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Apr 13

Ron Johnson: a great plan with a fatal flaw

Ron Johnson’s exit at jcpenney this week wasn’t exactly huge news to those who’d been watching the company fall off a cliff in 2012. Boards tend to notice when the losses start approaching the one-billion-dollar mark.

Now we get a deluge of analyses from retail experts and amateurs alike. I would only remind you of one basic rule of life:

Don’t believe everything you read.

I’ve been surprised at how many articles either misunderstand the retail industry or conveniently misplace the facts about the challenges facing jcp.

So what the heck, I’ll throw in my two cents as well. I didn’t work for jcp, but as some of you know, I was involved in the jcp advertising that ran on the Oscars this year and last.

To better appreciate how and why Ron failed, you have to go back to the beginning.

Ron became CEO of jcp after a long period of courtship. He was being recruited to be on the board by investor and board member William Ackman. Ron’s great successes in retail (Target, Apple) and fresh point of view were seen as a breath of fresh air. And boy, did jcp ever need that.

Under its previous CEO, Myron “Mike” Ullman, jcp was clearly on a downward slope — yes, even with hundreds of sales each year and its Sunday supplements filled with coupons. It was still profitable, but the writing was on the wall. American shopping habits were changing dramatically. Big department stores were losing their appeal as more people were either shopping online or moving toward the specialty shops in the malls. Despite a core of loyal customers, and despite that “big sale” mentality, the store was fading in the public consciousness.

Concerned about its future, jcp needed to replace Ullman with someone who could reinvigorate the brand. The stores had to continue appealing to old customers, to be sure, but if the company were to thrive, it would need to attract new customers as well.

Ron Johnson seemed to be exactly what jcp needed. Wall Street vigorously approved, and jcp’s stock price rocketed at the news of his hiring.

Just a few months later, Ron unveiled his vision for the “new” jcp at a flashy NY event for retail industry analysts and journalists. jcp would be turned into a collection of a hundred shops, featuring great quality brands. And, instead of artificially inflating prices at the start just to have a big sale later, jcp would offer honest low prices every day. Again, the stock price jumped. People who lived and breathed the retail industry loved what they saw — even as they heard Ron estimate that it would take 2-3 years to complete the company’s transformation. Re-making 1,100 stores is a mammoth undertaking.

So what went wrong? Well, that’s where all the expert opinions come in. Many of which I believe are overly simplistic or just plain wrong.

Here are The 5 Big Mistakes That Led to Ron Johnson’s Ouster at JCPenney as described by Brad Tuttle at Time.com. I have seen others link to it as “a good analysis.” I disagree.

[Ron] misread what shoppers want.
Tuttle says that despite the trickery involved, shoppers love sales. Obviously there’s some truth to that. It’s also true that people love great quality at great prices, which is what Ron planned to offer. Given the right mix of products that people love, low prices, gorgeous stores and a great marketing campaign, it’s hard to say the plan was doomed to failure. Remember again, most industry experts thought it was a winning plan when it was first unveiled. Since Ron’s vision was never realized, it’s sheer speculation that people wouldn’t have loved the new jcp. But there’s a more important reason to dismiss Tuttle’s reason #1. Even with the neverending sales and barrage of coupons offered by jcp before Ron arrived at the scene, jcp’s numbers were dwindling. Catering only to the mindset of the traditional jcp shopper was not an option. Something had to change.

He didn’t test ideas in advance.
Okay, I’ll give Tuttle partial credit for this one. Obviously, knowledge is a good thing. But let’s not forget the support Ron had for his pricing vision. The man has his expert advisors. Wall Street bought into it. And the renowned brands that Ron was bringing into the store were super-eager to be part of what they saw as a winning plan. “Oh yeah?” you say, “well, they were ALL wrong — that’s why testing is so important!” Well, my answer to that is that Ron and all the experts weren’t wrong. The vision was a great one. What wasn’t so great was the road map to get there. Hang with me for a bit.

He alienated core consumers.
This is actually part of the previous point. No further comment.

He totally misread the JC Penney brand.
This is totally silly. True, jcp has a brand. True, that brand has meaning for its customers. But very few brands remain motionless as time goes on — especially when that brand is sliding toward irrelevance. Tuttle pooh-poohs the idea of creating a collection of cool shops, saying that people don’t want “a fun place to hang out.” The reason jcp was dying is that people were less interested in going there. Despite its sales, it was boring. Ron’s plan to transform jcp into a place people might actually want to go was absolutely right on. No matter where you shop, there’s a little thing called “the shopping experience.” It dictates whether you go back to that store anytime soon. To be blunt, the shopping experience at the old jcp sucked. Ron’s plan to turn jcp into a place you’d want to visit — with cool shops staffed by specialists, free wi-fi, fast checkout, etc. — was very seductive. I believe it would have built a bigger, better and more relevant jcp brand. Ron would have been pleasing the core customers as he attracted a wave of new customers.

Overall, he didn’t seem to like or respect JC Penney.
Could not be further from the truth. jcp has thousands of employees, representing thousands of opinions. Part of the CEO’s job is to get employees to rally behind his vision. There were plenty of people at jcp who were excited about Ron’s path to the future, and there were those who were “old school” and resistant to change. No doubt one can dig up plenty of quotes from those who might question Ron’s love of jcp. Unless you hear it coming from Ron himself, it’s all hearsay.

What I heard directly from Ron was a deep, unwavering love of jcp — the brand and its people. He studied the writings of the founder, James Cash Penney, and often quoted him. And here’s a little shocker for you: good old James Cash hated sales and gimmicks. He didn’t believe in “marking up prices just so we can mark them down.” He believed in total respect for the customer — and that’s what Ron played back at every opportunity. Ron did not have a “distaste for the company” — he had a profound sadness that the brand had fallen to such low levels. His greatest goal was to restore jcp to its former status as “America’s favorite store.” Tuttle also notes that Ron had a “disdain” for the customer base, which again is absolutely 100% untrue. The creative team heard one thing from Ron consistently from our very first meeting, that our mission was to “put a bear hug around Middle America.” That’s the jcp customer. With his every idea, Ron was trying to win the love of his customers. He wanted to make their money go further, give them great merchandise and have them enjoy the shopping experience.

So — if Ron was so right about everything, why did it end so spectacularly bad?

In my opinion, there is one very simple reason. I don’t mean to minimize it, because it’s a horrific miscalculation, and I can understand why Ron would be dismissed because of it:

Ron failed because he changed the prices long before he could visibly change the stores.

He did a basic cleanup of the selling environment (eliminated junk and switched to whole-number pricing). Then, before he could widen the appeal of jcp, he took away the one thing traditional customers were hanging onto: sales and coupons.

As noted earlier, jcp sales had been sloping downhill for quite some time before Ron arrived. However, the patient was not yet in critical condition. What Ron should have done is keep the existing pricing policy in place while he more quietly built the “new jcp” in the background. He could have been bringing in exciting new brands and renovating stores more progressively, without forcing customers to go cold turkey on sales and coupons.

He ripped out the old before the customers could really see the new.

That, very simply, is why Ron’s plan didn’t work. There may be other contributing factors, but they weren’t store-killers on this level.

So what’s jcp’s future now? Personally, I’m extremely curious to learn what will happen to (a) Ron’s vision for the physical appearance of the stores, (b) his vision for the shopping experience, and (c) the relationships Ron had nurtured with some great brands (Michael Graves, Jonathan Adler, Terence Conran, Martha Stewart, etc.).

I hope jcp has the ability to right the ship. However, the company’s latest actions don’t exactly inspire confidence.

Ron was hired because the policies of the previous CEO weren’t working. He has now been replaced by that very same CEO. When it was announced that Ron was out, jcp stock rose 10% in after-hours trading. When it was revealed that Ullman was taking the job, the stock dropped 6%. It appears to be a “who is less bad” situation, rather than “who would be great.”

According to this article, Board member Ackman said last May that under Ullman, jcp was “chronically mismanaged.” This week he said Ullman is “the right guy at the right time.” Spin is a wonderful thing, isn’t it?

And what becomes of Ron? If I were him, I’d take a nice long vacation and look at the world of possibilities. Ron is one of the nicest, most inspiring people I’ve worked with. He loves retail, and he loves delighting his customers.

Hard to imagine he won’t be doing that again.

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  • Alex

    I’m curious as to what will happen to the stores that have already been re-imaged or the ones that are currently under construction and haven’t completed their new look.

  • ksegall

    No store was completely re-vamped. I believe many of the bigger stores had about ten “shops” set up. The new look wouldn’t have been complete for another year or two, at least. (Which was the problem!)

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  • JCPonderings.com

    “He ripped out the old before the customers could really see the new.”

    For the last few months of I’ve been saying just this at JCPonderings.com.

    I believe there’s this vicious Apple bigotry that half of the pundits apply to Ron Johnson. That he’s so Westin Hotel in a Super 8 nation. But the truth as you stated it is the simple truth.

    One part you left out is that his pricing scheme raised prices about %14. And so the real way to put this is — “The board appointed Ron Johnson which immediately alienated classic JCPenney customers, he ‘lowered’ fake prices but slightly raised ‘sale’ prices, and he did all of this long before compelling new product arrived.”

  • bladrnr

    I must say I don’t shop at JCP, but I remember my mother taking me as a kid back in the ’70s. She always favored JCP over Sears. Being a long-time Mac user I was curious as to how Johnson was going to turn things around for JCP. His getting fired is a testament to the board at JCP. They don’t get it. I don’t see JCP lasting another five years. We shop at Kohls for the most part and part of the reason is the great deals and the fact that you don’t have to walk through the mall and waste time to get to the store. JCP does not have my business in the future. It takes someone with vision to turn things around and I hope Ron takes that vacation and lands in a better environment. Kudos to him for trying.

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  • http://www.facebook.com/peter.sgouros Peter Sgouros

    having recently visited a couple of jcps in the area, one of which appeared to have been (at least mostly) revamped and the other in the midst, I really enjoyed the experience. I don’t generally shop in malls and was actually delighted at the nature of what was in the various ‘shops’. especially compared to the other department stores down the hall.

    I’m really quite saddened that he’s not going to get the full term to finish the change. I was really looking forward to it.

  • http://www.facebook.com/balaloski Dan Balaloski

    I think it’s even more simple than this: “Value pricing” usually is a rip off. I’ve found that most times when a retailer tries this way of doing business, the prices they set are simply too high to be attractive. That’s because the impulse shopper who “has” to have something when it first comes out or who doesn’t have the time to wait for sales, pays full price and effectively helps subsidize the bargains for people like me who have no problem waiting for things to get to the clearance rack.

    Contrast this model with “everyday low pricing” at stores like Walmart and Menards. EDLP does indeed work in these environments because these prices are low enough to represent a good value.

    You can’t fool the customer over time. A $30 pair of jeans with an everyday “value” price of $26 isn’t going to impress someone accustomed to waiting for them to go on sale for $19.99 or on clearance at $14.99.

  • http://www.facebook.com/balaloski Dan Balaloski

    One more comment: FWIW, I think Johnson’s ideas for merchandising were trendy and I could see the appeal. But he was throwing out a lot of babies with the bathwater. I like national brands, but for casual wear the St. John’s Bay brand (which was eliminated under Johnson) was very respectable in terms of both quality and price.

    Building on the strengths and improving merchandise was necessary, but where JCPenney is very weak, in my opinion, is store environment. Even the newest off-mall stores are very blah in my opinion. There is no excuse for a Target to have a more appealing store environment than a JCP.

  • Greg

    Ken, I’m not sure once you’ve gone the route of constant sales and coupons, that you can ever go back. I worked in the auto industry at the dealership level for about 15 years, and it was sometime around the mid 90′s as i recall, when the first 0% interest rates were offered. The first offering was for one month and I believe was for the minivan only, at the Dodge/Plymouth/Chrysler dealership I was employed at. We sold a ton of them. but of course over the next two months sales pretty much dried up. All we had done is pull sales forward. Over the next year the 0% was of course offered again for another month,which was then extended for a second month, and now fast forward to some 16 years later, and here we are still offering 0%. How do you possibly reverse this now?

    Pretty much all retail has been bastardized to the point I have no idea what i should be paying for anything. Furniture retailers, grocery stores, auto dealerships, big box retailers and most major brand outlets all operate with constant sales. This is just the way it is, and I don’t see any possible way to change it.

    While Ron was certainly successful with the Apple store experience, it must be noted that the Apple stores have always operated the same way from the start. No constant sales no coupons, everybody pays the same. If the iMac I want is $1299, I know I can’t go to Sears, or Target or Walmart and buy it cheaper, and I also know that Apple is not going to have it on sale for $899 just before Christmas. Consider for a moment if Apple were to change this policy and start selling their products everywhere with no price control…..how would they ever be able to go back to what they have now?

    I applaud what he was trying to do, I’m just not sure it was possible.

  • Bradley

    I was in JCP last week and everything was covered and I was excited to see what was coming. Then he was let go, very unfortunate. I agree with Ken the timing was the downfall, not the vision IMO. I am honestly interested to see what the future holds for JCP, it has changed my opinion of wanting to shop there because the excitement is lost now.

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  • Michael Ellis Day

    There’s no way this was enough time to evaluate Johnson’s leadership or direction. The funny thing is, while I was never a fan of the Apple Store experience — not arguing with their success, merely saying I’m not the customer they were meant for — Johnson’s changes got me to visit jcp for the first time in many many years out of sheer curiosity, and finding it unexpectedly pleasant I ended up going back to buy. I anticipated the store becoming a regular shopping destination for me. Now that seems a lot less likely.

  • Hoyt

    Ken, tell Ron to keep his vision alive. The concept will work, just on a much smaller scale (not 1000 stores, but maybe 20 across the US). He should start-up his own Dep’t store, but in a 21st century style. Once sears and jcp start to close great locations- snap them up- before nordstroms take them.

  • nuthinking

    I am not expert on the field but I think very good points have been raised in the comments and in your analysis Ken. Just looked to me though that Ron vision was too similar to Apple’s while the products, and especially the target, aren’t. While a Mac user might appreciate quality and a good shopping experience for a fair price, maybe for the “Middle America” price tags matter. Unfortunately today many people, by principle, buy only things on sale (clothes, food, cars, etc..).

  • http://twitter.com/sarumbear Riz

    This shows to prove why Apple’s rigid secrecy to what they plan is a must when it comes to consumer market. From what I read, if Ron had transformed the shops to the level that they were ready to attract new customers and then launch the new jcp, his plan could have succeeded.

    - Wow factor always sells.
    - In general people do not have imagination, if you don’t have the funds to achieve your plan, don’t expect anyone to sponsor you, let alone your customers.
    - Customers are not loyal, they will not give you the benefit of doubt, if unhappy for the smallest of reasons they will desert you.

  • ksegall

    Totally agree about the secrecy thing. It was a critical factor in the way Steve managed Apple. “Spilling the beans” was an intolerable offense in Steve’s world, because it was the secrecy that created the buzz and got millions of dollars’ worth of free publicity. “The big unveiling” is part of the showmanship. Unfortunately, Ron got up on stage and revealed “the new jcp” more than a year before it would be visible.

    The Apple Store is a perfect example of your point about people not having enough imagination. There was no shortage of people predicting instant doom for the idea of a physical Apple Store, yet the Apple Stores became one of the biggest successes in the history of retail. The couldn’t see what is so obvious today.

    Customer loyalty is another key point, so thanks for raising that one too. When a brand stands for nothing but value, customer loyalty lasts only as long as you have the lowest price. That’s a very, very thin brand. When you have a more substantial brand, one that connects on an emotional level (like Apple), it can withstand the various crises that pop up along the way (like Antennagate). You have a real relationship with customers. Those customers keep coming back, and spread the word among friends, family and colleagues.

    It is this kind of customer relationship that Ron was trying to build. That’s why he was doing a lot of extra things beyond price to win their hearts. Again, it’s too bad that those things weren’t in place yet.

  • ksegall

    I believe Ron’s thinking was similar to Apple’s in principle, but he really was adapting the principle to jcp’s customers. He was bringing in brands that would appeal to Middle America, priced to be attractive to that target group — and offering “kind gestures” on top of it (free back-to-school haircuts, free holiday photography, free boxes of candy for Valentine’s Day, etc).

    He was quite conscious of the fact that he was dealing with a very different kind of customer at jcp, one that is not nearly as affluent as Apple’s customers. I think he was also of the mind that being a value-only brand would never lift jcp out of its doldrums, and that the store could only succeed if it offered something beyond value.

    Again, what people seem to forget is that there was no future in “the way things used to be” at jcp. They had to either find a way to strike a new chord with customers or watch the brand continue to decline.

  • http://twitter.com/sarumbear Riz

    Military history shows that when the general dies the captain often fails his soldiers.

    Steve was a general, Ron was a captain. The problem was that there was no general at jcb. The board should have at least took the role of the war committee and steer Ron away from his (now obvious) mistakes.

    The sad truth about corporate boards is that, often their only job is to hire or fire CEOs. This is the expected outcome when they fail to act as their titles demand and direct the company, as a Director should.

  • W

    This may be connected to your thoughts, Ken, and it may not be.

    The main issue I see with JCP is something that we study a lot more in other fields (like real estate development) where the intersection of multiple social factors can all impact the fate of a brand in ways that are way beyond their retail smarts.

    I’ve spent a lot of time following JCP as a case study the last few years. In the case of Johnson, he encountered something he had not really seen before: he was given a brand that had been abandoned by consumers. Target still had a loyal following, and was also fueled by a general hate of WalMart by many design savvy consumers. Apple had a consumer base that absolutely crackled with electricity over their products and point of view.

    JCP, however, was entirely divested. And Johnson’s attempt to put the jumper cables on it caused him to get tangled in something that real estate investors understand too well–if a place is missing the heart or the “spirit of place”, even if all the fit and trim is perfect, people will avoid it. It’s not just that they won’t pay attention, it’s that they will actively try NOT to experience the tension between the shiny and new and the empty. It’s almost creepy when you see a place that SHOULD have people, but doesn’t. And it connects you to the thought of what caused you to abandon the place previously.

    I’m not saying this problem is easy, or that I have the answer. I’ve spent years of my career struggling over just this sort of problem, and sometimes we can get it right and sometimes we do not. I’ve seen beautiful little shops just miss it, and come across as an “empty heart”, and sure enough they struggle as anchors in their shopping centers and all the inline shops suffer as well as people go OUT OF THEIR WAY to avoid a the tension of the place. It’s why empty retail centers are so hard to fill.

    You may be dead right about what drove folks away to begin with under Johnson. But once they were gone, he had a much more devastating problem on his hands that he had never encountered in the same way before. He had a divested brand.

    If I had a brand with any cache or loyalty today, and unlimited cash, I’d go after Johnson in a heartbeat. He is a great thinker and contributor to the field. But I would need to see him resurrect a divested brand before I would hand him another turnaround.

  • ksegall

    Great comment, thanks. You make a really good point about the tension between the shiny new and the empty. It does give you a creepy feeling about a place and brings up all the negatives.

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  • http://www.ferdinandcc.org/ Lester Nelson

    I myself was going to post a link to your site in the comments here, as you’ve had so many (in my opinion) astute observations over the last couple months about jcp, the changes Johnson had made/was making, the hypocritical AFA, and critiques of the critics. Your site had become a daily read for me, and I don’t even live anywhere near a jcp!

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  • David Thall

    I see an interesting correlation between John Browett, the person Apple hired to replace Johnson to run their retail, who as we all know failed as well. He was fired within about ten months. I believe that in one respect, he failed for the same reason that Johnson failed. They each came from a very specific corporate culture, where they respectively got the kind of support they needed fo thrive. But then went to a completely different one, where they either didn’t get the support they needed, and/or didn’t fully understand the new culture they were working in. The big difference of course, is that there was nothing wrong with Apple’s retail, but JCP’s needed serious change. My point is, that some talented people often do their best work only in the right environments, corporate culture-wise, or otherwise. Reminds me of what happened to various creative talent who moved between different ad agency cultures, back in the day.

  • David Thall

    I think you make a good point about the JCP Board. Wanting change is one thing. But supporting change and allowing it to happen is an entirely different matter. The responsibility for that falls on the JCP board.

  • Van

    I think you are right about the problems JCP ran into with misinformation. I’m still surprised to read news reports with obvious errors. As it relates to JCP, one was highlighted in a reader comment, and it is one I have read more than a few times. St. John’s Bay is still sold at JCP; I’ve purchased several items over the past few months, and I see new merchandise from that brand all the time. Why does that keep coming up? Is that brand sold only at my local store?

  • tom

    So he ripped the heart out before having the pace maker on hand. Seems like a rookie mistake but Ron is no rookie. Ron believed the company had life-blood still in it’s veins to wait longer but the board lost faith… perhaps they believe the company is at it’s time of death and would rather let it fizzle out to the bitter end than give it a chance to die on the table or an opportunity to experience the ‘golden years’. Where will Ron go from here?

  • ksegall

    I agree, David. There was definitely internal resistance to Ron’s approach at that place. Many didn’t understand the need to create a new kind of store and work in a different way. I’m sure those people are quite happy that things are “back to normal.” Too bad. Because that’s a normal that led to the need for a new CEO in the first place.

  • Virginia Postrel

    Great dissection of the conventional wisdom and I agree with you on the critical error. It’s exactly the same point I made on Bloomberg View. That it isn’t the conventional wisdom says more about schadenfreude than about JCP. http://www.bloomberg.com/news/2013-04-10/jc-penney-s-johnson-forgot-the-first-rule-of-retail.html

  • ksegall

    Thanks Virginia. Your article sums it up well.

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  • Dave

    Ken, I have a question for you about the marketing campaigns during Johnson’s tenure. Do you think the use of Ellen DeGeneres and the Father’s Day father and father ad helped further alienate jcp’s existing customer base?

    There seemed to be a lot of negative reaction to those ads from conservative and religious groups. I would guess that a large part of jcp’s existing customer base was comprised of people who identified with these groups.

    Maybe jcp should have also held off on the controversial ads until after the new customer base was in place.

  • ksegall

    The Ellen partnership has been a positive, despite the Million Moms’ campaign against her. America loves Ellen. Featuring gay couples in Father’s Day and Mother’s Day ads did create a controversy that jcpenney certainly didn’t need. That was the work of Michael Francis, the deposed president.

  • Lisa Grayson

    Fascinating topic and sorry I am so late to the dance. I believe your evaluation is the closest as to why Ron went bust. Gazillionaire CEO’s in a highly competitive market such as clothing retail, tend to dictate what the customer wants, instead of simply asking them.

    I once sat next to a down to earth guy on a Southwest Airlines flight from Dallas to Oklahoma City. During the short flight, we talked about average things that people from the region talks about. Out fight ended and we said our goodbyes. Imagine my shock, when I saw that same guy on a commercial a week later, touting his airline. He was Herb Kelleher.

    The point of my story is that Herb was just an ordinary guy, who actually would fly on a non frills airline, with a great reputation for punctuality, just what the average Joe wanted in travel. He learned this by being to relate with his targets market.

    I agree with you that the board should have taken a more active role, and resources should have been spent finding out what customers had to say about the JCP brand. Ron should have been instructed, based on those result. And I can guarantee you, it would not have been no sale pricing or ending coupons.

  • The_Overdog

    So you all think setting up a mall (minishops inside a JCP) inside a mall is a good retail idea? Somehow recursion doesn’t seem like a good idea to me. If I want a minishop inside a mall, it seems like I’d just go to another store.

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  • Tsnnn

    Crap, just go look, hard at one of those chic mini stores, let’s pick Conran, you want a crockpot, you get a choice of one style, price, coffe marker, toaster in shape of a loaf of bread, one model, one pick, there is very few items in that mini store, same with the rest. JCP ‘s prices were not the lowest, they were low, not the lowest. Jeans that were $29.95 were now $40, vacuum cleaner $30 cheaper at Target on sale, the list goes on. Unless you were going to be a slave to 100 brands Ronnie was going to carry, shopping at JCP was going to be mindless and boring. This works with Apple products, limited choice if any in color, set price never discounted. This was a clobbered together mess of ideas.