JC Penney: Better isn’t the same as good

I bought some JC Penney shares on Thursday in advance of their earnings announcement.

I almost never buy individual stocks, but this was an easy decision. Penney’s execution has improved dramatically since Ron Johnson’s departure. Two major competitors–Sears and Kohl’s–are flailing. The year-over-year comparison is absurdly easy. Inventory seems to be tightly managed, which virtually guarantees a solid lift in gross margin. But mostly importantly, negative Wall Street sentiment has been fueled by much fundamental misunderstanding–as evidenced by the large amount of short interest.

My hunch was right. Penney’s reported better than expected performance. And the stock has popped some 15%.

Yet I am keenly aware that better is not the same as good. Penney’s has a huge amount of work to do just to get back to the performance level of the pre-Johnson era which, frankly, was solidly mediocre. The moderate department store sector has basically become a zero sum game where top-line growth must come from stealing share from the competition. And competition is, and will remain, intense.

I am, however, optimistic about the immediate-term. The self-inflicted wounds of the Johnson era are gone. Marketing and merchandising are moving in the right direction. Appropriate attention is now being placed on e-commerce and omni-channel capabilities. As Sears sinks into oblivion, JCP is poised to gain market share and leverage their real estate position. Mike Ullman’s back-to-basics strategy is appropriately conservative and should result in steadily improving gross margins.

It’s also important to note that a year ago Penney’s had done virtually everything one could think of to chase customers away. Importantly, a significant percentage of their stores were off-line in preparation for the home re-launch. Gross margins were getting pummeled by clearance markdowns. Lastly, retail remains a relatively high fixed cost business. As sales improve (both in-store and on-line) Penney’s will start to see tremendous operating leverage.

So for me, better is a virtual certainty for Penney’s–at least for the next few quarters. And those who see the brand at the brink and in need of massive store closings are going to be disappointed (and, as an aside, they also fail to understand the importance of physical stores in driving the online business and overall omni-channel strategy).

Better is easy.

Good? That’s a whole different question.

Attraction, not promotion

If you are familiar with 12-step recovery programs you know that most employ the Eleventh Tradition of Alcoholics Anonymous, which goes as follows: “Our public relations policy is based on attraction rather than promotion.”

The obvious reason for this practice is that 12 Step programs have the anonymity of their attendees at their core. Moreover, AA–and its many spin-off programs–reject self-seeking as a personal value. But it goes deeper.

Most people do not wish to sold to or want to heed the clarion call of “pick me, pick me.” If I have to hit you over the head again and again with my message, perhaps you are not open to hearing it. Or maybe what I’m selling isn’t for you. Constantly reducing your price or pitching me all sorts of deals may be an intelligent way to clear a market, but all too often it’s a sign of your desperation.

12 Step programs are among the first viral programs to scale. They gained momentum through word of mouth and blossomed into powerful tribes as more and more struggling addicts came to be attracted to and embraced the lifestyle of successful recovery. No TV. No radio. No sexy print campaigns. No 3 suits for the price of 1. When it works it’s largely because those seeking relief come to want what others in the program have.

In the business world, it’s easy to see some parallels. Successful brands like Nordstrom and Neiman Marcus run very few promotional events, have little “on sale” most days of the year and have very low advertising to sales ratios. Customers are attracted to the brands because of the differentiated customer experience, well curated merchandise and many, many stories of highly satisfied customers. Net Promoter Scores are high.

Contrast this with Sears and JC Penney who inundate us with an onslaught of commercials, a mountain of circulars and endless promotions and discounts. How many of their shoppers go because it is truly their favorite place to shop? How many rave about their experience to their friends? Unsurprisingly, marketing costs are high and margins are low.

Migrating to a strategy rooted firmly in attraction vs. promotion does not suit every brand, nor is it an easy, risk-free journey. Yet, I have to wonder how many brands even take the time to examine these fundamentally different approaches? How many are intentional about their choices to go down one path vs. the other? How many want to win by authentically working to persuade their best prospects to say “I’ll have what she’s having” rather than keep beating the dead horse of relentless sales promotion.

Maybe you can win on price. Maybe you can out shout the other guy. Maybe, just maybe, if you can coerce just a few more customers to give you a try you can make your sales plan.

Maybe.

 

 

 

 

JC Penney: The way, way back (Part 2: The action plan)

In part 1, I laid out the context in which JC Penney must recover from the disastrous performance of the past 2 years. In particular, I posited that their performance is likely to get better in the near-term. But I also pointed out that better is not the same as good. Even a return to the “decent”  2012 performance levels–which won’t come any time soon–is not an acceptable long-term outcome.

Now, from my outside looking in perspective, are what I believe to be the essential components required for Penney’s to make its way back to long-term viability.

  • Nail the positioning/Evolve the value proposition. To gain top-line momentum and assure near-term financial stability, Ullman and team are bringing back “legacy” products for their traditional core customer and returning to intensive sales promotion. This is necessary, but not sufficient. The value proposition of 3 years ago is not sustainable. Like all retailers serving the moderate market and offering a wide range of products, the challenge is crystallize your competitive positioning and to ruthlessly edit against the key customer segments, purchase occasions and price points you wish to own. Deep customer insight is key to getting this right. Penney’s must figure out how to attract a younger, more fashion forward customer over time, while not alienating its historical core. A tricky proposition to be sure and one that must be approached as an evolution rather than the catastrophic revolution that Johnson attempted. Once this is decided upon, it must become the “true north” that guides all future strategic execution.
  • Accept that it’s about ‘share of wallet” and plan accordingly. Maybe the economy will begin to grow above the rate of inflation. Maybe the long-term secular decline in the moderate mall-based department store sector will reverse. Maybe I will be starting quarterback for the Cowboys. But let’s not plan on it. The reality is that Penney only thrives, must less survives, by stealing share. The good news is they are likely to get a bounce from Sears’ slow slide into oblivion. But the rest will not come easily. Copying Macy’s and Kohl’s won’t cut it. Sucking less is not a strategy. Carefully choosing the customers Penney’s wishes to serve, understanding the levers to their engagement and loyalty and out-executing the competition are the table stakes. And since it’s a battle for share, expect the competition to fight back fiercely.
  • Defy the sea of sameness. Visit any of Penney’s key competitors–on or off-the-mall–and you’re struck by the lack of differentiation in product, presentation and experience. Take the brand name off the circular and, except for color scheme and typeface, all the advertising looks virtually identical. During the Johnson regime JCP obviously went too far and too fast on just about everything. But the underlying logic should not be lost. Penney’s must build stronger proprietary brands, while selectively bringing in (or amplifying) differentiating national brands to win in targeted consumer segments and price points. They must relax their seeming obsession with depth and get behind key items that solidify their new positioning. And advertising must be about this differentiation, not just price promotion. You can’t own “discount.”
  • (Re) Build a customer data & insight asset/Treat different customers differently. Ron Johnson’s eschewing of customer research and analytics, along with his dismantling of Penney’s CRM capabilities, contributed to Penney’s implosion. More and more, those brands that have the deepest understanding of customer behavior, the ability to reach a large percentage of their customer base on an individually addressable basis AND the willingness to progressively customize their offerings will gain considerable competitive advantages. Penney’s historical strengths in direct-to-consumer, large private label credit card base, burgeoning loyalty program and an e-commerce business that is (finally!) beginning to tap its inherent potential are all important building blocks. It’s time to step on the gas. More dollars to direct marketing. More personalization, less mass. More “test and learn. Rinse and repeat.
  • Invest aggressively in frictionless commerce/Own the moderate omni-channel customer. Right now cross touch-point shopping behavior is the norm. Right now only retailers talk about channels. The growing reality is that consumers think brand first and are becoming increasingly channel agnostic. They are expecting a seamless experience between digital and brick & mortar worlds. The growth in mobile further blurs any distinctions. For Penney’s, organizational silo busting must be a priority. They need to learn from the success that Macy’s and Nordstrom are having and translate that to a brand appropriate omni-channel strategy that will make them the undisputed leader in their competitive set.
  • Re-invigorate and evolve the brand. The JC Penney brand is a blessing and a curse, resonating strongly with some, not connecting well with many. JCP simply cannot win without retaining many core customers, deepening relationships with infrequent shoppers and attracting a new generation of potential high spenders. This is a hell of a challenge and the only certainty is that it will take tremendous investment and many years to prove successful (think Cadillac). Current marketing efforts are, understandably, about winning back customers Johnson “fired”, clearing old merchandise and securing financial stability. The basics of this should be accomplished by mid-year. Then the tide needs to turn to a multi-year strategy that shifts the focus on discounting to emphasize trust, value and the key elements of product and experiential differentiation. Plans need to assume it will take 5-10 years to make a meaningful dent in the minds of the critical Millennial segments.
  • Re-energize the culture. Deep customer insight, well articulated value propositions and kick-ass operational capabilities are great. But it is leaders, their teams and the determined perseverance of individuals that make the difference between a compelling strategy and its actual impact. The wrong-headedness of Johnson’s strategy, his inept management style and his gutting of key personnel has set back Penney’s mightily. I know of many talented, loyal Penney’s associates who both wish for and believe in Penney’s resurrection, but who have elected to leave for more secure career opportunities after enduring more than 2 years of craziness and disappointment. Ullman’s instincts in this regard seem spot on, but one should not underestimate the challenge of rebuilding key organizational capabilities, attracting the new talent necessary to take the brand beyond where they were in 2012 and building a customer-centric culture for the brave new world of omni-channel. Improving results will help, but this too is a multi-year substantial investment.
  • Don’t get distracted. Wall Street will push for cost reduction and store closings. To be sure, there will be incremental opportunities to ferret out buckets of productivity. But Penney’s issue–just like Sears’–is sales productivity and growing target customer share of wallet. They need to keep their eyes on the prize.
  • Settle in for the long-haul. I’m not about to get into the timing issues inherent in the signs Wall Street values that might cause Penney’s stock to pop. Having said that, I do think many of the liquidity issues are overblown. I do think new spring merchandise and easy comparisons to last year’s dead on arrival Home strategy should generate solid comps. I do think that gross margins will steadily improve. And I do think that many of the investments Johnson’s team made in upgrading layouts and presentation can serve as a stronger platform as new merchandise hits the store. Do with that what you will. But the transition from better to good will not come in a few quarters. Even in a best case scenario I expect it will take Penney’s at least 3 years to get back to 2012 performance levels. Whether they can do what it takes to be around a decade from now remains a huge open question and will remain so for quite some time.

 

Note, if you are desperate for entertainment and/or wish to check out my early call on the inevitable failure of the Ron Johnson strategy, just Google my name and “JC Penney” for my many JCP related blog posts of the past 2 years.

JC Penney: The way, way back (Part 1: The challenge)

Yesterday JC Penney reported its first quarterly same store sales increase in more than 2 years.

Given the free fall the company found itself in during the Ron Johnson era, this news provides a measure of hope. After all, there can be no ascent from a dive without passing through stabilization. And even though the gain was paltry–about 2%–it came during a period of consumer ennui, crappy weather and intense sales promotion throughout the industry. Later this month, when Penney’s reports quarterly earnings, we’ll get a clearer picture of the toll aggressive discounting took on margins.

Unlike some doom-sayers on Wall Street, I am cautiously optimistic about Penney’s near-term. Product assortments are improving, which bodes well for continued top-line growth. While the company still has a bit more work to clear all of Johnson’s merchandise debacles, I expect improving margins as the company better matches inventory to consumer demand. A return to more typical promotional marketing has Penney’s back in the competitive mix. E-commerce improvements are starting to make meaningful contributions. 

But of course better is not the same as good.

First of all, we should not lose sight of the fact that even before Johnson’s messianic arrival, JCP was struggling. Despite many attempts to re-invent itself, they remained a middling performer at best, stuck in neutral, in a moderate department store sector that continues to shrink. A transformation was, in fact, needed. Just not the one Johnson and team inflicted upon them.

Second, during the past 2 years Penney’s has lost roughly 1/3 of its sales. That means they need to increase revenue by well over 40% just to get back to where they were in the pre-Johnson, more than a bit mediocre, days.

Retail is still largely a high fixed cost business, and even with some additional pruning in real estate and a shift to more e-commerce, there is simply no way to earn an adequate return without dramatically improved brick and mortar sales productivity. And of course they must accomplish this in an environment of lackluster consumer spending and intense battles for market share. Though, Sears’ slow slide into oblivion should be the gift that keeps on giving.

To be sure, there is much of the proverbial low hanging fruit to be picked. Basics of execution were lost during the past two years. The Johnson merchandise and marketing strategy showed a poisonous contempt for Penney’s core customer. New product concepts were rolled out that were dead on arrival, creating many pockets of incredibly low sales productivity (I’m looking at you Bodum!). The increasingly critical digital channel was left  twisting in the wind. 

Addressing many of these glaring gaps should come fairly easily and quickly. Crafting a winning, long-term strategy is a totally different challenge.

Coming in Part 2: The action plan

I love the way you lie

Whether you stumbled upon Richard Chang’s excellent article “Outlets may not be the bargain you think“–or happen to remember my post from 3 years ago entitled “Faux clearance: Do outlet customers really care”–you may already know that the vast majority of merchandise sold through outlet and off-price channels is made specifically for those stores. Moreover, most of the purported discounts are entirely made up.

With few exceptions, much of the product sold through “regular” channels–department stores, specialty stores, e-commerce–is sold at a discount, and often a substantial one. Open today’s newspaper, or go on-line, and you will see tons of product discounted 20-50%. If you are a Joseph A. Bank customer you can often get a “Buy 1, Get 2 Free” deal. Take advantage of an additional savings coupon, or use your store credit card at many retailers, and you’re likely to reap at least another 10% discount.

While, arguably, we have seen an uptick in promotional intensity in recent years, the notion of marking something up to be able to then claim big savings has been a core component of most brands’ playbooks for at least as long as I’ve been in retail–and that’s over 20 years. For many retailers, the concept of “regular” price is purely fictional.

An essential part of Ron Johnson’s attempt at transforming JC Penney was the concept of every day, “fair and square” pricing. Surely–his left brain must have told him–customers would understand that $40 every day is better than $60 some days and $40 only on the days we happened to be running a sale. No more smoke and mirrors! No more waiting for a sale! No more wasted costs on advertising and store expenses to manage this expensive con job!

Well, we all know how that turned out.

My hope is that brands will be far more transparent in their pricing and discounting strategy. But barring legislative action, my experience tells me that holding my breath for this wish will only turn my face blue.

Whether it’s out of customer ignorance or some weird twist in evolutionary biology, the reality is we’re all part of a grand delusion.

We love the way you lie. And more, apparently, is better.

 

The alternative reality of retail “sales improvement”

According to many, including management, sales at JC Penney improved in the just reported quarter. They were down 12%.

Sales improved at Best Buy too, declining 0.4%.

Of course what they really mean is that the negative trend improved. Things are bad. Just not quite as much as last time.

But improvement in the sense of growing market share, being more relevant to consumers, having more money to pay the bills–you know that sort of trivial stuff–the cold splash of reality is that it’s still not happening.

So if you are on a plane hurtling toward the earth, you might take some comfort in learning that the dive is no longer so steep. More time to pray, more time to reflect on your life and more time for the pilot (hopefully!) to pull out before you smash into the ground.

If you are trying to lose weight you might be somewhat happier that this week you “only” gained two pounds, rather than last week’s five. But no matter what you tell yourself, you are still further away from your goal.

Or if your 401K was down 25% last year and you are only down 12% this year, you might feel just a bit less badly about your needing to work until you’re 80  (until you realize that it will take a 47% gain just to get back to even–which, coincidentally, is the same increase that Penney’s need to get back to the start of the Ron Johnson era).

Don’t get me wrong, obviously when a trend has been relentlessly negative, an improvement in that decline sure beats the alternative. And a less steep descent provides the promise of a potential ascent.

Just don’t confuse better with good.

And don’t forget as long as you are growing more slowly than your best competitor, you are still losing ground.

Your boat may not be drifting as badly, but you are still miles from the shore.

 

 

JC Penney: Trouble on the home front

Ron Johnson’s tenure at JC Penney is the (horrible) gift that keeps on giving.

Amidst recent rumors of another CEO change, continuing Board drama and potential liquidity issues–not to mention the little challenge of pulling the core business out of its steep descent–now we have Johnson’s much vaunted Home strategy landing with a resounding thud.

And this blunder is, in many respects, the most misguided element of the “transformation”, the biggest opportunity wasted and the most vexing to fix.

The boldness of the new strategy was admirable: rip-up a chronically under-performing large section of the store, add new experiential elements, upgrade presentations and, most critically, bring in exciting, differentiating brands. Yet here too the misguided thinking evident in Johnson’s vision for the rest of the store is made abundantly clear.

After months of construction, tens of millions of dollars in investment and lots of hype, what we discover is a well-organized, beautifully designed space with lots of unproductive, poorly conceived merchandise. And don’t get me started on the Martha Stewart, Macy’s fiasco.

As I’ve opined before, at the core of Johnson’s erroneous strategy was trying to change Penney’s customer base too quickly. That huge miscalculation is evident in spades in the Home re-think. Brands like Jonathan Adler, Bodum, Conran and Ordning & Reda may have immediate recognition and appeal to some affluent consumers and design aficionados, but the notion that they would quickly be relevant to the Penney customer is simply nuts.

Even a brand like Michael Graves, which certainly had some success at Target, might be expected to convert reasonably well at the outset, but it’s hard to imagine it has much drawing power in the grand scheme of what is desperately needed.

Aside from these broader strokes, there are many major tactical blunders. The Bodum shop is a case in point. While the section is distinctively and attractively presented, much of the product is way too expensive. Did somebody really think many people were going to buy $200 coffee makers at Penney’s from a brand they’ve never heard of?  Other choices would be funny if they weren’t so costly. The Bodum shop (and website section) seems to believe the world is ready for a French press revolution. Maybe Williams-Sonoma or Sur la Table can lead that movement, but at Penney’s it’s just a big mark-down waiting to happen.

The Happy Chic by Jonathan Adler shop is also eye-catching, but the product assortment is way too specific to have the impact and productivity it needs. The Michael Graves and Martha Stewart shops are filled with a bunch of random stuff at odd price points.

Throughout the rest of the home section there is ample evidence of Johnson’s specialty store strategy taken too extremes. Some product is just too expensive for Penney’s core (Conran), some product is so narrowly focused in design point of view it can’t possibly be productive or contribute to a coherent view of Penney’s desired positioning.

Another issue throughout much of the new areas is lack of product density. The design does a nice job of showcasing product, but it’s Retail 101 to be mindful of having enough product and enough transactions to give yourself a chance of being profitable on the space. At Apple this “negative space” mentality works when you have strong traffic and products that cost hundreds (or thousands) of dollars.  But when one is selling $15 picture frames, $20 throw pillows and $3 dinner plates, well, not so much.

The investment in space for product demonstrations, design advice and customer service is just sad. It’s clearly an expensive exercise in productivity drain and customer irrelevance.

Some Wall Street analysts have been acknowledging the serious problems with Penney’s home business, but minimizing its magnitude because home represents “only” about 12% of revenue. And given the damage that’s been done to the rest of the business it’s fair to say that in the immediate term it’s hardly the #1 priority. But that misses the broader point.

Let’s remind ourself that prior to the Ron Johnson fiasco, Penney’s did not have a sustainable long-term strategy and plays in a retail market sector that’s been growing slower than inflation. They need a ~30% sales increase and vastly improved margin performance just to get back to where they started pre-Johnson. That means that all aspects of the store have to work. It’s also important to note that the Home store represents more than 12% of the space, and even though Penney’s has a huge opportunity in e-commerce, the reality is that today they have a relatively high fixed cost business and there is tremendous financial leverage in making the brick and mortar Home business productive.

For any department store developing top-of-mind preference and driving cross-shopping is paramount, so success in Home–or any department for that matter– is about more than traditional financial mechanics.

The most vexing issue of course is what does new (kind of) CEO Mike Ullman do now? In the immediate term he’s been focused on the right issues: trying to pull a rabbit out of the hat for the Fall season, driving more urgency and impact through promotions and creating near-term financial flexibility.  And to be fair, it will really be the Spring season before we can get a good read on whether Penney’s is getting any real traction on un-doing the mess that Ullman re-inherited.

Unfortunately for Penney’s the home category may well be the hardest and costliest piece to fix. Going back to where they were (which is largely the path they are now on for the apparel business), is not a viable option. More investment will be needed, either to build consumer interest in the new brands while they evolve the assortments, or to re-envision the space to be consistent with whatever JC Penney 3.0 turns out to be.

Regardless, a few things are clear. First, there are no easy or quick fixes. Second, immediate concerns over leadership (CEO and Board) and liquidity aren’t making the task any easier. Third, and most critically, for Penney’s to claw back lost market share and have any chance to fight and win in an intensely competitive omni-channel world, patience, new thinking and significant investment will be required.

Let’s hope they get that chance.

 

JC Penney: Gloat edition

What’s the difference between God and Ron Johnson?

God never thought he was Ron Johnson.

In the wake of Ron Johnson’s ouster as JC Penney CEO there’s been plenty of gloating.

In fact, nearly all of Johnson’s tenure saw myriad industry analysts, pundits and denizens of the 24 hour news cycle become practically giddy in pointing out the perceived failings of his transformation strategy and his seeming lack of self-awareness.

When he finally got the axe, the sheer volume of “I told you so” and “it’s about time” tweets made me think that Twitter was going to launch a sister site named schadenfreude.com

Now regular readers of this blog will surely recall that I have written multiple posts, as early as March of 2012, challenging Johnson’s strategy and predicting its failure. Frankly, having been the head of strategy at two Fortune 500 department store retailers–and now being in the business of peddling strategic advice to the retail industry–I believed I had both the relevant experience and the marketing need to be out there as a vocal critic.

But I do think it’s entirely fair to say that, at times, I did go overboard. As an ego addict in recovery, I find that this still happens from time to time.

I hope that any of us who may have taken perverse pleasure in pointing out the foolishness of the Johnson regime come to accept at least three important realities.

First, that their mis-steps have resulted in real pain for many, many people, primarily through significant job losses.

Second, that the new team has to quickly catch the proverbial falling knife, stabilize a rickety ship and sort out a compelling strategy from the ruins of a woefully misguided one.

Third, that the job of the new team will be even tougher than the one Johnson assumed.

So let’s get the jokes, the gloating and the schadenfreude out of our system. There is important work to be done.

 

 

 

Humblr.

If we’ve learned anything from Ron Johnson’s 17 month tenure at the helm of JC Penney, it’s that he and his new team could have benefited mightily from demonstrating greater humility.

All too often when conflict emerges among nations, families, teams or individuals, it’s a visceral need to be right that stands in the way of progress and compassionate connection.

If I’ve learned anything from my own journey during the past few years, it’s that I am at my absolute worst when I let my ego run the show. Defensiveness and self-righteousness are my enemies, not the solution.

Kindr.

Gentlr.

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A new way to connect.

It might be worth a try.

This might take a while

Certainly the world is moving at an increasingly faster pace.

Clearly we have seen transformative new business models seemingly come out of nowhere to supplant industry incumbents.

Without a doubt, traditional sources of customer loyalty are being challenged in a rapid onslaught of ever-expanding options and innovative marketing techniques.

Yet, for many brands, it is still very much the case that relationships and trust matter.  And those precious assets are rarely earned quickly.

Despite the publication of Permission Marketing well over a decade ago, too many brands fail to follow the basics of Seth’s admonitions.

Too many brands want to get married on the first date.  Too many brands fail to take the time to treat different customers differently.

Too many brands think quantity trumps relevance (I’m looking at you Groupon).  Too many brands think they can shift their customer base quickly (I’m looking at you JC Penney).

As the pace of change accelerates, you may be tempted to do everything faster. But if you have a business model that is anchored in trust, rooted in deep relationships and in building a growing permission-based asset, the right answer may well be to go more slowly and deliberately.

Yes, it might take a while. But it’s likely to be worth it.