5 Critical Errors That Triggered Ron Johnson’s Removal at JC Penney
17 months after he recruited former Apple retail executive Ron Johnson to run J.C. Penney, hedge fund manager and activist investor William Ackman led the revolt that ousted his own pick. Other Apple veterans who followed Johnson are headed for the exits as well. Could any of this have been prevented? What were the major mistakes that led to the ouster? Time magazine’s Brian Tuttle points to five big mistakes that led to Johnson’s ouster.
April 18 2013 by ChiefExecutive.net
Time’s Brian Tuttle opines that, “Johnson was trying to accomplish the seemingly impossible with a radical reinvention of the JC Penney brand. Many thought that if anyone could do it, it was Johnson, the retail superstar credited for making Target hip and turning the Apple Store into a monster success story. His plans were bold—too bold, virtually everyone now agrees. Correspondingly, he was removed as CEO not because he came up a little short of the goals set for the company. He was ousted because he failed in spectacular fashion.”
Upon the change of control announcement Penney shares dropped another 12 percent with the stock closing $13.93. The retailer’s same store sales, which slid throughout last year are down more than 10 percent. Concerns about the failure to turn the Plano, TX company around were exacerbated by the fact that Johnson never relocated from California and more often than not was never in the trenches with the executives. Steven Roth, a board member and one of the company’s biggest shareholders sold 40 percent of his stake in Penney’s, a clear sign that the board’s confidence was ebbing. Increasingly the board began exercising more control over Johnson. The Wall Street Journal and others have reported wrenching changes and layoffs that have hurt morale. “Many longtime Penney employees said they felt that the new hires judged them or felt that they weren’t smart. Apple references were constant.”
When Johnson was brought in, J.C. Penney was an unremarkable chain store of 1,100 units serving middle America. Annual sales were around $17.5 billion for about three years, but operations were generating cash. Now the store is in crisis with sales having plunged to $13 billion and is running low on cash.
Time’s Brian Tuttle points to five reasons where Johnson went wrong. According to Tuttle:
1.) “He Misread What Shoppers Want
In early 2012, Johnson announced a major overhaul of the way JC Penney does business, with a new “fair and square” everyday low pricing scheme to replace the “fake prices” used commonly in the past. The idea sounded great—in theory. Didn’t everyone hate those “fake prices,” which were inflated only so that the inevitable discounts would seem tempting?
Well, they didn’t actually. Johnson thought it made sense to cut to the chase by listing realistic prices from the get-go and foregoing nonstop sales. It does make logical sense, after all. But shoppers aren’t purely logical creatures. They’re often drawn to stores not by the promise of fair pricing, but by the lure of hunting for deals via coupons and price markdowns. It’s all a game, and a contrived one at that. But it’s a game that shoppers are accustomed to playing, and that many — consciously or not — like playing, with the “How Much You Saved” line at the bottom of the receipt serving as a score.
It didn’t take long for people to note that Johnson’s no-coupons, no-sales experiment was failing to attract shoppers. Sales collapsed through early 2012, and by the summer, even Johnson acknowledged the stores had made a big mistake.
2.) He Didn’t Test Ideas in Advance
And why didn’t Johnson understand what JC Penney’s core customers enjoyed? Well, one reason is that he didn’t really ask them. When Johnson floated plans for the chain’s radical makeover, he was asked about the possibility of trying the new pricing strategies on a limited test basis. Johnson reportedly shot down the idea, responding, “We didn’t test at Apple.”
The fact that JC Penney’s longest-standing customers loved coupons and the prospect of finding “steals” via rounds of markdowns should have never come as a surprise to the company’s CEO. Ideally, the retail chain would have also known in advance that customers found Johnson’s new three-tiered “simple pricing” scheme—which didn’t include common shopping terms like “Clearance” and “Sale”—to be enormously confusing.
A continued sales slump forced Johnson to realize the error of his ways. JC Penney rolled out some half-hearted discounts on Black Friday 2012, which were deemed to be mostly underwhelming compared to 80% off deals in other stores. He flip-flopped on use of the word “sale” as well; in the company’s brochure for President’s Day weekend, the word “sale” was used 37 times over 24 pages of merchandise. Even that proved to be confusing, because in stores JC Penney was listing phony “manufacturer’s suggested retail prices” that no store ever charged.
3.) He Alienated Core Customers
As Johnson removed their beloved coupons and sales and increasingly focused on making JC Penney a hip “destination” shopping experience complete with boutique stores within the larger store, many of the chain’s oldest and most loyal customers understandably felt like they were no longer JC Penney’s target market. The return of “sales” hasn’t proved to bring about a return of these shoppers.
4.) He Totally Misread the JC Penney Brand
Johnson pictured coffee bars and rows of boutiques inside JC Penney stores. He wanted a bazaar-like feel to the shopping experience, and for JC Penney to be “America’s favorite place to shop.” He thought that people would show up in stores because they were fun places to hang out, and that they would buy things listed at full-but-fair price.
But early and often during the Johnson era, critics pointed out that JC Penney was not the Apple Store. The latter features cutting edge consumer tech that shoppers have grown accustomed to purchasing at full price. JC Penney, on the other hand, is stuck with a “reputation as the place your mom dragged you to buy clothes you hated in 1984,” as a Consumerist post put it. The idea that people would show up at JC Penney just to hang out, and that its old-fashioned shoppers would be comfortable with Johnson’s radical plans like the removal of checkout counters almost seems delusional.
5.) Overall, He Didn’t Seem to Like or Respect JC Penney
In retrospect, Johnson and JC Penney seem like a horrible match. All along, Johnson insisted that he absolutely adored the venerable JC Penney brand. But if he loved it so much, why was he so hell bent on dramatically changing it, rather than tweaking and gently reshaping as needed?
What’s more, Johnson seemed to have a disdain for JC Penney’s traditional customer base. When shoppers weren’t reacting positively to the disappearance of coupons and sales, Johnson didn’t blame the new policies. Instead, he offered the arrogant assessment that customers needed to be “educated” as to how the new pricing strategy worked. He also likened the coupons beloved by so many core shoppers as drugs that customers needed to be weaned off. Johnson and his team openly disparaged the house brands that accounted for about half the chain’s sales. Among those brands, ST. John’s Bay, brought in a billion dollars a year from sales of jeans, polo shirts and shorts.
Essentially, Johnson wanted JC Penney and its shoppers to be something that they’re not. He wanted them to be more like the scene at Apple Stores, or even Target, when in reality, there was probably more overlap with Macy’s, or even Walmart. “
What options does Myron “Mike” Ullman have at this point? Pershing Capital’s William Ackman is relying on the former J.C. Penney CEO that the board has brought back to save his investment, but he will need to work fast. Penney, which once employed 150,000 people now employs just 116,000. The drop in employment leaves Ullman with a morale level that has cratered, an issue that underscores that shareholders are not the only ones affected by Johnson’s policies. Analysts say that the retailer has until Memorial Day to firm up many of its holiday orders. The Journal reports that Standard & Poors recently warned that the company’s cash flow is declining and could force the retailer to seek fresh funds. One of Ullman’s first moves has been hiring investment bankers from Blackstone as well as advisors from private equity firm Centerview Partners to advise on ways to replenish its dwindling cash reserves, according to reports from The Financial Times. Centerview is also the firm that counts Jim Kilts former CEO of Gillette and former vice chairman of Procter & Gamble, as one of its senior partners.