Raining On Ron Johnson's Parade

Ron Johnson, the new CEO of JCPenney, had a dog-and-pony show in New York this morning to discuss the company’s go-forward strategy. The major change: fewer sales and a move toward an everyday low price (EDLP) program. He also mentioned some store redesigns that would create boutiques to make JCPenney more akin to European department stores. There was also an allusion to services (similar to Genius Bar). While that should help to weed out cherry-picking shoppers and improve JCP’s assortment and experience (which already has significantly improved before Mr. Johnson thanks to partnerships with Mango and Sephora), it is unlikely to reverse JCPenney’s downward revenue slide or to grow the challenged mid-tier department store sector. This is because the biggest problem with JCP is something that is very difficult to fix (the same challenge that Sears has, by the way) which is that it has over 1,000 stores mostly located in bad malls with declining foot traffic. The question I have isn’t so much, can JCP reinvent its stores or the store experience, but how will it drive traffic back to those stores? Only the small fraction of its stores located in prime locations will even have the opportunity to re-engage shoppers; in fact, by our count, only 84 of JCPenney’s 1,100 stores are co-tenants of Ron Johnson’s old employer and the premier retailer today, the Apple Stores. 

So, is there anything JCPenney could do to turn around its fortunes? Sure, it could try closing down underperforming or “brand wrong” stores, it could acquire a growing, hot retailer like Francesca’s Collection, or it could spin off its new deal with Martha Stewart into smaller, Martha-branded stores. Notice that all these options are addressing the real estate albatross, which requires either unloading bad real estate or investing in new locations. It’s unclear whether the company has the appetite or resources to do either. I always thought Ron Johnson was a curious choice for JCPenney. He’s a visionary leader with a track record of success generating growth by building new stores. Target was underpenetrated in the US when he was there, and the Apple Stores didn’t exist before he launched them. He’s not a turnaround expert who has experience with tired real estate locations located in B and C quality malls. I’m reminded of an old quote from Warren Buffett: When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.