New CEO sets path for J.C. Penney to reinvent itself
Retail • The gamble centers on revising pricing, limiting promotions.
Published: January 28, 2012 05:47PM
Updated: January 28, 2012 05:49PM
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This undated photo provided by J.C. Penney, shows CEO Ron Johnson. Penney said Wednesday, Jan. 25, 2012, that it is getting rid of the hundreds of sales it offers each year in favor of a simpler approach to pricing. On Feb. 1, the retailer is rolling out a three-tiered strategy that offers “Every Day” low pricing daily, “Monthly Value” discounts on select merchandise each month and clearance deals called “Best Price” during the first and the third Friday of each month when many shoppers get paid. (AP Photo/J.C. Penney, Barth Tillotson)

J.C. Penney’s new leader has a vision for tomorrow’s shopping experience. But the retailer is still stuck with yesterday’s stores.

Ron Johnson, who oversaw Apple’s retail strategy before starting at Penney this fall, said last week that his first steps as CEO would be to get rid of the nonstop promotions at the store and move to three kinds of prices (everyday, monthly specials and clearance). He announced a new designer partnership with Nanette Lepore, and a new spokeswoman and advertising star, Ellen DeGeneres. He also introduced a logo, and new color-saturated advertisements that barely mention price.

Within four years, he said, the stores would be completely redone, each divided into about 100 small boutiques with a service center that he called town square at the center. “We haven’t given the customer enough reasons to love us,” he said.

But Johnson is not creating a retailer from scratch. J.C. Penney has more than 1,100 stores, many in mall locations that have lost other tenants. That includes nine in Utah, where it also has an accounting center and a distribution center that collectively employ 1,500 people. More than 60 percent of its stores were built in or before the 1980s, according to Barclays Capital, and the company’s overall sales have been weak. Johnson added that he was not closing any stores, for now. “When we haven’t gotten the whole concept right yet, it doesn’t make sense,” he said.

Denise Lee Yohn, a branding consultant, said that she was impressed with some of his ideas, but that Penney’s physical presence was a limiting factor. “I don’t think the opportunity to do something dramatically different is possible, given their real estate and the realities of retail,” she said.

Investors last week had a different view, although there still is reason for caution. J.C. Penney shares soared nearly 19 percent Thursday when the department store chain delivered a 2012 profit outlook that was well above analysts’ projections, a day after debuting its pricing plan. Shares rose $6.44, to close at $40.72.

Conversely, in November sales at stores open at least a year fell 2 percent, and in December, same-store sales rose just 0.3 percent, both well below industry averages because of poor holiday sales. From 2006 to 2011, “J.C. Penney has had the worst performance among peers,” Barclays Capital analyst Robert Drbul wrote in a note to clients.

While many shoppers go to Walmart for price, Target for cheap style, high-end stores for luxury treats and the Web for ease, stores such as J.C. Penney have faded into the background.

At the presentation last week, Johnson outlined some of Penney’s troubles and his proposals to fix them.

Though retailers use promotional pricing to attract shoppers, even if they often vow to move away from it when it gets too pronounced, Johnson said the method used what he called fake prices — artificially inflated prices that are on near-constant markdowns.

But consumers, he said, were not fooled. From 2002 to 2011, the average cost that Penney paid for an item stayed about the same, from $9 to $10. During that period, though, Penney increased the average price tag to $36 from about $27. Yet even as the price tag rose, customers ended up paying less because of coupons or sales. “Now most things are on 60 percent markdown, and every time we do that, we’re discounting Penney’s brand,” he said.

Johnson said that 72 percent of Penney’s revenue came from products sold at a discount of 50 percent or more. The company is repricing all its items so that sale prices become everyday prices. The company will use sales data from last year to set prices at least 40 percent or less than the previous year’s prices. So, a woman’s St. John’s Bay blouse regularly priced at $14.99 could have the “Every Day” price of $7.

Also, he said, customers had to deal with a confusing number of emails, fliers and ads. Last year, Penney ran 590 promotions, he said, but the average customer visited only four times.

He will move to monthlong promotions, on which Penney will spend $80 million a month, which is a decrease from Penney’s current marketing tab. And instead of mailed fliers, the company will send shoppers a 96-page catalog each month with a more magazine-like presentation.

Johnson, who spent more than a decade at Apple, stressed the similarities between that company 10 years ago and J.C. Penney today. But those who were expecting Apple-esque technological prowess from Johnson’s presentation did not get it. “You have to stay tuned. I’ve been here 90 days — dazzling technology takes time,” he said.

The Associated Press contributed to this story