J.C. Penney: The Importance of Customer Research

jcp

Faced with dramatically plunging sales and a bleak future, this week the retailer J.C. Penney (”JCP”) fired CEO Ron Johnson just 17 months after he started with the company.  Notably, Johnson was the Apple executive who masterminded the retail experience for Apple Inc.  Shortly after Johnson was fired, JCP indicated that it was replacing him with the company’s former CEO, Myron “Mike” Ullman.

Johnson had a dramatic, yet flawed, vision for JCP.  For a chuckle, you might want to check out Business Insider’s excellent portrait of Johnson’s failed plan: http://www.businessinsider.com/ron-johnsons-failed-plan-to-turn-around-jcpenney-2013-4

As can be seen from the Business Insider article linked above, Johnson’s plan for JCP was like taking the Apple retail experience and just super-imposing it onto JCP with the apparent thinking being that what works for Apple will work for JCP.

As part of his plan, Johnson eliminated JCP’s high/low pricing policy of marking up prices and then offering sales and discounts.  Instead, he wanted to offer “fair and square” reasonable prices all the time.  Also, Johnson rejected the traditional retailing strategy of conducting pricing tests in a limited number of stores before widely rolling out the pricing changes, which was a big mistake.

Johnson’s pricing policy changes did not go over well with JCP’s bargain-minded customer base that was used to the company’s previous promotional pricing policies.

Sales plummeted and JCP eventually was forced to return to its former promotion-centered pricing policies.  But, by the time the company returned to its former pricing policies, it was too late; the customer based had been thoroughly alienated.

There are some valuable marketing lessons to be learned from Johnson’s failed marketing changes at JCP.

You must understand your customer.  You must be in touch with what your customer wants or needs.  The JCP debacle underscores the importance of customer research prior to changing pricing strategy.  I just simply don’t understand why pricing tests would not have been performed prior to making the significant changes envisioned under Johnson’s plan.  Was it a case of CEO hubris?

Summing up the key lesson is hedge fund manager and JCP principal shareholder and board member Bill Ackman: “One of the big mistakes was perhaps too much change too quickly without adequate testing on what the impact would be.”

Ironically, JCP board member Ackman was instrumental in Johnson’s hiring.  He even once showed a slide at a conference that stated: “Ron Johnson’s record of retailing success makes him the ideal leader to fix JCP.”

JCP’s failure under Johnson is a financially painful lesson for Mr. Ackman, since he is now sitting on a substantial underwater stock position in JCP.  Ackman’s hedge fund, Pershing Square Capital Management LP, currently owns 18% of JCP (39,075,771 shares).  He paid around $25 a share, while the share price is now $14.62—a 42% decrease in the per share price.  Ouch.

If you were the incoming JCP CEO what would you do to help turn-around the company?  I’m curious what you think.  Please leave your comments below.

 

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13 Responses to J.C. Penney: The Importance of Customer Research

  1. ncpalaci says:

    I’m a pretty infrequent shopper of JCP, but even I was a little taken back by all of their changes. Too much, too fast, indeed! It was like having an old friend suddenly sport a new style, have new interests, and dying their pretty golden locks blue. The store almost seemed foreign. I had read there was a lot of backlash in regard to their choice in spokesperson, Ellen Degeneres. I think she’s energetic and very likeable, but that along with a new name, new appearance, new logo, AND no more coupons – it was just too much for their longtime customers. I recently received some coupons from the store. It was amusing and I had thought to myself, that didn’t last long. Unbeknownst to me, the CEO had been terminated.

    In regard to your question, I think I would go back to the basics and begin with surveys and some focus groups. I would want to know what customers wanted to see from JCP at this point, what mattered to them most, and if they liked any of the new changes.

    Great post, Michael! –Nicole Palacios

  2. kristen.mercure says:

    Hi Michael,

    With Johnson’s on boarding, I think we saw just exactly what the halo of Apple can do: mesmerize beyond reason. It’s one thing to showcase your CEO’s past experience; it’s another to hang an entire company on the cut-and-paste model he brings. The sheer number of times Johnson mentioned Apple in his investor speeches was obscene, particularly when you know, as you aptly stated, the “what works for Apple will work for JCP” assumption is doomed to fail. The consumer for Apple is vastly different than the JCP consumer. Early adopters v. deal seekers can be on opposite ends of retail spectrum – but they can also have cross-over points. But how would we know if the team doesn’t take the time to substantiate their instincts with research? The silly thing is: I liked the new model. I found it easier to find the things I needed at prices that were consistent, when I chose to go to JCP, of course. It’ll be interesting to see the next chapter of JCP.

    Great post!

    Thanks,
    Kristen Mercure
    CMGT 541a

  3. Nikolos Gurney says:

    Michael,

    I am not much of a retail shopper so if you hadn’t shared this story I likely would have never heard of it (coincidentally my investing habits mirror my purchase habits, or rather I invest in what I use.) Anyways, I think that if I were the incoming CEO I would look to re-establish JCP as a great outlet for bargain shoppers. I would accomplish this through a mix of the old strategy and new media avenues. Backcounty.com is a very successful model that I think a large number of retail businesses could learn from. They use a number of online bargain outlets to drive traffic to their main site and build customer loyalty like http://www.steapandcheap.com, http://www.whiskeymilitia.com, http://www.chainlove.com, and http://www.departmentofgoods.com. This strategy has allowed the to build a digital brand that is very strong with a well rounded following. I believe that JCP could do the same, or at least learn from this model much better than the Apple model.

  4. Justin McAneny says:

    Hey Michael,

    It amazes me that company’s just do this stuff without doing any research. I understand that research can be expensive, but in the long run it almost seems like it has to be worth it unless you, as a CEO, really are willing to gamble. We have to remember to not alienate regular customers while attracting news ones, huh.

  5. Stuart Haack says:

    Interesting thoughts, Michael! I think the Bill Ackman quote said it all. Johnson came from Apple where it sounds like he was a resounding success. But at JCP, not so much. The difference is in the industry and its subsequent customer base. At Apple, Johnson was dealing with a tech-savvy audience who not only coped well with change, but welcomed it and got excited for it. When dealing with the JCP customer base, however, Johnson made the mistake of not taking the time to understand his customers. This is not an industry vertical where change is necessarily welcomed. It’s about a comfortable buying experience, not a cutting-edge one. And that’s not to say that he was revolutionizing the retail experience. But he did shift too much too quickly, in my opinion. I think the new CEO should work towards rebuilding that trust with consumers and find a good place between where Johnson was taking the company and the former comfort zone of JCP customers. If you revert all the way back, I think you show a fear of progress, which might be just as detrimental.

  6. willeverett1 says:

    What’s good for the goose isn’t always good for the gander. The Apple and JCP client bases are so different. I remember when the Fair and Square thing was launched. “No more coupons, just the lowest prices.” The thinking is that people come in for the savings the coupons offer. In fact, they come in for the buzz and energy the coupons generate. Promotions generate a kind of dialogue between retailer and consumer. Nice try, mister former CEO, but people need a little hype in their retail experience.

  7. Allison Cordova says:

    Hi Michael,

    Great recap of all of JC Penney’s missteps. I would advise that they look at their previous strategies and examine what has worked for them on the past. It seems that by bringing the old CEO back, they may be heading in the right direction. Overall I find that bringing the old CEO back was an interesting move on their part. Let’s hope they have a quick turnaround, since their stock and sales could definitely use the boost!

  8. Andrew Santelli says:

    Michael,
    Thanks for a cogent and timely post. I really think years from now Johnson and JCP will be a case study in business schools (it probably is already!). If I were the CEO of JCP, my first priority would be returning to the core of what shoppers come into the store for. When I was reading about Johnson’s approach at JCP, one article mentioned an ad campaign that talked about “getting clothes you’d actually be proud to wear.” Ouch. What if you were JCP’s core customer? How would you feel about what the company was now telling you – that your clothes aren’t good enough? I think these are two questions Mr. Johnson never asked himself or his team, and it showed.
    Andrew

  9. guia says:

    Hi Michael,

    What an excellent post.

    JC Penny just can’t catch a break! First they were scrutinized for their new price structure, then they got flack over having Ellen as a host and all the while, their biggest problem was staring them in the face. A lack of understanding from the customer.

    I think JCP is an interesting case study. Within the past two years, I would argue that they crossed a pivotal moment to really turn the brand around. It’s advantage is that it has created its own consumer market (somewhere in between an all inclusive retail store vs. an exclusively clothing retailer. Yet, they weren’t able to fine tune their strategy in order to meet the customer demand due to a reason you point out very well – they didn’t understand who they were selling to.

    Also, I think the failure of Apple’s former executive only underscores the point that consumer retail is not apples to apples (no pun intended). While it is important to have the skills of a generalist, it also helps to know the market and its consumer.

    Really well done post. Thanks for sharing!
    Rachael

  10. cmcoleman says:

    Michael, imagine though if all this had worked, and JCP was on top, we’d be studying all the things done right. Was it a case of high risk, high reward?

  11. dayney says:

    Hi Michael,

    I read this story when it broke. JCP has been struggling to be competitive for quite some time and personally I don’t think they realized the lackluster (Ron Johnson) they were getting even though his credentials were impressive. Now, it’s time for the company to really re-evaluate it’s financial position and start targeting a new generation of consumers, but maybe this time they’ll do a SWOT analysis first before “jumping in.”

  12. calandry says:

    This hits close to home for me. I became a JCP loyalist shortly before Johnson took over. As a value-conscious consumer, I thought the prices were competitive and I enjoyed the thrill of a good sale that knocked the prices down even further. When the “new” JCP came about, it was a bit disconcerting. I was used to sales and markdowns and Johnson’s removal of that practice was pretty abrupt. I’m quite sad to see the obituary for JCP already being written. Although the damage has been done, I think JCP can rebound. It’ll be a while before it can be restored to its former glory, but it is within the realm of possibility. I hope this serves as a cautionary tale for other CEOs who think a “one-size-fits-all” approach is best. Johnson has learned a valuable lesson. While Apple is an industry rock star, its sales strategies don’t necessarily translate to department stores. I’m sure it’s a lesson Johnson won’t soon forget.

  13. crwillia says:

    Hi Michael,

    Another thing that occurred to me as I was thinking about this post — which is an excellent case study in the perils of copycat marketing — is how Johnson’s tactic to play up his Apple background may have added to JCP’s negative word-of-mouth. As Kristen points out the two brand loyalists likely reside at opposite ends of the spectrum. However, Johnson may have reeled in some Apple customers who may not have been JCP shoppers. Then, once there, they found low-quality items. Likely they spread the word about the low-cost, low-quality items. His decision to utilize this strategy might have had legs if JCP quality was a few notches higher.

    Cathy
    CMGT 541
    Spring 2013