Update: Michael Francis, president of JCP, announced his resignation on June 18, 2012. Francis was hired by Johnson during JCP’s c-suite overhaul.
Ron Johnson, the former retail boss at Apple, became CEO of department store chain JCPenney in November 2011.
Since then the company, which had a very good 2010, has implemented a series of gigantic overhauls to nearly every aspect of its business.
It’s resulted in the shedding of customers, sales, employees, and profits. It’s so bad, one employee warned, “I fear we are turning into Sears, the laughing stock of retail.”
This past week, analysts put out more grim evaluations regarding the success of Johnson’s attempts to make JCP more like AAPL. Given its current direction, it’s hard to imagine Johnson keeping his job much longer. How did someone who oversaw one of the world’s most admired retailers create this big of a mess in a year?
The company did well in 2010 (increasing profit 36 per cent over the year prior). But cotton wreaked havoc on the clothing industry in 2011. Flooding and other shortages caused cotton prices to hit an all-time high. Rather than staying conservative with expectations, J.C. Penny raised its earnings expectations at the beginning of the year, as if cotton prices weren't an issue.
JCP shares dropped nearly 5 per cent as a result.
One year ago, JCPenney announced Ron Johnson, the man at the helm of Apple retail through the company's epic rise, would be taking over as CEO in November. Stock surged on the announcement and speculation was rampant about what the former Apple guru would bring to JCP. Johnson was formerly a vice president at Target and was lauded for his retail genius.
Saatchi & Saatchi and JCPenney 'mutually decided' to part ways after five years in December of last year. It came only a few weeks after PMK-BNC was brought into replace M Booth & Associates, the company's PR agency for the last six years.
Now things were changing -- really quickly.
Johnson got to witness the master of keynotes work many times during his tenure in Cupertino, Calif. In January, he held an Apple-style conference that made it clear: JCP was going to try to be like Apple.
It was awkward how many times Apple was mentioned during the keynote, but that's what the people wanted to hear.
The key takeaways:
- Marketshare is king.
- Retail prices have risen, while retail value has remained stagnant. This leads to discounting, which hurts brands like JCPenney.
- JCPenney ran 590 promotions in 2011, consumers ignored 99 per cent of them. As such, Johnson only wants 12 promotions.
- Sales were removed in favour of regular pricing with the best prices offered the first and third Fridays of each month.
- Rather than one big store, Johnson wants brands to have smaller shops within JCPenney locations, a Genius Bar type concept will be placed in the middle.
Johnson showed off the new logo during his keynote, it was the third logo in three years. The new logo captured JCP's newly-launched 'fair and square' pricing strategy fairly well, but it didn't make customers want to adopt the pricing model any quicker.
Johnson hoped to save $200 million by firing 600 of JC Penney's 5,900 employees at its sprawling Plano, Texas, headquarters. It was described as a streamlining effort and couldn't have helped morale going into what would be a disastrous May.
The speed at which Johnson replaced nearly all of the company's top executives was remarkable. It created a situation that makes it impossible for Johnson to avoid credit or blame -- right now it's the latter.
Even now, it's unclear how much of middle management was fired in early May, but one source told us 'thousands.'
The JCP PR team was once again explaining the importance of long-term goals, while the mood amongst the retail staff was grim.
One employee described how things went down:
'One hundred store managers across the country were quietly laid off two days before they announced the home office reductions and the call centre closing. The rest, phase two, happened Monday. They said it was done purely on year-end appraisal ratings, but someone in my store got a higher rating than I did (and was laid off anyway), and also they changed what the ratings stood for this year, and eliminated performance improvement documentation, so that they did not have to wait longer to do this. If my name or even state comes out I will lose my severance.'
JCP ended commissions for its sales staff. The company spokesperson tried to explain how it would help 'personal growth and development,' but the real reason is simple: economics.
Employees described May 9 as having a 'funereal atmosphere.'
The stock was falling, people were being laid off, salaries were cut, and sales and promotions were becoming extinct. It was not a great time to be an employee at JCP.
When Johnson announced his master plan for the company's success, at the top of the list was controlling marketshare. Unfortunately, despite positive surveys regarding the changes, its customers are leaving for Macy's.
Unlike JCP, profits at Macy's were up 38 per cent in Q1 and Macy's head Terry Lundgren was confident enough about how bad things were at JCP that he told Women's Wear Daily that market share was going to continue to increase.
Here's how the collapse started. Q1 numbers were a big miss:
- Sales of $3.15 billion, missing expectations by $250 million
- Loss of 25 cents a share, 1.5x expectations
When Johnson took over, he argued that the constant discounting of items created a cyclical degradation of the JCP brand because of a stagnant value in face of growing price.
But this year, JCP admitted 'month long savings' was not an effective replacement for 'sale.' So, after only a few months, it brought back the word 'sale.' An analyst for CITI claimed 2/3 of JCPenney's customers did not understand its new pricing system.
On Friday, Morgan Stanley put out a report indicating the constant rebranding of JCP is driving its core customers away. While it might not be easy for JCP to see internally, for outsiders the problem seems obvious: a complicated pricing structure and constant image makeovers.
Johnson's massive overhaul was either going to be genius or an utter failure. Currently, it appears to be the latter. Q1 2012 sales at JCP were down 20 per cent from the year before. It closed five of its 1,1100 stores in Q1, after axing seven the year before. And still same-store sales were down. The stock is down 30 per cent.
The book may be about to close on Johnson, unless he's got something unexpected up his sleeve for the rest of 2012.
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