Re-engineering a business too far, too fast

America's JC Penney chain went from venerable to troubled in just over a year

What a difference a CEO makes. When Ron Johnson was brought in to run JC Penney in late 2011, the department store chain was still referred to in the media as "venerable". Now, it's more often called "troubled".

On paper, Johnson's appointment was a coup for JC Penney. He had been the head of Apple's successful retail business, carefully engineering the expansion of the company's distinctive stores across the US and beyond. His formula of hand-picking prestigious locations Fifth Ave in New York, Regent St in London and building large, minimalist showrooms for Apple's line-up of small, minimalist products had helped the Californian business to pioneer new ground in the way tech companies sell their products. Before Apple, he had earned his spurs at Target, the big-box retailer.

JC Penney, though very different and much smaller than Apple in terms of revenue or global reach, seemed like the perfect springboard for this retail guru to emerge from the shadows.

More than a century old, the company has 1000-plus department stores which are the mainstays of shopping malls across the US. For decades it has served the American middle class, luring them with discounts and coupons. When Johnson arrived, only a small fraction of products sold in JC Penney stores were pushed to customers at full price. More often than not, items were marked down to drive footfall.

But by 2011, the middle class wasn't in such great shape. And investors wanted someone to revive what had become a tired, if reliable, old brand compared with rivals such as Macy's.

A key mover behind Johnson's appointment was William Ackman of Pershing Square Capital, an activist investor who had negotiated a place on the JC Penney board by buying up the company's stock, and is now its biggest shareholder with 18 per cent of the business. Johnson was initially engaged in talks over a directorship but those negotiations soon turned to the chief executive's job.

The markets backed the move. JC Penney's stock surged when Johnson's name was first announced in June 2011. Here was the man who was going to bring some Apple-style magic to JC Penney (never mind that the two companies are fundamentally different).

Among Johnson's early ploys was getting rid of what he called "fake prices" - the business of constantly marking down price tags. This, he said, was a problem, because not only did it dilute the JC Penney brand, it caused confusion because the company was sending out all kinds of flyers and coupons that customers had to make sense of. He came up with a plan to get rid of the myriad promotions in favour of a regime that promised "fair and square pricing". One widely cited example was that of a US$14 ($16) T-shirt. Ordinarily, JC Penney would mark it down to, say, US$6. But Johnson decided that instead of discounting, it should just be priced at US$7. What could be simpler?

Along with the streamlined pricing model came a plan to revamp the stores, with numerous mini-stores inside the big department store-sized space. Speciality brands would thus lure in customers looking for a pair of jeans from a well-known jeans manufacturer, or a pair of shoes from a renowned shoe maker.

Johnson also debuted a new logo. But, crucially, he didn't road-test his pricing ideas. The late Steve Jobs famously disliked market research when coming up with new Apple products and Johnson seemed to be applying the same ethos to JC Penney.

It didn't work. Customers deserted the company in droves, with sales slumping by 25 per cent in 2012. He had evidently gone too far, too fast, and alienated thousands of loyal customers. The announcement this week that Johnson is leaving, and that his position will be filled by Myron Ullman, the man he had replaced in 2011, isn't just a blow for the Apple star, it also marks a sharp reversal for Ackman, who had stood by Johnson as he embarked on his quest to remake the business.

Last week, after the company's stock slumped by nearly 28 per cent over the first quarter, Ackman betrayed his disappointment when he told an investment conference that "one of the big mistakes was perhaps too much change too quickly without adequate testing on what the impact would be". The turnaround plan, he added, had been "very close to a disaster".

Now the road ahead is uncertain. Many have already highlighted how curious a choice Ullman is, given how dissatisfied Ackman clearly was with his previous leadership. But perhaps that's the point. What JC Penney needs now is a return to form, not a revamp.

Any turnaround is likely to take time, however, given the scope of the changes initiated by Johnson. Analysts at Piper Jaffray, for example, expect that despite the leadership change, the company will still burn through up to US$1 billion this year.

- Independent

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