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From Prophet To Pariah, J.C. Penney’s Ron Johnson Falls Hard;
“Brilliant Or Bankrupt” Strategy Reminiscent Of Tesco’s Sir Terry Leahy In Launching Fresh & Easy

Jim Prevor’s Perishable Pundit, April 11, 2013

Oh how the mighty have fallen:

J.C. Penney Co. dumped Ron Johnson, the chief executive it poached from Apple Inc. with great fanfare 17 months ago, replacing him midway through a major overhaul of its stores that has produced a disastrous drop in sales.

Penney's board met Monday and agreed to part ways with Mr. Johnson. Sorting out whether to press onward or roll back Mr. Johnson's changes will fall to his predecessor, Myron Ullman, who is rejoining the company as CEO.

It is rather extraordinary as Johnson’s hiring brought accolades suitable to the second coming as investors thought Ron Johnson, who pioneered the concept for the Apple retail stores and the famed Genius Bar, could bring such magic to J.C. Penney Co.

He was no one hit wonder; when at Target, it was Johnson who signed the famous contract with architect Michael Graves that in some sense created the concept of “Tarjée” combining great design with economical products.

But the J.C. Penney assignment was always going to be tough:

Johnson has spent years in the shadows, hatching two of the most significant retail concepts in a generation. At Target (TGT) he made the deal with Michael Graves that helped the company meld good prices with great design. At Apple (AAPL) he worked with Jobs to create the most profitable retail store in the world.

Now Johnson, 53, is embarking on his toughest challenge. In front of those clouds at Pier 57 a day and a half later, he proclaimed that he would turn J.C. Penney (JCP) — a dowdy brand aimed at the middle class at a time when the middle class itself is in peril — into "America's favorite store" by the end of 2015. Not America's favorite department store, mind you; America's favorite store of any type.

To attract customers, Johnson unveiled a radically simplified pricing strategy, a slimmed-down but improved selection of brands, and a change in the store's layout, which will consist exclusively of mini-boutiques arrayed around a "town square." His goal is to reclaim the department store's long-lost identity as a place shoppers visit not only for the goods but also for the enchantment of discovering something new.

The new pricing strategy is ambitious — and risky. Customers have been trained by Penney's and others to hold out for massive discounts. In the era of online shopping, few have the inclination to visit a store with a faded brand like J.C. Penney's. Johnson knows all of that and seems to relish the challenge. Behind his preppy, earnest exterior beats the heart of someone who is out to change the experience of today's shopper — one $4 towel at a time.

“People want to belong to something deeper," says Johnson. Since childhood he has had a near-messianic ability to lead people and make them feel as if they belong, as if they're part of a great cause.

As we said, the press treated him like the second coming.

In the end, the results were catastrophic. In the most recent quarter, same-store sales fell a shocking 32%. In a sense, the customers went on strike against Johnson’s innovations.

Now in fairness Johnson would say that the transition requires more time. That retraining the consumer — who at Penney’s had been educated to expect clearance sales and promotions — is a long term process. He has pointed out that anyone looking at the numbers for the Genius Bar would have thought it a big failure 18 months in.

This is probably all true, though it was highly predictable that Johnson would not have much more time than he got. This is mostly his own fault. It is notable that his contract with J.C. Penney, though hefty up front to cover all the stock and things he lost by leaving Apple, is not believed to include termination payments. This means he probably never had “the talk” with the board that hired him in which he explained that he needed five years to make this work and that sales would be catastrophic in the interim. Certainly in its communication with shareholders, J.C. Penney never gave an indication it expected such big losses in business while old customers were retrained and new customers attracted.

In all likelihood, Johnson’s protestations notwithstanding, he was just wrong. Apple’s success was built on having preferential access to a line of products that people desperately wanted and were willing to pay premium prices to get. These products were complicated and so a store that specialized in them and could share expertise regarding them was much valued. This simply has very little to do with how consumers buy socks and underwear.

All retailers are often wrong, and Johnson being mistaken is neither surprising nor disqualifying. What is odd is why he and his board of directors allowed a kind of “brilliant or bankrupt” bet with the whole company?

If a national retailer thinks that it should shift to everyday low pricing from a high/low strategy, that is a plausible option, but typically one would choose a couple test markets. Do it in all the stores in a few cities and see how it works. Maybe same store sales do drop substantially and then rebound surpassing prior heights. This kind of data would allow a retailer to plan financially for the needed investment and to reassure creditors, stockholders, etc. Without the data, panic ensues as it did here and one is left never knowing what might have ultimately worked.

It is not clear why Johnson didn’t proceed this way, but it also is not clear why Tesco, in its Fresh & Easy roll-out, didn’t just open five stores, use local wholesalers and distributors and refine the concept until the retail concept worked or Tesco knew it couldn’t work.

It is so eminently logical that one must think that personal considerations warped the decision-making process. Ron Johnson was a famous executive. He had no interest in spending 99% of his time running an old declining department store chain, putting on white sales and whatnot, while spending 1% of his time on a 12-store test of a new pricing strategy.

Equally Tesco’s famed CEO at the time of the Fresh & Easy launch, Sir Terry Leahy, was interested in a great capstone to his career, so he emphasized that Fresh & Easy was a “roll-out not a test”— which meant it rolled out without a test.

Back when he was running produce and then perishables for Wal-Mart, Bruce Peterson used to tell us that he had the greatest job in the world because he had the opportunity to make money for his employer while making dreams come true for lots of vendors. Some guy would come up with some notion — say that they should sell smaller coconuts in three packs — rather than larger ones whole. If the idea made any sense, they would try it out in one division or certain select stores and see how it did. Sometimes it was a hit and got rolled out nationally; Wal-Mart made money, the vendor became rich and consumers got a product they liked. It was win/win/win. Sometimes it didn’t work, and both Wal-Mart and the vendor went onto different projects.

It was a little like roulette, where you spun the wheel and took your chances. But it was not like Russian roulette; nobody was going to die.

Now Fresh & Easy is dead, and precious few retailers — a business where they fight to the death for half a point of market share — have ever rebounded from the kind of sales losses J.C. Penney has endured. It was all a failure to research and a willingness by the boards responsible to give into the vainglorious attitudes of those too certain of themselves for their own good.

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