When old hippies get together, if one of them says: “I was there,” the rest automatically know the “there” was Woodstock, the three-day outdoor rock festival in upstate New York attended by 400,000 people in 1969 that defined a generation.
Well, if Ron Johnson, new CEO and team, accomplish what he envisions for a completely transformed JC Penney, and in three years no less, I will be able to say “I was there.” And, about 700 other media, analysts and notable industry attendees will know I meant the “Jobsian” launch presentation on January 25th. I won’t go through a description of the event because it’s been more than adequately covered by every major print and broadcast medium. In a word, to call it “Jobsian” is an understatement. And, a “Woodstock-like” defining moment for a new era of retailing is totally appropriate. Ron Johnson was JC Penney’s Jimi Hendrix.
But, it wasn’t the jaw-dropping presentation and stage setting that fired me up. It was the content. Crisply, clearly and logically, Ron Johnson explained how he and his new team at the top were going to completely transform the department store business model into a unique, new retail model, how they were going to establish the JC Penney brand as not just “…America\’s favorite department store,” but “…America\’s favorite store, period.”
He reflected on how back “in the day,” (the 1960s), department stores had it all. Using Dayton’s as an example, he said they were an “unbelievable experience,” describing how families would spend the entire day. But, “department stores, in some ways, are lost in the landscape.” He then went through the sector’s share loss over the past 20 years, much of it going to specialty stores because consumers prefer those brands and the experience over what he referred to as “tired stores,” “stale presentations,” “ not the newest products,” and “zero integrity in pricing.” Emphasizing the pricing issue, Johnson said, “People are disgusted with the lack of integrity on pricing.\”
Further pondering the whole sector’s share loss he said: “department stores have all the competitive advantages: low real estate, big marketing budgets, lots of space,” concluding, “something is fundamentally wrong here.” Another comment regarding specialty stores and a lead in to one of his transformative strategies, he said, “In an Internet age where you can have exactly what you want with one keyword, people won\’t tolerate big stores. You have to break it down for them. When we want a great product today, we go to a specialty store like J. Crew, or H&M.”
The Transformative Strategies
So, in “praise of fresh air” (the day’s theme), on a “Jobsian” inspired big stage, in an equally inspired “breath of fresh air” theatre, surrounded by a crisp blue sky with gently drifting white clouds, Ron Johnson laid out six transformative strategies. And, perhaps missed by some, all six were inter-connected, integrated, so that when implemented, there will be an enormous synergy. And, who will be the beneficiary of this synergy? The consumer, of course, and thus, the JC Penney brand. The combination of the following six elevates the consumer experience, providing a compelling reason for consumers to make the JC Penney brand a destination. The six strategies were: product; price; personality; presentation; promotion; and, place.
Johnson started with what he called “fake prices,” marked way up just to be caught in a vortex of continuous markdowns (in hundreds of ingenious ways), and therefore, in his opinion, driving the consumer crazy in hundreds of different ways. He said at one point, “The fundamental flaw of department stores is the pricing strategy.” Worse, as he counted 590 separate sales last year, the average customer only purchased four times a year. “So customers ignored us 99 percent of the time,” he said. And, in their analysis, they found that on average, consumers were forcing prices back down to their pre- mark up levels. Noting that about 75% of their products were selling at a 50% discount, he said, \”I thought to myself, this is desperation.”
And I believe he started with his pricing strategy, because directly or indirectly it currently has tremendous negative impact on the other five strategies. As he said, “Now most things are on 60 percent markdown, and every time we do that, we’re discounting Penney’s brand,” (which falls under the “personality” initiative). Over time, it also affects product and private label and brand strategies, certainly promotion (marketing, advertising, etc., always on sale), as well as presentation.
So, his belief that the “shell game” of pricing is driving consumers crazy, and that they understand the fair value of things, thus end up paying only what they consider fair, has led him to a three-pronged “fair and square” pricing strategy: 1) pricing all goods at about 40% lower than where they start currently (beginning 2/1/12); 2) Themed promotions 12 times a year (vs. the current 590), and 3) “best-price-Fridays,” promoting sales on the first and third Fridays of every month to clear slow movers.
In essence, Johnson is betting that consumers will welcome the simplicity and fairness of this strategy. And, by the way, I’m doubling down on his bet.
Of course, this strategy by itself is not enough. While it will reduce current promotional marketing spending from about $1 billion a year to $80 million a month, the consumer has got to have other reasons to leave the Internet and come to the stores. So, they are going to physically restructure all 1100 stores over a three year period, converting them into compelling shopping experiences where consumers will wander through about 100 “power” branded shops that will be visually inviting, well-lit, uncluttered with fewer racks, and well-curated with interestingly displayed merchandise.
The 100 best brands deserving of a shop means that roughly 300 brands will be shed from their current stable. Johnson said, “We want private brands, not private labels,” indicating they will likely only retain wholesale brands with great equity as well. They will also pursue other brands that can add exciting shops in the stores, such as their recent deals with Nanette Lepore and Martha Stewart. They’ve had successful shops with MNG by Mango and Sephora as well. So, ironically, this new “building of boutiques” will take a direct shot across the bow of the very guys that stole department store share over the past 30-40 years: the specialty chains. Essentially, the newly retrofitted stores will look like enclosed “mini-malls.”
And, promising to be the most exciting and fun attraction in this new shopping extravaganza will be what they are calling a “Town Square.” Not to be unveiled until 2015, enough was said to understand that this will be like a place of learning (genius bar anyone?), a place to hang out, maybe for a coffee or to watch an event, or whatever. If done right, consumers shop through the “main street” of shops ending up at “Town Square.” The whole brand, JC Penney, becomes a compelling experience, so much so that consumers will come more often, stay longer and spend more.
And, by the way, Johnson’s intentions for Martha Stewart do not disappoint the speculations in my last blog: It’s a Good Thing: Martha Stewart and JC Penney.
Finally, to pull all of this together into one powerful re-positioned JC Penney brand is a re-imaging across the entire spectrum of marketing. Think “back to the future” Americana modernized. From JC Penney’s original Golden Rule store as the genesis of today’s fair and square commitment, to a square red-framed logo with patch of blue in the upper left corner with “JCP” white lettering (depicting the American flag, also “fair and square”), and, to crisply cool and quirky advertising inspired by Norman Rockwell’s iconic art illustrations on the covers of the Saturday Evening Post of yore, with a dash of modern Target-like humor.
They’ve also retained TV star Ellen Degeneres to be their spokeswoman and to be tied into other advertising and TV events. As Johnson said, “We’re fine with growing old. We’re not fine with growing stale.” And, new President Michael Francis, former Target CMO, pointed out that with the elimination of the enormous time staff spends on the hundreds of promotions and the complex pricing system, they can now focus on brand building.
What Are The Odds?
As always strategy is one thing, execution is another. Enormous implementation challenges await Mr. Johnson and team. His huge bet on consumers’ embracing “fair and square” pricing may be the biggest. Right on its heels would be the transformation of stores into small, specialty-type shops, and its relevance in smaller markets and stores. The curating of merchandise from 400 to 100 power brands (including the retention of new brands), and the updating of current merchandise is a huge undertaking. The re-imaging and marketing strategies seem to be fairly well on the way, and in my opinion, powerful and refreshing, and which I believe consumers will find compelling.
Another significant challenge will be to transform the organization. Without a doubt, this grand transformation will result in culture shock for many within the company. So, to lead its successful implementation is going to require not only a “buy-in” from the actual “doers,” but clear and continuous top-down communication and education so that everyone understands how to do it.
Finally, regarding the pricing gamble, if they lose some customers addicted to the current department store promotional madness, I believe they will win more back in the long run.
So, what are the odds? Ron Johnson declared: \”I know with every bone in my body that we will make this America’s favorite store.\” If so, there will be a 7th “P” not yet articulated: “perfect.”
I’ll double down on that.
A Final Déjà vu Moment
Long ago I began ranting about the department store business model, and why, year over year for more than the last 30 years, they were losing market share, and mainly to the specialty stores. It even led to an analysis in my co-authored book: The New Rules of Retail, in which we devoted a chapter to the very subject of specialty stores having a strategically superior business model. But, we then commented on how the department stores could not only beat the specialists in their own game, indeed they could win the consumer on a lot of additional fronts.
Ron Johnson’s model is its definition. It is enormously aggressive but, if successful, could very well transform the entire sector.