Why Did JC Penney Stumble So Badly Under Ron Johnson? It's Culture, Stupid


Apr 20, 2013

Written by Mary Buffett

Victory has a thousand fathers and defeat is but an orphan. In the case of CEO Ron Johnson’s firing at JC Penney, the orphan label is so colossal because it might shutter after 111 years in retail. He may have built Apple’s retail operations but his hubris may have killed JC Penney.

When you think about it, it’s by far one of the most spectacular retail failures in a generation. In 2010, at the behest of JC Penney boardmember William Ackman, the company fired Myron Ullman, their longtime CEO. To give their wilting brand a needed jolt, they hired Ron Johnson, who helped transform retailing as the head of Apple’s retailing arm into something spectacular.

On paper, it made a great deal of sense. At Apple, Johnson blew up the rules of modern high tech retailing and rethought how brands and shoppers should connect. Apple showcased their products and educated their fiercely loyal tribe how to get the most out of their technology. Their highly educated retail staff brought people up to speed in a rapidly evolving marketplace. Best of all, it reinvented customer service with the creation of the Genius Bar and when new products were launched, the lines were often the longest at Apple’s own retailing locations.

When JC Penney brought Ron Johnson on to head up their flagging retail division, the board expected nothing short as the same result. In order to get Johnson, the cost would be huge. They would give him a signing bonus for $50 million, which was the estimate of the stock options he would relinquish upon his departure. Industry analysts within retail promised to watch closely to see if Johnson could replicate the stunning success at Apple within a more complex world of mass retail.

The challenges that mass market retailers have faced over the last generation have accelerated mightily in this Great Recession. While stores like Wal-Mart were able to anticipate how their core customer would shop through market research and state of the art supply chain management, venerable brands like K-Mart/Sears and JC Penney stumbled. Some analysts predicted that some might even join the retail graveyard alongside Montgomery Ward’s, Woolworths, or Mervyns.

Last week the JC Penney’s board threw in the towel after 17 months with Ron Johnson. The numbers spoke for themselves. In spite of an exciting brand refresh, retail sales were off by 25 percent and the stock had fallen by half. Ackman, once Johnson’s greatest champion, now called for his head. It was announced that he would be fired and that his replacement would be none other than Myron Ullman, the very same guy who washed pushed out of a window to make way for Johnson in 2010. Once Wall Street discovered the “New Boss was the Old Boss,” the stock fell another 10 percent.

Johnson’s’ failure at JC Penney should remind people that just because you’ve been successful in one area, it does not always guarantee success somewhere else.

Why did Ron Johnson fail so spectacularly? When you look at how he planned to retool the JC Penney brand, it might have worked if executed more thoughtfully. Johnson’s marketing team morphed the old name into JCP. The ad campaign was snappier and in sharper focus. Ellen DeGeneres became the face of the brand and the pricing strategy was novel — simplified pricing using round numbers. There would be no sales with deep discounts. Johnson did not want to insult customers with high markups that would be later heavily discounted for sales. As I walked through one of their stores recently, the floor had an expected freshness about it; it was vibrant. The crowds even seemed better.

But JC Penney was not Apple. At Apple, Steve Jobs hated focus groups and stop asking customer long ago about what they wanted. Instead, Jobs and his core product team at Apple focused on anticipating the needs of their core customers. For the most part, it worked. Jobs always fashioned himself as a penultimate product guy and held the last word on how form followed function.

We celebrate the fact that the Macintosh, iTunes, and the iPhone revolutionized the brand. However, Apple launched its share of clunkers as well, including the Apple III, the Lisa, and the Newton. People also forget that when Jobs launched the original Macintosh in 1984, its functionality was severely limited and the gaps were addressed only in later models. Perhaps a little extra due diligence with something as iconic as the original Macintosh would have made all the difference.

The other critical piece was that Apple’s fierce customer culture lined up to take a leap of a leap of faith alongside Steve Jobs whenever a new product was launched. Nobody ever got excited about Gil Amelio, the CEO prior to Job’s return from exile. Nobody has demonstrated that kind of excitement with the JC Penney brand.

Prior to big launches at Apple, rumors would float through trade blogs, rumors of a new shiny product would be hinted, and by the time it launched — usually by Jobs himself — there would be lines around their retail stores. It is a culture that lionized successes and forgave mistakes. We forget that for all of the ballyhoo about the latest iPhone, Samsung now has quickly caught up in functionality and design, which is reflected in its surging marketshare.

When Ron Johnson moved over from Apple to JC Penney, he also imported Job’s distrust of market research. He felt that marking up products before offering steep discounts was a sham and an insult to customer. It was the old movie adage, “If you build it they will come.”
To contrast, JC Penney to Apple, the venerable retail chain was seen as a brand aggregator that offered steep discounts. Over the years, their marketing group had trained their customers to wait until the big sales would appear before they would shop. It is not uncommon within certain retail verticals. For example, the only time I shop at Bed Bath and Beyond is when I get a 20 percent coupon in the mail — and I have stacks of them.

When it comes to retail, shoppers vote with their feet. If they could not find the deal of their dreams with JC Penney, they would move onto another retail floor, like Wal-Mart or another low priced competitor. By thinking that he could recalibrate the way shoppers looked at JC Penney with a simple branding refresh, he forgot the central rule when it comes to mass retail—the customer is always right. Even with the customer is wrong, they’re always right. Even when everybody knows that prices are overinflated to cover deep discounts in sale environments, the customer is always right. There is no way around that rule.

Ron Johnson foolishly believed that he could work the same magic at JC Penney that worked at Apple, forgetting that both shopping cultures were as different as apples are to oranges. Johnson could have taken a longer view of phasing out the sales while pumping up the brand. The revenue would have paid for the expensive construction costs of JC Penney’s brand refresh while holding on to their core customer. In that interim phase, Johnson could have attracted a new generation of shoppers that would see JC Penney as something better than a place their parent shopped during the 1960’s and 1970’s. Instead, Johnson gambled everything on his initial roll of the dice and now JC Penney’s brand is damaged and their balance sheet is on life support; their long term sustainability as an organization has been called into question.

Smart organizations know when to step back from walking off of a cliff. In the late 1980s, Ford was going through a model refresh of their iconic pony car, the Mustang. The current model was getting long in the tooth and the marketers at Ford wanted to pit the new Mustang against a number of sportier foreign entries like what was found in Nissan or Toyota showrooms. Unlike other models showcased by Ford, Mustang drivers have been very protective of their brand, even when Ford appeared indifferent after they rolled out a series of underperforming Mustang II’s in the mid 1970’s. When Mustang club members saw this new Mustang, they reacted badly. It had none of the lines and sex appeal of the original. They made a big stink and Ford quickly realized it had goofed. The “new Mustang” was later released as the Ford Probe, which only lasted for a few years before it disappeared into obscurity.

However, in the 1990’s Ford made Mustang club participants an integral part in the car’s redesign. They were there at all part of the process. Designers knew what Mustang owners wanted and when the car was released, it was a runaway hit. In fact, the car had several design echoes of the original Mustang and that drove a wave of retro redesigns for the updated Chevy Camaro and Volkswagen bug.

There are all sorts of autopsies at play but I believe that Ron Johnson failed to understand what the core customer wanted in their relationship with at JC Penney. By choosing to change the basic retail model without asking his cores customer how they felt about it, his vision was misaligned with shopper expectations. By forgoing customer research and by thumbing his nose at the Penney’s shopping culture, Ron Johnson sowed the seeds of his own ruin.

However, in this case, his failure might have also taken a venerable brand down with him.

Pin It on Pinterest

Share This