Penney Case Study MBA 503 March 28, 2013 Background JC Penney is one of only a handful of one hundred year old plus companies in the United States. Founded in 1902 by James Cash Penney, the company has grown into a major retailer, with 1,104 stores and approximately 116,000 employees as of February 2013. The company sells merchandise and services through its department stores and website, jcp. com. Their product mix includes clothing and shoes, accessories, jewelry, home furnishings and beauty products. In addition, they provide services such as styling salons and portrait studios.
James Cash Penney founded the company on the Golden Rule; treat others the way you want to be treated. That strategy worked well for them over the years as indicated by several financial milestones, including their first $1 billion sales year in 1951, their first $1 billion catalog sales year in 1979, and their first $1 billion online sales year in 2005. JC Penney weathered the storm through many major crises, including World Wars I and II and the Great Depression.
They benefited from the enormous population growth and spending power of the American middle class, their core customers.
Over the years the company expanded into the drug store, insurance and banking business. Recently, though, JC Penney has suffered. The recent great recession hit them rather hard and their sales and profits suffered. In order to regain market share and redefine the company the Board of Directors brought aboard Ron Johnson, head of Apple’s retail stores and former Target executive. Johnson was tasked with rebranding the 110 year old retailer and making it more competitive against their rivals such as Kohl’s, Macy’s, and Target.
Johnson’s strategies were focused on an ambitious goal; to make JC Penney America’s favorite store. Business strategy In January 2012 Johnson introduced a bold new business plan to transform and reinvent JC Penney. This four-year plan called for new pricing strategies, promotions, store renovations and an expansion of their stores-within-a-store concept, all with the hopes of attracting new customers and to become more competitive. Johnson envisioned wider aisles, less cluttered and brighter sections of stores dedicated solely for individual brands, and an overall more inviting shopping experience.
The grand strategy included remodeling all 1,100 stores, eliminating coupons and huge markups, focusing on low everyday prices (not to be confused with Walmart’s everyday low prices) and introducing up to 100 branded stores-within-a-store, essentially converting the company from a discount retailer to a specialty retailer. Johnson planned to return the company to its roots by following the Golden Rule; treat others the way you want to be treated. In the company’s 2011 annual report to shareholders Johnson described this strategy as “Fair and Square”. He labeled 2011 as their year of transition and 2012 as their year of transformation.
Johnson wanted to bring back JC Penney “to the golden age of department stores, when retailers offered truly special experiences that customers loved. ” His four-year plan was expected to culminate by 2015, when shopping at JC Penney was to “be unlike and retail experience that exists today. ” So far the transformation has been dismal, causing dramatic reductions in the company’s sales and profits, far below expectations of management and investors. Since Johnson took over, their stock price has fallen nearly 52%, from $32. 04 on November 1, 2011 to $15. 41 as of March 25, 2013.
Management now believes their recovery will take longer than expected and they will most likely have to adjust their strategies depending on sales performance and customer’s reactions. The company seems to be struggling to find their identity and is having a difficult time differentiating themselves from their competitors. They have not yet appealed to their traditional, core customers or attracted the new value-conscious customers they set out to. SWOT analysis Like any company, JC Penney has internal strengths and weaknesses, as well as external opportunities and threats, many of which are described here.
Strengths Some of JC Penney’s core strengths are their long history, established locations, nationwide presence and strong brand recognition. They’re known as a brand destination, offering reasonably priced and popular national and private brands. They cater to a huge portion of the population, the American middle class. They have convenient locations and are typically an anchor store in shopping malls. Their in-store Sephora shops attract younger and middle to upper middle class consumers. They have a well diversified supplier base, strong marketing campaigns, and effective cost and inventory management systems.
Weaknesses Their first and foremost weakness is the new pricing strategy, Fair and Square. Their elimination of coupons and daily sales caused a backlash from their core customers, as indicated by the tremendous decline in same store sales. Those coupon addicted consumers appear to be moving over to low cost Kohl’s. Also other groups of consumers do not view them as trendy and are choosing to instead visit competitors Macy’s and Target. Their convenient locations are also a weakness as well as strength, as they viewed by some as stuck in shopping malls, with high rent and little flexibility.
Opportunities JC Penney’s stores-within-a-store concept appears to be a huge opportunity for the company. The fresh, open spaces dedicated solely to exclusive and private label brands has the potential to draw new customers while also offering a new experience to long term loyal shoppers. The expansion of their in-store Sephora locations will hopefully lead to additional impulse buys in other areas of the store. Also there is room in niche markets underserved by their competitors, such as big and tall clothing and maternity wear.
Finally, there is ample room for the company to expand internet sales not only in the United States but also internationally. Threats What threats does JC Penney not face? They are in an uphill battle against a crowd of competing retailers. They are attempting to offer low everyday prices which put them in line with bargain retailers such as Kohl’s, and Target, while at the same time attempting to become a more classy, higher end store along the lines of Macy’s, Nordstrom, and Bloomingdales. JC Penney views all these companies as competitors as seen in their own proxy statement.
JC Penney is not as large as some of its competitors, many of which have more substantial resources and are constantly attacking their market share. The company also faces threats from economic conditions, such as high unemployment and the recent recession. When consumers are under financial pressures can easily decide to shop elsewhere, such as Kohl’s, Target, and even the dreaded Walmart. Even the perception of better value can drive consumers elsewhere. Also, shopping mall popularity is shrinking, with some retailers focusing on and consumers preferring stand-alone locations similar to Kohl’s.
Over the years the company has made huge investments in these mall locations and cannot easily move to lower cost sites. Finally, a more specific threat may come from someone close to the company. Bill Ackman, activist investor and CEO of Pershing Square Capital Management, has been rather vocal about the company’s operating and financial performance. Although he has been a strong supporter of Ron Johnson, if the company’s sales don’t soon stabilize and improve his opinion may turn negative. Considering Pershing Square owned approximately 39 million shares (18. 1%) of outstanding common stock this is understandable. An investor such as Ackman can put huge pressures on the company to change direction in their strategies and choice of management, including Johnson. Repositioning strategy JC Penney has set out on a total redesign of their business model and is trying its best to reposition itself in the marketplace. Their plans are so huge that it even seems like starting a whole new company. Early on Ron Johnson said that he was “treating the department store chain like a startup company. ” Their transformation strategy has plenty of critics.
Some analysts believe Johnson has sought to remake the company too quickly, he may be on the wrong path and his vision for JC Penney may be distorted by his success at Apple. A November 2011 article by Andrew Ross Sorkin, co-host of CNBC’s Squawk Box, had an excellent summary. Sorkin writes “…J. C. Penney is not Apple – and let’s be honest, it can never be Apple. The company doesn’t make its own magical, revolutionary products that bring tears of joy to its customers. It is a low-end department store that Mr. Johnson is hoping to turn into a lightly higher-end department store that sells clothing made mostly by other manufacturers. ” Others call the strategy a “perfect example of what happens when a big-time retailer fails to keep pace, listen, and respond”, “customers have been confused and unwilling to go along with the new image” and “some customers actually feel betrayed. ” I am not a JC Penney shopper, so in order to get an idea what JC Penney is all about I recently took a trip to their Schaumburg, Illinois location. I have to say I was pleasantly surprised at what I saw. Their store was bright, open and inviting.
The aisles were wide with plenty of room to move around. Compared to stores I do frequent such as Kohl’s and Target the environment was pleasing. I like that the company presents its prices in whole dollars, since I am one of those many consumers who get annoyed and are not fooled by the “99 cents” thrown on the end of price tags. I would much rather see JC Penney’s $25 tag on a product than someone else’s $24. 99. Also, they seemed to have quality products at reasonable prices. Although I didn’t conduct a scientific survey, I randomly asked a few shoppers about their experience.
Most were happy with JC Penney and enjoyed their new look and prices. What I didn’t find a lot of, though, were actual shoppers. The store was somewhat empty compared to other anchor stores like Macy’s, Sears and Nordstrom. Walking through those stores was a bit more difficult mostly due to the large number of customers. The comments from shoppers at those stores were not a good sign for JC Penney. Essentially they said they just don’t care about the store. On that particular day and time, shoppers clearly did not prefer JC Penney. Again, this was in no way a scientific survey, just a quick impression.
Financial health JC Penney has had a long history of growth and strong financial performance. Strong revenues fueled their growth over the years, allowing them to enter new businesses and open hundreds of stores. However, the financial health of the company has suffered greatly during their transformation and the last three years of financial performance has been depressing. Net sales decreased almost 27% from 2010 to 2012, from $17. 76 billion to $12. 99 billion. Even worse the company’s net income dropped from a gain of $832 million in 2010 to a loss of $1. 31 billion in 2012.
All geographic regions experiences declines as seen in their comparable same store sales, which decreased 25. 2% from 2011 to 2012. Internet sales decreased 33. 0%. Management called 2012 difficult and below expectations. Investors and outsiders call the performance terrible, except for those shorting the stock, of course. The financial difficulties may have long lasting negative effects. Some analysts have even floated the idea of insolvency. In a November 2012 Forbes article, Deutsche Bank analyst Charles Grom said “At first blush, the JCP print is not very pretty.
At second blush, the JCP print might be even worse than the first blush…Trends at J. C. Penney is obviously getting worse, not better, and we are becoming more and more convinced that sales in 2013 will also decline, which could lead to a going-concern problem next year. ” Not all financial performance has been so fatalistic however. Ron Johnson set out on a four year timeline and hopes to generate as much cash as possible from the old model during the transition. J. C. Penney estimates that the redesigned stores can produce much greater sales; $269 per square foot in new stores versus $134 in old ones.
Value chain analysis JC Penney is achieving value some value in inbound logistics and operations, where they have moderate efficiencies and cost savings. They don’t achieve much value in outbound logistics, although they are working to improve this area with technologically advanced checkouts and RFID tags on their merchandise. Much of their value has historically come from marketing and sales, although the current transition is diluting the added value. Customers are essentially trained for and expect steep discounts and coupons. Most of their value is achieved through strong customer service.
They expect passionate employees and strong connections with customers. Their lenient return policy adds some value to shoppers. Also they have a new strategy of offering shoppers comparisons while they shop, showing suggested prices next to the retail price in order to show the value. The company also has broken their coupon free stance and has reintroduced promotions and additional sales. Strategy for promotions Pricing JC Penney’s customer base has historically consisted of price-conscious shoppers drawn to daily and weekly promotions and large discounts.
They’ve introduced a new three-tiered pricing strategy called “fair and square” which consists of everyday prices, monthly prices, and best prices. The basis of this strategy was to cut prices by 40% across the board and offer low initial costs instead of having huge markups that would be slashed by sales and coupons. However, their new has not been well accepted, as indicated by their horrible financial performance in 2012. Customers found it confusing and same store sales have dramatically declined. The backlash to their pricing strategy has been swift and the company has reacted by reintroducing more sales.
The company has also added tags or signs to merchandise that show the manufacturer’s suggested retail prices alongside their fair and square everyday price. Place Along with pricing JC Penney plans to revamp all their locations with their stores-within-a-store concept called The Shops, which will consist of up to 100 individually branded shops along a charming pathway called The Street, all surrounding the core of the store called The Square, which will contain “fun, helpful services and attractions that customers will love. The new concept hopes to have mass appeal, with less clutter, clearer pricing, more space and a more appealing color palette. The individual stores will include additional Sephora locations, Izod, Arizona Jean Co. , Joe Fresh, and MNG by Mango. Management believes that endless seas of clothing racks are not what customers today want. Promotion Another major component was to dramatically reduce the number of yearly promotions, allowing the company to save huge amounts of marketing dollars and to more effectively communicate with customers.
They planned to reduce the number of promotions from 590 in 2011 to 12 in 2012 saving approximately $220 million. The new promotions would be month-long event focused on the natural course of their customer’s year, such as holidays and seasons. Additional promotions were planned for what the company called Best Price Fridays. They also brought in a new spokesperson, Ellen DeGeneres, to help connect with their target consumers. Product A major component of their transformation strategy was to “deliver extraordinary global brands that will forever change the way people view jcpenney. The company is introducing more global, in demand brands, expanding on their Sephora model with Levi’s, Izod, Liz Claiborne, and The Original Arizona Jean Co, and jcp brands. They’ve also introduced a new modern looking logo, rooted in the design of the American flag. According to their press release, “the new JCPenney logo, which combines the elements that have made JCPenney an enduring American brand, by evoking the nation’s flag and JCPenney’s commitment to treating customers fair and square. The new logo has not garnered the admiration the company expected, but still gives a fresh look to the 110 year old retailer. Ron Johnson, CEO The Board of Directors of JC Penney brought aboard Ron Johnson to remake and rebrand the company and he is surely doing just that. Since becoming CEO in November 2011 he’s implemented huge changes that have the potential to pay off big or cause the retailer to fade into oblivion. He has many positive attributes, such as a strong background in innovation and success with Target and Apple.
Also during the recent struggles he has shown the ability to adapt and make changes when needed. On the negative side he appears to have not initially listened to his customer base and pushed forward with changes that would take several years. Eliminating discounts and coupons definitely was a poor judgment call. According to activist investor Bill Ackman, Johnson has done “incredible things” so far and “what Ron is doing is something that has almost never been done before. ” And Johnson has vocalized his understanding of the situation he is in. “I’m really leading two companies.
One is J. C. Penney, a promotion department store. The other is JCP, a specialty department store,” said Johnson. “What’s going to be good for one is not going to be good for another. ” I would recommend he continue with the transformation of the stores and move forward with the stores-within-a-store concept. It is a much more appealing environment than their old setup. I would also recommend he scale back his pricing strategy and bring back more coupons and rewards. The low everyday prices sounds too much like Walmart’s everyday low prices. Five forces analysis
JC Penney competes in a highly competitive industry with few barriers to entry. They compete with local, regional and national retailers, mostly other department stores, as well as internet retailers. Threat of substitute products There are plenty of viable substitutes that now compete with traditional department stores and can easily eat up some of JC Penney’s market share. Various internet retailers can provide the same of similar products for lower prices because of their lower operating costs. Also discount retailers such as Target are now selling brand name apparel.
Bargaining power of customers Consumers will decide the fate of JC Penney, not management. Internet access enables shoppers to search for the best prices from the comfort of their own homes as opposed to spending a day driving around town searching for deals. Threat of new entrants Besides helping shoppers, the internet has allowed small stores and suppliers easy access to consumers around the world. They no longer have to open a brick and mortar location to compete for customers with retailers like JC Penney. Bargaining power of suppliers
This is an interesting area considering the company’s intense focus on exclusive partnerships with brands. Suppliers appear to prefer the dedicated brand “shops” throughout the store since it clearly highlights and separates their products, as opposed to being crowded out by dozens of other options. However, with the sales decline and uncertain future suppliers may be hesitant to take such a large gamble with JC Penney. Competitive intensity Competition in the retail industry is highly intense. During JC Penney’s transformation their rivals such as Kohl’s and Macy’s have become increasingly popular with consumers and investors.
While JC Penney stock has fallen nearly 52% from November 1, 2011 to March 25, 2013, Target stock is up 30. 0% ($52. 61 to $68. 41) and Macy’s is up 40. 9% ($30. 06 to $42. 36). Recommendations I have several recommendations for JC Penney which I believe may help them recover from their recent troubles and give them hope for the future. First and foremost they need to adjust their pricing strategy by bringing back more promotions and coupons. Their customers had been trained to expect huge sales and shop with piles of coupons.
Considering we’re living in the age of the great recession and television shows such as Extreme Couponing I’m shocked they took such a dramatic risk. It has obviously not paid off and they need to make more adjustments. A soon approaching opportunity for the company is the back to school season of which they should really try to take advantage. Second, with the fresh looking stores they need to focus on bringing in younger shoppers. Recently they partnered with talk show host and comedian Ellen DeGeneres, which was a good move, since Ellen reaches a large middle class viewership.
But they need to go further and bring in additional young, hip spokespeople, with the goal of having the 18 to 35 year old shoppers make JC Penney their store of choice. They should create a strong social media campaign including mobile advertising and web-only specials, highlighting their exclusive brands and designers. Finally, they need to find a way to speed up the remodeling of all their stores and get those sought after brands on their sales floors more quickly. Exclusive brands such as Sephora, MNG by Mango and Joe Fresh help to differentiate the company from their competitors and the quicker those are in stores around he country the better. The four-year timeline put forth by Ron Johnson may be a little too long for investors and shoppers. The sooner they complete the transformation the sooner they can begin to recover from the recent tremendous financial losses. Conclusion JC Penney is a true American success story. They are one of only a handful of one hundred year old plus companies in the United States and have grown into a large, nationally recognized retailer. Over the past 110 years they have served the middle class well and have in turn been rewarded by sales growth and customer loyalty.
They have successfully weathered the storms of world wars, recessions, CEO transitions, and shifting demographics. Recently though the company has not kept pace with their competition. They now find themselves in the midst of a tremendous transition, attempting to switch from a promotional department store to a specialty department store. Led by CEO Ron Johnson, they set out to transform and modernize their stores, slashing prices and eliminating coupons and discounts in order to boost sales and profits. They soon encountered a backlash from customers, losing a tremendous amount of shoppers and revenue.
The company is now working hard to recover from their mistakes, regain market share and customer trust. I am optimistic about JC Penney’s future, but I am nowhere near as hopeful as Ron Johnson. They seem to be perpetually stuck in the middle between bargain and boutique. Will they weather this storm and come out ok on the other side? Yes I believe they will. Will JC Penney become America’s favorite store? I don’t believe it ever will. ——————————————– [ 1 ]. J. C. Penney Company, Inc. , Form 10-K, for the fiscal year ended February 2, 2013 [ 2 ].
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