to walk if they feel they are not heard.

The unfortunate reality for many companies is that the outside members of their Board of Directors fall short on both dimensions.

When I made my first strategy presentation to the Sears Board in 2002 I was certainly impressed by the distinguished careers of the outside directors sitting around the conference table.

But how many had any relevant experience with a retail brand turnaround or repositioning? How many had a solid understanding of the emerging impact of e-commerce? How many understood the fashion sensibilities of the mid-market female shopper? How many knew how to leverage customer data to fine tune a marketing strategy? How many had experience crafting a value proposition that could fight and win against increasingly strong price competition? How many grasped the intricacies of delineating and executing an assortment strategy that would differentiate us from both on and off-the-mall competition? How many had experience developing relevancy with the younger customer that we so coveted?

That answer was precisely zero.

Look at Sears’ Board today. Different players, same result.

Sears, of course, is just one depressing example, but you don’t have to look far to find many more. Just for fun, go check out J.C. Penney’s current Board.

We will never know how different things might have been if Jeff Bezos or Kevin Ryan or Tony Hsieh or any other similar forward thinking executive had been on Sears’ Board at any time during the last 10 years. And adding a Board member from a sexy, innovative company certainly does not guarantee success.

But if a Board is supposed to guide the future strategic direction of the company, you might want to have a few people who know what they are talking about when it comes to issues that truly matter. And they also need to be willing to get in the CEO’s face when necessary.

As an employee, you should expect it. As an investor,  you should demand it.

 

 

 

Do you suffer from pre-mature celebration?

This weekend brought us many stories of a booming “Black Friday “and suggestions that surprisingly strong sales over the weekend may mean a great holiday season for retailers. Today’s “Cyber Monday” will very likely produce a solid double-digit gain over last year, further supporting the narrative that the consumer is back.

I hope this is true. I really do. But I’m skeptical.

First, as I pointed out in my last post, historically there is no correlation between retailers’ performance in late November and their performance for the whole holiday season.

Second, in challenging economic times–which, last time I checked we are still in–many consumers become more deal conscious. This “surgical shopping” behavior causes them to cluster their spending only when they perceive the best deals are available. When the great deals stop, they pull their spending way back. If retail spending over the next week or so remains strong, that means something. If spending moderates, as I expect it will, we are just witnessing shifts in spending.

Third, even if the industry manages to generate sales above the expected ~ 3% growth overall and a ~ 15% rise in e-commerce, the question will still be whether this is profitless prosperity. Done well, “door busters” and other aggressive promotions can be important drivers of traffic that lead to selling higher margin items. Or, without a winning value proposition and a compelling customer strategy, they can be a recipe for destroying profit margins.

Bottom line, I believe we are witnessing pre-mature celebration. Only a longer view will tell us whether the customer is really back and whether a meaningful improvement in profits will be realized.

 

 

Connect the dots

In a world where there are relatively few choices and researching shopping options is difficult and time-consuming, a lot of friction stands between the consumer and the retailer. When collecting and sorting through all the relevant information to find the best fit product or service–connecting the dots to make a good decision–takes so much effort, the consumer loses energy quickly and the retailer just doesn’t have to be that good to get the sale and retain the relationship.

That world is gone. Forever.

Today, consumers’ choices are exploding exponentially and the friction is decreasing. Lots of dots. Lots of ways to access the dots. Lots of ways to sift through the dots.

But sorting through all the choices can be overwhelming.

Your mission–if you choose to accept it–is to connect the dots for your customers.

When you accept that the customer is in charge, that friction is being eliminated from the eco-system that is your business, you are in a position to lead.

When you make it Job One to understand your customers deeply, become channel-agnostic and commit to treating different customers differently, you turn customer-centricity into your competitive advantage.

When you take on the role of editor or curator, you connect the dots on behalf of your customers and move into a position of trusted advisor and ally.

Connect the dots and win.

Let others do it, and eventually you are just competing on price in a sea of sameness. And that’s bound to end badly.

 

 

The endless aisle and the world’s smallest parking lot

When I was in business school, one of the major consulting firms was notorious for asking interviewees the question: “what if energy were free?”  The short answer, of course, is “just about everything.” But the point of the question was to see if candidates could understand what a driving factor energy costs were in most businesses and consumers lives and whether the interviewees could quickly sort out the profound implications of no longer having that constraint.

I’ve been in retail about 20 years and for most of that time physical space has been the huge driving factor and constraint.

Retailers spend millions of dollars investing in stores and filling their shelves with millions of dollars in inventory. A lot of time and energy goes into visual merchandising and store display standards. Companies invest in planning and allocation software to optimize precious retail selling space and flow merchandise through their supply chains. You worry about things like “parking ratios” (the number of spaces you need per thousand of square feet).

And all along, Wall Street keeps you obsessively focused on comparable store sales growth, productivity per square foot and growth in square footage.

What would be different if most, if not all, of that did not matter anymore?

For more and more consumers, digital marketing and e-commerce has made the aisles endless and physical display meaningless. And the store is always open. Their parking lot is their desk chair, their couch, the smart phone or tablet in their hand. And your physical store is starting to look more and more like a showroom.

It won’t be long before most established retailers won’t be able to economically add any more net physical square footage. And if you are Barnes & Noble, the Gap, Sears or Best Buy, congratulations. You are already there.

If you are a multi-channel retailer where more than 10% of your sales are done through e-commerce and that channel is growing at double-digit rates, focusing on comparable store sales growth is becoming increasingly irrelevant. Comparable customer segment growth is far more meaningful.

If you have a lot of capital invested in physical stores and a large and growing percentage of your customers engage with your brand digitally before coming to your store, chances are you need a radical re-think about how you will drive brick and mortar productivity in an increasingly omni-channel world.

In a world of endless aisles and the anytime, anywhere, anyway consumer, just about everything is different. Or soon will be.

So the question is: are you?

 

 

Death in the middle

In politics, finding the middle ground is often challenging, but typically it’s what is needed to make societal progress.

In conducting our own affairs, behaving moderately–what the Buddhists call “the Middle Path”–is usually the best way to find happiness and serenity.

Yet in business, the middle is often the place to get stuck and eventually die.

Years ago, the middle was the place to be, the way to serve the broadest possible market and to maximize market share. Think Sears.

Today, the middle is the place to try to be something to a lot of people, but ultimately not mean much to any of them. Think Sears again.

In a world where consumers have virtually infinite choices, tremendous access to information at their fingertips and digital business models allow for increasingly deep levels of micro-segmenting, you can’t straddle the line anymore. You need to pick a lane.

The retail graveyard is filled with once great brands that at one time commanded strong customer loyalty, dominant market share and lofty PE’s.

None of these brands got sick and died quickly.

They all failed to understand shifting consumer desires.

They all failed to see how technology would change their core business models forever.

They all defended the status quo, while upstart competition went from interesting to good to great.

They all watched while others acted, and then their belated action came to look more like flailing than strategy.

If you are feeling safe in the middle, you might want to think again.

Your next best customer

Who is your next best customer?

There are two ways to interpret that question. Both are important. Both demand clear answers.

“Next best” can mean secondary, as in nearly, but not quite, your best. “Next best” can also mean who will be the best in the future.

Many companies fail to develop a growth strategy that successfully addresses and integrates multiple customer segments. The common mistake is to assume that what you do for your primary customer segment will “drag along” the next best segment. That’s rarely the case. Hyper-emphasis on your best customers usually leaves room for the competition to pick off those who feel neglected.

At Neiman Marcus, we did a great job growing our business with our top-tier customers–mainly by raising prices–while failing to hone and execute our strategy for the next tier of (quite profitable) customers. When the recession struck, we were hit unusually hard, particularly with this “next best” group.

The other mistake companies’ make is not focusing enough resources–or starting early enough–to cultivate the profitable customer relationships of the future. Of course it is difficult to know how to invest in customers who will not have an ROI for many years. But it’s even harder to try to wrestle those customers away from the competition once habits are formed and loyalties have solidified.

There are few categories where the consumers who will drive the majority of profits ten years from now, look much like those who drive current profitability. If you aren’t already working on a strategy to engage these future consumers, you might want to get started. Today.

And when in doubt, always remember: treat different customers differently.

 

The sales prevention department

If you work in retail you are familiar with the Loss Prevention Department, those men and women who work diligently to reduce inventory shortages, mis-handled cash and theft. For many retailers, the annual cost of these shortages is typically around 1% of sales. It adds up.

I wonder what would happen if you started a Sales Prevention Department.

First, you’d identify the most senior executive who regularly stands in the way of innovation and growth and who is afraid to take action on those stupid polices and procedures that get in the way of a compelling customer experience. You make that person the Chief Sales Prevention Officer (“CSPO”).

Then you transfer all the employees who stand in the way of sensible sales and profit growth.

I’m not talking about the ones who rightly worry about legal, compliance and financial reporting standards. You know the ones.

The sales associate who doesn’t wait on potential clients because they don’t “look like” serious spenders. The manager that perpetuates processes that make the customer re-enter the same information over and over again. The Vice President who stands in the way of a new idea because it will “cannibalize” existing sales. The folks that anchor on product and channel-centric practices, instead of promoting customer-centric ones. Pretty much all the vigorous defenders of the status quo; they all get to be part of this new group.

Then, when business gets tough, instead of doing a broad-based expense reduction initiative, or an across the board series of lay-offs, you will know where to start.

Actually, now that I think about it a bit more, since you’ve just formed the Sales Prevention department, why don’t you take those actions right now?

Me-tail

If you have any element of customer-centricity in your growth strategy, then you probably already subscribe to the idea of treating different customer differently.

And you might even accept that in a sluggish economic environment, growth must often come from gaining share of wallet. And that means you must steal business from the other guy.

Enter “Me-tail.”

Me-tail is about treating really different customers really differently. It’s retail on an intensely personalized basis. It’s Peppers & Rogers notion of the one-to-one future finally becoming a reality.

Me-tail is about truly shifting your mind-set, your product offering, your marketing and your customer experience from an audience of many, to an audience of one.

Me-tail starts with the customer and focuses on building a deep understanding of what is truly relevant, differentiated and compelling to that one individual–and then acting on it.

Me-tail can be adding customized products to your assortment or deep personalization of your marketing materials. It can be training your sales people to move away from a one-size fits all mentality.

Me-tailing acknowledges the overwhelming choices (and channels and media and influencers) consumers are confronted with every day and puts the retailer firmly in the role of editor, agent, concierge.

When you do Me-tail right, the consumer says to themselves: “You know me, you get me, you value me, you make my life better in way that no other brand does.”

Sure there are still plenty of businesses that are about assortment dominance and the absolute lowest price. And plenty of consumers who only want that.

And sure, it’s frequently logistically or financially impossible to literally deliver your offering effectively and efficiently to a segment of one.

But if you can’t out-Walmart Walmart or out-Amazon Amazon, chances are you will be better off moving towards the side of Me-tail.

So pick a lane. Think Me-tailer, not just Retailer. Because it’s death in the middle.

Life in beta

It used to be that if you were designing a new product or service, you would probably develop a prototype, test several iterations and then demo a nearly complete version for some target customers. After getting their feedback, you would make some tweaks before the final product was released, often supported by a big budget marketing campaign.

That new offering was intended to serve you pretty well for years to come with few, if any, changes.

It used to be that your career worked pretty much the same way. You got your degree(s), tested out an entry level job or two, and then settled in for a more or less linear career. If things went well, you’d pick up the occasional promotion.

This world was pretty easy to understand. Do this–most of the time–get that. Periods of coasting, mixed in with rare bursts of intensity.

Now, however, most of us live a life in relentless, never-ending beta.

Now, constant iteration is what is required and, most of time, nothing is ever truly finished.

Now, what allowed us to thrive (and stay sane) doesn’t work so well any more. Or perhaps not at all.

Now, we have a choice: change or fall further and further behind.

Now that I look at it, that’s not much of a choice.