Homework 4: Business-Level Strategies
 JC Penney

| September 24, 2018

J.C Penney: Searching their competitive advantage

J.C. Penney is an iconic American department store founded in the mountain west region over 100 years ago. Over the years the company has evolved from its origins as the Golden Rule store in Kemmerer, Wyoming in order to withstand the continually changing business environment. As the company is experiencing poor performance and again facing severe economic and competitive challenges in the retail sector, this mini-case discusses the decision for a change in strategy that has already been made, key leaders selected to transform the company, and positioning the company wants to offer to its customers.

Over the years, J.C. Penney has repeatedly adjusted to the market needs of the time. The company’s expansive presence throughout the U.S, catalog business, broad range of goods and services, and private label brands are critical elements of its strategy which have persisted despite changing market conditions.

Revising the company’s existing strategy as it entered the new millennium, J.C. Penney took aim at the middle class consumer and positioned itself as an alternative to successful mass merchandisers. It did this by:

» modernizing and building an Internet presence,

» actively marketing with social media tools,

» taking measures to lengthen in-store visits,

» attempting to soften the store image,

» adding destinations like coffee bars,

» introducing well-known celebrity product lines,

» emphasizing a store-within-a-store model, and

» shifting to single-story (off-the-mall) venues.

At face value, these are solid moves; but in the fight for a shrinking middle class target market, J.C. Penney is still poorly positioned “in the middle” between mass merchandisers and more conspicuously focused department stores.

Competitive landscape

Mapping industry rivals can be a helpful method of visualizing a company’s relative competitive position in the marketplace. It can be particularly useful in this case where consumers and retailers are continually shifting to discover the best price-product-value combination. JC Penney operates in an industry where survival depends upon the ability to generate sales. Clearly, the successful competitors in the industry are those with an intense strategic focus and a strong brand image.

The following chart plots J.C. Penney’s key competitors according to their profitability (measured by net margin), revenue (bubble size), and relative market position (based on pricing perceptions of consumers or targeted image along a discount-specialty continuum). Plotting values are recorded in the table below.

Retailer Net Margin Sales ($ bil.) Market Position
Target 4.3% 68.5 2
Sears -7.6% 41.6 2.75
Kohl’s 6.2% 18.8 3
JCP -0.9% 17.3 4
Macy’s 4.8% 26.4 5

Sears

Kohl’s

Macy’s

JCP

Target

Net Margin

Mass Merchandise Mid-Tier High-End Discounter Retailer Department Store

The table below further describes and explains the information displayed in the chart.

Retailer Net Margin Sales

($ bil.)

Market Position Comments:
Target 4.3% 68.5 2 Based on sales volume and performance, Target is succeeding with its target market of price-sensitive consumers who are looking for style and quality associated with mid-tier retailers.
Sears -7.6% 41.6 2.75 Sears – the second largest company in terms of revenue – formerly held a higher market position in the 3-4 range along with JCP. After the company failed in an attempt to upgrade its clothing selection into a more expensive position, it entered a merger with Kmart. This move aligns the financially troubled company more with mass merchandise discounters than with high-end stores.

Retailer Net Margin Sales Market Position Comments:
Kohl’s 6.2% 18.8 3 Kohl’s is a solid, mid-tier retailer. Smaller than most of its competitors, it has the best performance in the group.
JCP -0.9% 17.3 4 Smaller in sales than all of the other named competitors, JCP features celebrity-focused private label product lines. The company applies pricing gimmicks to compete against discounters
Macy’s 4.8% 26.4 5 A good performer amongst this group, Macy’s is positioned at the top end of the mid-tier segment. It has a deep product portfolio of private label brands, differentiated by store to deliver exceptional value for the customer. This merchandiser operates strategically using new technological tools to execute precision marketing and to stay in touch with changing market trends.

Transitioning to the 21st century

During the first decade of the 21st century, JCP focused on increasing its Internet presence and Internet sales with Facebook campaigns, viral advertising, and a revamped Web site. To date, its Internet presence is achieving some success. Additionally, in an attempt to soften its image and keep its customers in its stores longer, JCP began opening Seattle’s Best Coffee bars in its department stores in 2009.

Around this time, JCP decided to target the middle class consumer by positioning itself as an alternative to mass merchandise stores such as Target. JCP continued its tradition of developing and marketing private label brands by working with well-known designers and product lines. These included the cosmetic company Sephora, chef Emeril Lagasse, designers Ralph Lauren, Kimora Lee Simmons, and Ryan Sheckler, and interior decorator Martha Stewart. JCP also revamped many of its successful labels such as Arizona Jeans and designs from Liz Claiborne. More of the firm’s older stores were transitioned to single-story venues with large parking lots and shopping carts. During this time, JCP was using a traditional pricing strategy with relatively high prices punctuated by hundreds of promotions and sales that occurred at different times during each year.

Unfortunately, sales began to stagnate during the financial recession of 2007. Competition increased from both low-price discounters such as Walmart and, to a lesser degree, Target, and from higher end retailers such as Nordstrom. To a degree, JCP found itself in a virtual no man’s land, unable to compete on price and without the product quality and selection to attract customers looking for more crisply differentiated products. JCP’s new CEO, Ron Johnson, who was the head of retail at Apple prior to becoming the CEO of JCP, thought the stores looked tired and that customers were insulted by the higher-than-expected prices.

Awareness of the firm’s deteriorating performance and its less-than-positive-future potential caused JCP’s board of directors to conclude that changes had to be made quickly in order for the firm to better serve all stakeholders and certainly shareholders. The board decided that a new strategy was required in lieu of merely extending efforts to find ways to improve the implementation of the current strategy. By the end of 2011, Johnson and others were prepared to initiate significant changes to improve JCP’s performance.

J.C. Penney’s new strategy in 2012 under new leadership

“I’m not here to improve, I’m here to transform.” Ron Johnson, 2011

J.C. Penney adopted entirely new strategies under the leadership of Ron Johnson. Existing strategies have failed to revitalize the company or produce sustainable results. At this time, J.C. Penney needs to stand out from among converging mid-tiered retailers

J.C. Penney’s new plans were particularly exciting because of the fresh management team that has been installed. The company’s new leaders were equipped with visionary talent, proven records in retail, fashion, and international settings, and transformative experiences. The individuals forming a key part of JCP’s new leadership team have critical experience with companies that have established a recognizable brand name or image. They worked with companies that have done things differently and had success doing so. Whether it is experience with Apple, Target, Abercrombie & Fitch, or Kellwood, the key underlying commonality is that they all had knowledge in identifying and highlighting products and experiences for consumers. New CEO Ron Johnson had devised a restructuring and rebranding plan aimed to both rejuvenate store sales and to recover shoppers who are trending toward online purchasing. With the goal of becoming “America’s Favorite Store”, his strategy was a bold attempt to differentiate J.C. Penney and to create value for customers. However, it was not without risk. Johnson’s plans were costly, and failure can do severe and permanent damage to the company.

The main thrust of Johnson’s strategic shift was to abandon the company’s traditional pricing strategy (based on relatively high prices punctuated by hundreds of promotions and sales throughout the year) in favor of a stable “Fair and Square” three-tiered pricing scheme. It is here that most of the debate centers. He was aiming in the right direction, but it is uncertain whether he was employing the right strategy to achieve the company’s goals. Johnson’s new strategy is oriented to differentiating JCP from competitors in ways that create value for customers. Offering customers low and stable prices for goods and services is a key aspect of the strategy Johnson is implementing at JCP. Since he knows that JCP cannot outcompete discounters rivals such as Walmart by competing only on the basis of prices offered to customers, Johnson decided to focus JCP’s efforts (as a mid-tier retailer) on the price conscious middle- and upper-middle class consumer – a group of customers he believed was dissatisfied with products and experience offered by discounters such as Walmart and potentially by high-end retailers such as Nordstrom as well. Johnson hoped the stability in his pricing scheme and JCP’s new engaging atmosphere would persuade customers to frequent JCP.

· Everyday low price. The firm will use sales data from the previous year to determine the everyday price. The intention is for these prices to be at least lower.

· Fewer promotions. There will be only each year, with each one corresponding to the calendar months. The store will select items to put on sale for a “Month-Long Value.” Poor-selling products would go on clearance and be tagged “Best Prices,” letting consumers know that this is the lowest price possible.

· A new tag to help the customer identify the “tier” in which a product is located. JCP used to cover the old price with the new sale price. Now, each time a product is allocated a new price, it receives a new tag to let customers know the value they are receiving. A red tag indicates an “Every Day” price, a white tag a “Month-Long Value,” and a blue tag a “Best Price.”

· Haggle-free pricing. The firm will use whole numbers in its prices. Johnson believes customers are not fooled by the old pricing scheme and will appreciate the candor of up-front pricing.

· New advertising. Ellen Degeneres is the new face of JCP and TV ads will be aimed to inform and excite shoppers about its new pricing strategy and its benefits.

While this strategy may seem similar to Walmart’s everyday low cost prices, JCP was not attempting to price its products lower than the discounter Walmart. Instead, it expected to provide a low, stable price for customers desiring to purchase higher-level quality merchandise than is offered by discounters such as Walmart.

Another major element of Johnson’s strategy was to create a new engaging atmosphere that diminishes the store traffic being lost to online channels. A lot of energy was expended to design a solid brand identity and to change the image of the company in the eyes of the consumer. Johnson hoped that fresh displays and layouts would limit the threat of online competitors by giving customers a place they enjoy shopping. JCP expected the new look along with the ability to physically see, touch, and try on clothes will give it an advantage over online retailers, who are an increasingly strong threat to JCP.

Status of JC Penney

Indeed, things did not go as planned. JCP received backlash from all types of stakeholders. J.C. Penney ousted CEO Ron Johnson in 2013 following his short, disastrous tenure. While discussions will weigh in on both sides of the argument, a significant number of red flags can be raised in concern over Johnson’s approach. They include, but are not limited to the following points:

· J.C. Penney’s image has been associated with frequent bargain discount sales for years. How deeply entrenched is this image in the minds of the consumer?

· Has the company fully considered the consequences of making a complete break from the past? What are the expectations of today’s cautious consumer? More importantly, what are the interests and needs of J.C. Penney’s base of core customers?

· How will consumers perceive the changes? Could a low, stable price give the impression of lower-quality merchandise? Could the elimination of discounts give the impression of higher prices? Neither scenario matches the price-quality target for which the company is aiming.

· Perhaps the one thing J.C. Penney is known for or does well is drawing people in for the sale. What might be the unintended effects of conducting less advertising and promotional events?

The current CEO Marvin Ellison has not missed a beat to clean up Johnson’s mess. Ellison, a veteran of Home Depot (HD), has improved Penney’s long-struggling e-commerce business, bolstered its portfolio of brands and overhauled its management team. In Wall Street’s eyes, the retailer’s gain compares favorably with the declines seen at rivals such as Walmart and Sears Holdings (SHLD), which has been spiraling downward for years. JCP, though, is making improvements on its Web business and now share inventory information with its bricks-and-mortar stores. It also ran a test to allow customers to order merchandise online and pick it up later at physical stores. The effort was a success, and JCP plans to roll out the service at all locations before this year’s back-to-school season.

In 2017 JCP announced it is implementing a plan to optimize its national retail operations as part of the Company’s successful return to profitability. Under the plan, the Company expects to close two distribution facilities and approximately 130 – 140 stores. These strategic decisions will help align the Company’s brick-and-mortar presence with its omnichannel network, thereby redirecting capital resources to invest in locations and initiatives that offer the greatest revenue potential. “We understand that closing stores will impact the lives of many hard working associates, which is why we have decided to initiate a voluntary early retirement program for approximately 6,000 eligible associates. By coordinating the timing of these two events, we can expect to see a net increase in hiring as the number of full-time associates expected to take advantage of the early retirement incentive will far exceed the number of full-time positions affected by the store closures,” added Ellison.

“We believe closing stores will also allow us to adjust our business to effectively compete against the growing threat of online retailers. Maintaining a large store base gives us a competitive advantage in the evolving retail landscape since our physical stores are a destination for personalized beauty offerings, a broad array of special sizes, affordable private brands and quality home goods and services. It is essential to retain those locations that present the best expression of the JCPenney brand and function as a seamless extension of the omnichannel experience through online order fulfillment, same-day pick up, exchanges and returns,” said Ellison. As a result of the store actions, JCPenney will close a distribution center located in Lakeland, Fla. in early June, at which time operations will transfer to the Company’s logistics facility in Atlanta as part of a strategic effort to streamline store support services. The Company also is in the process of selling its supply chain facility in Buena Park, Calif. in an effort to monetize a lucrative real estate asset.

Offering unique brands is an integral part of the strategy. JCP brought back store brands such as St. John’s Bay for women and Okie Dokie for babies that Johnson had angered customers by shelving. The company also has big plans for the Sephora “stores” in its stores and the launch of Fenty Beauty by Rihanna. It opened 28 Sephoras in 2015 and 60 more in 2016. JCP also carries former New York Giants Hall of Famer and TV host Michael Strahan’s fashion line in more stores. JCP still has not recovered from the damage suffered under Johnson’s reign. Revenue has fallen from $17.26 billion in 2011 to $12.26 billion in 2015 and $12.97 billion in 2016. The company’s stock price has not recovered either. In the current competitive environment, J.C. Penney is struggling to gain recognition among young people. That is indicated by the top performing divisions, which include home, Sephora, footwear and handbags. It has a tight control on its inventory, reducing inventory by 8.8% over the prior year – That is good. Total sales dropped 1.8% and net income dropped as well. The company is operating 138 fewer stores. The stores represent about 14% of the company’s locations but account for just 5% of its sales. About 5,000 employees lost their jobs as a result of the closures. Currently, J.C. Penney is not profitable because its operating strategy does not align with its pricing strategy.

J.C. Penney is anticipating closing eight of its department stores across the U.S. in 2018. It’s part of the company’s ongoing plan to right-size J.C. Penney’s store fleet as more sales move online. J.C. Penney operates roughly 875 department stores today. Meanwhile, J.C. Penney is betting big on its beauty department and is pouring resources into beefing up make-up and hair services. Earlier this week, the company announced it would be hiring 6,500 stylists for its hair salons across the country, which are branded as “The Salon by InStyle.” Like many of its peers, JC Penney continues to struggle to woo shoppers who are increasingly turning to Amazon and other online channels to browse and buy.

Sources:

1. NASDAQ News release (https://globenewswire.com/news-release)

2. Forbes Magazine

3. CBS news

4. Business Insider

5. CNBC

6. USA Today

7. www.thestreet.com

Competitor Comparison

Net Margin 2 2.75 3 4 5 4.2999999999999997E-2 -7.5999999999999998E-2 6.2E-2 -8.9999999999999993E-3 4.8000000000000001E-2 68.5 41.6 18.8 17.3 26.4

 

Homework 4: Business-Level Strategies JC Penney ( )

Name: __________________________________

MGO403 Time: ____________

What business strategy did JCP attempt to follow under Ron Johnson in 2012? What is JCP’s current business strategy?

_________________________________

Why do you believe so? (support your view with Value Chain analysis)

____________________ ….

 

1

Homework 4: Value Chain Analysis: JC Penney

Identify the major activities that may add incremental value or cost

value chain may be modified for a specific industry

Rate each activity of the firm as superior, equivalent, or inferior compared to competitors’

This analysis may help you understand or assess the type of strategy the company follows.

 

2

HW-4: Value Chain Analysis: JC Penney

Name: __________________________________

MGO403 Time: ____________

Value Chain Category Observed Activity* Rating (S, E, I) Explain WHY
Primary      
Operations      
Supply Chain Management      
Distribution      
Marketing and Sales      
Service      
Support      
Firm Infrastructure      
Human Resource Management      
R&D      
Information systems      

Note: Other columns may be added as needed for case analysis.

S, E, I = superior, equivalent, or inferior

* Observed activity may include capability, approach, etc.

** Rate activity as superior, equivalent, or inferior relative to competitors and explain WHY

3

Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity as superior, equivalent, or inferior.

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