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J.C. Penney Company, Inc.: Surviving the Ron Johnson

(CEO) Era

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Author: Alan N. Hoffman

Pub. Date: 2017

Product: Sage Business Cases

DOI: https://doi.org/10.4135/9781526427489

Keywords: Johnson & Johnson, department stores, stores, branding, customers, logos, sales

Disciplines: Strategic Management, Leadership, Organization Studies, Change Leadership, Organization

Design, Strategy Transformation, Business & Management

Access Date: January 8, 2025

Publisher: Rotterdam School of Management, Erasmus University

Online ISBN: 9781526427489

© 2017 Rotterdam School of Management, Erasmus University All Rights Reserved.

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Abstract

Ron Johnson, the architect behind Apple's wildly successful retail stores and 15-year Target veteran,

became American department store chain J.C. Penney’s new CEO in November 2011. The owner

J.C. Penney had high hopes for Johnson, who proceeded to make drastic changes to the company

including a new logo and a new spokesperson (Ellen DeGeneres). His vision included transforming

700 of the largest J.C. Penney stores into collections of some 100 branded shops with a central “town

square” gathering area for services. Johnson planned to implement a simplification of the company’s

pricing strategy including a reduction in the number of times prices were marked down. Johnson knew

that transforming J.C. Penney's 1100 department stores nationwide would take considerable time and

effort, and that changes would also involve jobs cuts, including nearly 1,000 employees at its head-

quarters, and closing one of its three call centers.

J.C. Penney fired Ron Johnson after just 17 months, following a disastrous decline in business directly

attributable to the failure of the new business plan. Ex-CEO Mike Ullman then rejoined the company

and was charged with stabilizing the retail chain, which was in a free fall after racking up almost a bil-

lion dollars in losses in 2012 as revenue plunged nearly 25%.

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Case

Ron Johnson, the architect behind Apple’s wildly successful retail stores and 15-year Target veteran, became

American department store chain J.C. Penney’s new CEO in November 2011. The owner J.C. Penney had

high hopes for Johnson, who proceeded to make drastic changes to the company including a new logo and a

new spokesperson (Ellen DeGeneres). His vision included transforming 700 of the largest J.C. Penney stores

into collections of some 100 branded shops with a central “town square” gathering area for services. Johnson

planned to implement a simplification of the company’s pricing strategy including a reduction in the number

of times prices were marked down. Johnson knew that transforming J.C. Penney’s 1100 department stores

nationwide would take considerable time and effort, and that changes would also involve jobs cuts, including

nearly 1,000 employees at its headquarters, and closing one of its three call centers.

J.C. Penney fired Ron Johnson after just 17 months, following a disastrous decline in business directly at-

tributable to the failure of the new business plan. Ex-CEO Mike Ullman then rejoined the company and was

charged with stabilizing the retail chain, which was in a free fall after racking up almost a billion dollars in

losses in 2012 as revenue plunged nearly 25%.

Company Background

James Cash Penney was born on September 16, 1875 in Hamilton, Missouri. In 1898, Penney began working

for the Golden Rule Stores, a small chain known for selling quality goods at low prices. In 1902, Penney be-

came a partner and opened his first Golden Rule Store in Kemmerer, Wyoming. In 1907, Penney purchased

the Golden Rule Stores by buying out his other two partners. In 1913, the company incorporated and changed

its name to the J.C. Penney Company. The first company headquarters was located in Salt Lake City, Utah.

In 1914, the company moved its headquarters from Salt Lake to New York City. By 1922, the company had

grown to 371 stores in 27 states (JCPenney). The stores were typically located in downtown areas that made

shopping convenient for people working in the city. The company then began to introduce the first of its own

private label brands that included Gaymode hosiery, Silver Moon lingerie, Big Mac work clothes, and Town-

craft menswear.

On October 23, 1929 J.C. Penney Company became a publicly traded company. One week later the stock

market crashed—an event that became known as Black Tuesday, the beginning of the Great Depression.

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Page 3 of 33 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era

During the Depression, J.C. Penney actually grew—growth driven by the company’s reputation for high qual-

ity and low prices, and the company gave back considerably to the community as well (Encylopedia.com).

During the mid-1970s, when shopping trends changed from consumers walking downtown to shoppers driving

to malls, J.C. Penney became an anchor, or foundational, store in malls around the country. In 1983, J. C.

Penney shifted its business model, refocusing its product offerings on soft goods, and no longer selling au-

tomotive services, appliances, paint, hardware, or fabrics, then stopped carrying sporting goods, consumer

electronics, and photographic equipment in 1987. The company introduced additional private label apparel

brands during this time, choosing to become a department store rather than a mass merchandiser (Encylope-

dia.com). In 1988, the company headquarters relocated to Plano, Texas and J.C. Penney Telemarketing was

established to take catalog phone orders and provide telemarketing services for other companies. In the late

1980s, although it had historically been a middle of the road store, J.C. Penney attempted to move up-market

by enlisting fashion designer Halston to provide the latest fashions. This fashion line ultimately failed, and the

company decided rather to continue to develop its own brands. In the 1990s, the company successfully shift-

ed its focus to women’s fashion, allocating 41% of store space to it, which had a positive impact on financials

(Encylopedia.com).

At the same time, catalog sales grew with the introduction of the private label brand Arizona Jeans and a

marketing campaign about “doing it right” (Encylopedia.com). In 1994, the company launched www.jcp.com,

becoming one of the first national retailers to embrace the Internet. New sales growth came from private label

brands like Arizona Jeans, Worthington, and St. John’s Bay. The company focused on both dual income mod-

ern families (ages 25 to 54) and families that were just starting out (35 and under) to serve its middle of the

road, primarily female demographic, while catalog sales transitioned to online commerce (Encylopedia.com).

In 2009, J.C. Penney opened its first store in Manhattan just down the block from Macy’s flagship store on

W. 34th Street. The company exited the catalog sales business in 2010 and stopped printing its large sea-

sonal catalogs, exploiting press coverage about its being the last of the print catalogs to cease operations,

and heralding the end of an era. In that same year, J.C. Penney became the exclusive retailer of the iconic

Liz Claiborne brand and international fast fashion brand MNG by Mango, which was set up using the store-

within-a-store concept. In 2011, J.C. Penney became the exclusive department store retailer for ALDO’s Call

it Spring brand, again embracing a store-within-a-store concept, and launched its Modern Bride experience

in its fine jewelry department (JCPenney). In late 2011, J.C. Penney acquired the worldwide rights for the Liz

Claiborne family of brands, including the fashion jewelry brand Monet, for about $288 million. The deal posi-

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tioned Penney’s department stores as the exclusive destination for Monet as well as Liz Claiborne.

The Ron Johnson (CEO) Era: 17 months

Ron Johnson, the architect behind Apple’s wildly successful retail stores and 15-year Target veteran, became

J.C. Penney’s new CEO on November 1, 2011. J.C. Penney had high hopes for Johnson, who proceeded

to make drastic changes to the company including a new logo and a new spokesperson (Ellen DeGeneres).

His vision included transforming 700 of the largest J.C. Penney stores into collections of some 100 branded

shops with a central “town square” gathering area for services including free haircuts for kids, and small shops

around the perimeter. Johnson further planned to implement a simplification of the company’s pricing strate-

gy including a reduction in the number of times prices were marked down. Johnson knew that transforming

J.C. Penney’s 1100 department stores nationwide would take considerable time and effort, and that changes

at J.C. Penney would also involve jobs cuts, including nearly 1,000 employees at its headquarters, and the

closing of one of its three call centers.

J.C. Penney fired Ron Johnson after just 17 months, following a disastrous decline in business directly at-

tributable to the failure of the new business plan. Ex-CEO Mike Ullman then rejoined the company and was

charged with stabilizing the retail chain, which was in a free fall after racking up almost a billion dollars in

losses in 2012 as revenue plunged nearly 25%. At that point it was not clear if Ullman would continue with

Johnson’s plans to remake the legacy department store chain; however it appeared that Ullman planned to

return J.C. Penney to its roots while developing a point of differentiation and competitive advantage in the

present day market, rather than simply implementing Johnson’s vision. J.C. Penney very quickly learned that

it needed to listen to its customers and drive desired changes, rather than implement a drastic overhaul.

Mr. Ullman, 66, brought almost eight years of senior executive leadership to the organization, along with spe-

cific company and industry knowledge, as well as a sensitivity to the “voice of the customer” and an altruistic

intent to “fix” the company:

Given that Ullman decided on the spot to take the job, and to do so with no employment agreement for only $1

million in salary a year, we believe his interest is purely in fixing J.C. Penney and leaving a legacy that ends

on a high note. His experience and the respect he has in the department store industry is already apparent,

as the company has secured a loan from Goldman Sachs and vendors have continued to support the team

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Page 5 of 33 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era

despite difficult financial results (Swinand, 2013).

At the same time, J.C. Penney learned a hard lesson about the risks associated with workforce reduc-

tions—that seasoned store veterans with tribal knowledge of the company and its operations, and the industry

as a whole, offered a unique competitive advantage, thus letting them go was a huge risk. This realization

was duly noted in its 2012 10-k explanation of its reductions to shareholders:

These reductions, combined with our voluntary early retirement plan initiated in 2011 and voluntary departures

of employees have resulted in a substantial amount of turnover of officers and line managers with specific

knowledge relating to us, our operations and our industry that could be difficult to replace. We now operate

with significantly fewer individuals who have assumed additional duties and responsibilities and we could

have additional workforce reductions in the future… These workforce changes may negatively impact com-

munication, morale, management cohesiveness and effective decision-making, which could have an adverse

impact on our operating efficiency (J.C. Penney Company, 2013).

Strategic Direction

J. C. Penney wanted to be “America’s favorite store” and the company that treated its customers “fair and

square” according to the traditional values of the Golden Rule Stores (MarketLine, 2012, p. 24). The company

was in the business of physical and online department store sales in the fashion and home goods market seg-

ments. Subsets of the department store included women’s apparel, men’s apparel, home goods, men’s and

women’s accessories, children’s apparel, footwear, make up, and fine jewelry. Some stores ventured into ser-

vices, offering design consulting, wedding registries, hair styling, optical offerings, and portrait photography

(MarketLine, 2012). In its bid to recoup its losses after the Johnson debacle, J.C. Penney invoked its trust-

ed history, positioning itself as the department store that listened to its customers and was a “better place to

shop.” It strove to meet the needs of families through its private label brands and selections for all segments

of the population. It also sought ethical suppliers and chose to “give back” back to improve relations with local

communities.

J.C. Penney’s strategic goals included profitability, growth, increased market share, efficiency, accuracy of in-

ventory, appropriate levels of quality, and customer-oriented service. Aligning its 2,500 domestic and foreign

suppliers with its objectives was imperative for ordering the right goods at the right time in the right quantities

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Page 6 of 33 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era

through its purchasing subsidiary. Maintaining quality and having all of its suppliers operate ethically was of

utmost importance, thus the company operated inspection offices in 15 countries to implement these objec-

tives (MarketLine, 2012).

To achieve a competitive advantage, J.C. Penney focused on differentiation and location. It used customer

service and strong private label brands as well as national brand name offerings to create points of distinction.

Offering these brands within the store and opening its doors to partner boutiques, J.C. Penney became a

retailer with “shops within the shop.” The company competed on “price, quality, style, service, product mix,

convenience, and credit availability” (MarketLine, 2012, p. 21). It used a basic defender strategy to maintain

market position, yet the company was not a technological leader—it did not make innovative changes to push

its stores to new levels. It did, however, try to adapt to the current environment and make its traditional phi-

losophy fit new trends.

Competitors

J.C. Penney operated within the Department Store industry, a sector that included large, multi-department

retail and discount stores retailing a wide range of general merchandise such as apparel, jewelry, cosmetics,

and home furnishings/household products, but excluded supercenters and warehouse clubs. According to

Mintel, this industry had 64.9 billion in sales in 2011 (Mintel, 2013).

By definition the retail industry was always highly competitive with few barriers to entry. J.C. Penney’s

strongest rivals in the apparel and home furnishing retailers industry included Macy’s Inc., Kohl’s Corporation,

Sears, and other department stores. Macy’s had the highest percentage of the market share, approximately

$16.3 billion (or 21.73%), followed by Kohl’s with 11.3B (or 15.06%), and lastly J.C. Penney with $2.6B (or

3.47%). Kohl’s and Sears were traditionally considered low-end department stores and Macy’s was seen as

high end, while J.C. Penney was traditionally viewed as middle of the market in terms of pricing. The remain-

der of the market was held by smaller companies’ department stores (Yahoo, 2013).

Macy’s Inc.

Headquartered in Cincinnati, OH, with 175,700 employees working in 850 stores in 45 states, Macy’s was, in

2013, the top competitor in the apparel and home furnishing retail industry with $27.7 billion in sales for the

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year ending February 2013. A retail company operating stores and websites under two brands, Macy’s and

Bloomingdale’s, its operations purveyed a wide range of merchandise from apparel and accessories for men,

women, and children to home furnishing and other consumer goods. The company expanded globally under

Bloomingdale’s stores and through license agreements with Al Tayer Insignia in Dubai. Macy’s had always at-

tracted customers by offering superior selections and convenient locations. The company also had high-end

makeup boutiques within its stores, the store within a store configuration that J.C. Penney wished to emulate

(Yahoo, 2013).

Kohl’s Corporation

With over 1,150 family-oriented department stores and a website, and 30,000 employees, Kohl’s Corporation,

headquartered in Menomonee Falls, WI, was another major competitor in the apparel and home furnishings

retail industry, selling apparel, footwear and accessories for women, men and children; soft home products;

and housewares. Kohl’s apparel and home fashions were designed to appeal to classic, modern classic, and

contemporary customers. The company had $19.279 billion in sales for the year ending February 2, 2013,

and it was thus well positioned as the second largest player in the apparel and home furnishing retail industry.

Kohl’s began reaching out to technologically savvy customers by equipping all the stores with Wi-Fi, continu-

ing to improve digital mobile sales platforms, and building the infrastructure to allow shipping on-line from its

stores (Yahoo, 2013).

Sears Holding Corporation

Sears Holding Corporation, a retailer with 2,019 full-line and 54 specialty retail stores in the United States and

475 full-line and specialty stores in Canada had, as of February, 2013, approximately 246,000 employees in

US and approximately 28,000 employees in Canada. At that time, Sears was the leading home appliance re-

tailer in US and offered a broad range of apparel labels as well, including Land’s End, Jaclyn Smith, Sandra

Lee Levi’s, etc. The company operated in three segments: Kmart, Sears Domestic, and Sears Canada with

$39.85 billion in revenues for the period ending February 2, 2013 (Yahoo, 2013).

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Sustainability and Technology

In October of 2013, J. C. Penney reported that over 500 of its stores qualified for Energy Star certifications.

According to Katheryn Burchett, SVP of Property Development, “stores that proudly display the ENERGY

STAR label generate fewer greenhouse emissions than non-certified structures, and each certified building

saves the Company thousands of dollars in energy costs every year” (JCPenney, 2013). The improvements

were important for both cost reductions and company perception, particularly from an environmentally sus-

tainable perspective.

Social media (Facebook, Twitter, Pinterest, Google+, and YouTube) also presented marketing opportunities

that capitalized on the latest digital technologies, which J. C. Penney worked hard to leverage as an effective

means to market and connect with consumers.

J. C. Penney was looking to implement RFID technology in its inventory management systems under CEO

Ron Johnson, but in early 2013 the company elected to move away from the initiative as part of a cost-saving

effort. Implementing RFID tags would have enabled J.C. Penney to reduce costs, but the initial investment

was too large for the company to take on as it tried to bounce back from major losses.

Marketing

J.C. Penney’s marketing efforts were designed to increase both foot traffic to J.C. Penney retail locations

and visits to jcpenney.com [also known as jcp.com] to increase sales. Marketing collateral also positioned the

J.C. Penney brand according to the vision and mission of the organization, further communicating the com-

pany’s points of differentiation (private and national brands, ease of walking around store, price) that drove

consumers to choose J.C. Penney over a competitor.

Analysts pointed out that J.C. Penney could improve its segmentation efforts through marketing messages

that catered to segments other than its traditional target market of American middle class families (all age

ranges and genders). In response, J.C. Penney revitalized its focus on families just starting out, primarily

speaking to women, or dual income families in the 1990s. However, when, under Ron Johnson, J. C. Penney

changed the way it communicated its pricing, and positioned pricing as three tiers of deals, it lost 10% of its

female customers, its primary demographic.(MarketLine, 2012, p. 21).

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Market research revealed crucial information that J.C. Penney’s needed to consider to maximize its marketing

efforts. First of all, a Mintel survey indicated that shoppers actually visited a J.C. Penney’s or other com-

parable department stores only relatively infrequently: 38% visited less than once a month, and 21% once

a month. The research also indicated that Social media efforts were geared to 18-24 year olds, yet online

conversations indicated shoppers saw J.C. Penney’s as primarily for Baby Boomers, pointing to a brand po-

sitioning and segmentation issue as well as suggesting that the company’s efforts to “speak” to a younger

demographic were missing their mark. Nonetheless, the 18-24 year old demographic recorded the highest

percentage of visits to the store per month, and women of all ages were more likely than men to shop there. It

was important for the company to keep in mind that women and young adults, its two primary demographics,

were the most likely to be price sensitive. In addition, young adults shied away from department stores that

were not conveniently located. Finally further market research made clear that when segmenting marketing

messages, the company needed to pay attention to the 35-44 year olds demographic, as well as to Hispanics,

the two demographics most likely to shop for the whole family across the departments of the store rather than

just visit one section (Mintel, 2013).

A wide range of income levels reported shopping at J.C. Penney, however the highest number of people who

visited a J.C. Penney’s had household incomes of $75,000 to $99,999. In terms of race, the Mintel survey of

shoppers indicated that J.C. Penney’s customers crossed all races. 50% of white survey respondents, 48%

of blacks, 44% of Asians, and 56% of Hispanics had shopped at a J.C. Penney. In terms of marital status,

the Mintel survey indicated that 48% of single respondents, 49% of partnered individuals, 52% of married re-

spondents, and 45% of separated or divorced respondents had shopped at a J.C. Penney’s; therefore marital

status did not significantly affect shopping at J.C. Penney. In terms of family size, the highest percentage,

61%, of those shopping at J.C. Penney’s, were families of four, while lowest percentage, 40%, were singles.

Thus, families were the main segment of J.C. Penney shoppers. Employment was not a significant factor in

the decision to shop at J.C. Penney’s as 50% of each category (employed, unemployed, self-employed) had

shopped at a J.C. Penney’s. Nor was age: 50% of the millennials, Generation X, and baby boomers surveyed

had shopped at the store, though only 39% of the World War II generation had. Millennials were the main

demographic to have shopped J.C. Penney on line (Mintel, 2013). To increase its market share, J.S. Penney

could cultivate older shoppers aging population as a potential growth market looking for particular styles and

conveniences.

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Shopkick

In October 2013, J. C. Penney announced that it was teaming up with shopkick, a mobile shopping app set up

to recommend products in participating stores near users, who in turn earned points by entering participating

stores and by making purchases. The points earned were called kicks and were redeemable for gift cards

(shopkick). By the end of 2013 shopkick had over 6 million users and had already partnered with several oth-

er retailers, including Macy’s, Old Navy, Best Buy, J.C. Penney, Crate & Barrel, Sports Authority and Target.

As part of its initial promotion, J. C. Penney offered users additional kicks. According to Cyriac Roeding, CEO

and co-founder of shopkick:

J.C. Penney’s nationwide rollout of shopkick makes shopping more inspiring and rewarding. For shoppers,

we delight them by rewarding them for behaviors they are already doing while shopping. For retailers, like

J.C. Penney, we are driving incremental traffic and sales and ensuring that marketing dollars are invested in

driving actual foot traffic – it’s a win-win (JCPenney, 2013).

In addition, J.C. Penney need to pursue further mobile marketing opportunities, including native applications

for the iPad, iPhone, and android devices; a mobile friendly website; and mobile coupon functionality.

Brand Positioning

J.C. Penney had always been a middle of the road department store, competing heavily with the higher end

Macy’s and the lower end Sears. Under its new CEO J.C. Penney attempted to position itself as more afford-

able yet more “with it” (or to position itself a bit lower in the ranking of department stores, as businesses in the

middle often have to move up or down for growth). As part of its reinvention, J.C. Penney updated its logo to

“jcpenney” in 2011. A college student at the University of Cincinnati won the logo competition, bolstering the

company’s desire to engage its stakeholders and reach the younger generation who would be more apt to be

drawn in by its new lower prices (Exhibit 1: logo images and logo evolution). The all lowercase text highlight-

ed the brand’s recognition of more casual trends, and the fact that some of the text was outside of the box

was meant as a graphic representation of J.C. Penney’s move away from the traditional storefront of the past.

The problem was that, in actuality, the new logo upset customers, as it did not match either J.C. Penney’s

image or customers’ nostalgia for the J.C. Penney of their childhoods. It became clear that the association

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Page 11 of 33 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era

in customers’ minds was more “Old Navy” than a classy department store (Brand New, 2013). In addition,

J.C. Penney stopped using Saatchi & Saatchi, the marketing agency it had been using for the past five years,

when it discovered that 99% of the 590 promotions it ran in 2011 had been ignored by consumers (Green,

2013).

Further changes in 2012 reduced the logo simply to JCP in light of the trend toward shorter names in the age

of social media, and to coincide with its price-oriented marketing goals. However, like the original re-design,

this also caused alarm with consumers as no one called J.C. Penney “JCP,” reducing brand recognition to

56% (Brand New, 2011). The company then attempted to promote its lower prices positioning with a cam-

paign highlighting that J.C. Penney treated its customers “fair and square,” capitalizing on the square around

the JCP in its logo. It also added blue to its traditional red and white color scheme, playing on patriotism to

push J.C. Penney as “America’s favorite store” (Brand New, 2012). As part of its lower price positioning, the

number of promotions was reduced to 12, as the idea was that rather than having sales, the company main-

tained everyday low prices with monthly communications created by a different marketing agency, Peterson

Milla Hooks (Green, 2013). In market research conducted for J.S. Penney, 26% of customers reported lower

price positioning would lead to an increase in shopping at J.C. Penney; only 8% said it would reduce their

shopping. However, in actuality, sales dropped (Lubin, 2012). Rather than showing savings, the pricing was

a three-tier structure: the everyday low price, the monthly special price, and the best price (J.C. Penney Cor-

poration, Inc., 2012). After the implementation of the lower price positioning, customer surveys revealed that

consumers perceived the prices as higher, and only 16% of respondents associated low prices with J.C. Pen-

ney, making it clear that most customers did not see the value of “fair and square” (Edwards, 2012). This was

partly because the store did not play into psychological techniques such as $19.99 pricing – the pricing was

rounded to the nearest dollar. Customers also reported missing coupons as they could no longer brag that

they saved X percent (Lubin, 2012). Thus, customers’ perception was that prices were increasing rather than

decreasing, while the quality remained the same, causing much customer confusion: was the brand moving

up in the market or lower in the market?

Ultimately, J.C. Penney’s re-branding fractured customers’ sense of the company: there were several versions

of the J.C. Penney logo circulating; Google searches turned up only bits and pieces of the company’s website;

and the site’s functionality needed to be optimized for new tablets and other mobile devices. Thus, the site

was fragmented and required reassessment for usability such that all its pieces could be accessed from

jcpenney.com or jcp.com with easy access to investor relations, media relations, and history, sections current-

ly hidden under a “full site” button.

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Page 12 of 33 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era

Despite all these marketing issues, J.C. Penney did succeed with Ellen DeGeneres as a spokesperson even

though a few Christian groups complained about rainbow pride (J.C. Penney Corporation, Inc., 2012).

2012: Firing Ron Johnson amidst Apologies

When J.C. Penney realized the three-tiered pricing was a mistake, it reinstated coupons offering a $10 gift

card at the end of 2012 and a 30% off sale (MarketLine, 2012, p. 21). Throughout 2013, discounting the sug-

gested retail price became the corporate pricing strategy, with emails about savings events and price tags

showing the difference between the suggested price and the actual price (Mintel, 2013).

In 2013, “It’s No Secret,” an apology ad acknowledging that J.C. Penney’s changes in marketing and brand

image had ventured away from its roots, ran on TV and YouTube. The YouTube video stated that the good

news was the company was listening to its customers and learning. It encouraged customers to talk with the

company on Facebook and “come back to J.C. Penney” (Brand New, 2013). Three-tiered no coupon pricing

had been disastrous for J.C. Penney, so towards the end of 2012, the decision was made to return to the

Macy’s way. Analysts pointed out that the company must continue to find pricing at levels customers would

accept for the perceived value. The company also reverted to offering deep deals and discounts to drive sales

and these promotions were smoothly integrated into the home page of the company’s website and other mar-

keting channels.

Also in 2013, J.C. Penney reverted to its pre-2011 logo and began to re-upscale its image from the low-end

image it had experimented with by capitalizing on brand nostalgia to regain consumer trust. Its other logos

were still in use in various marketing capacities, however, pending streamlining to one logo. At that point,

skeptics continued to insist that the old logo was bland and questioned how the company would use its his-

toric position to gain competitive advantage in the current marketplace (Brand New, 2013).

In its return to simpler times, J.C. Penney also reinvested in its core brand value with a focus on its private

labels St. John’s Bay, Stafford, and jcp Home, as well as on sales of other classic brands such as Levi’s, Nike,

Carter’s, Dockers, Alfred Dunner, Vanity Fair, and Izod. Focus again shifted to connecting with customers and

positioning J.C. Penney as a “better place to shop,” increasing customer service levels which, it was hoped,

would translate to better customer satisfaction, despite the human resources challenges involved. The com-

pany sought to find the right mix of private, exclusive, and national brand offerings and the right inventory

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levels. Progress as of October 2013 indicated a small increase in sales (J.C. Penney, 2013). Its strength lay

in developing its private label brands and the images associated with those brands, which were exclusive to

J.C. Penney. The company also decided to pursue partnerships with trendy brands and well recognized ac-

tors. For its children’s line, J.C. Penney began offering Disney toys, role-play options, and Disney apparel. As

Macy’s had traditionally featured high-end makeup lines in its stores, J.C. Penney decided to open additional

Sephora locations inside its stores to offer high end make up to its shoppers. Thus, the company began to

focus on providing “shops” within the shop such that by entering J.C. Penney’s, the customer felt she or he

was entering a mini mall with partner brands.

Women’s clothing was the biggest draw to the store (Mintel, 2013). In all departments, J.C. Penney combined

private label brands—brands only available at J.C. Penney—with national brand offerings, most recently in-

corporating Martha Stewart’s products, including a joint website of J.C. Penney and Martha Stewart products.

There was a problem with this move, however, as Martha Stuart had a contract with Macy’s which resulted

in a lawsuit and poor press coverage. Eventually, J.C. Penney was permitted to sell Martha Stewart items

without using her name (Lutz, 2013).

The company dedicated sections of its stores to Liz Claiborne, Olsenboye (founded by Mary-Kate and Ashley

Olsen), IZOD, Supergirl by Nastia (a lifestyle line for girls founded with Olympic gymnast Nastia Liuin), Royal

Velvet, ALDO, One Koss by Cindy Crawford and a new exclusive brand for basic fashion – jcp. In fact, J.C.

Penney acquired the exclusive rights to the Liz Claiborne brand name and its subset, Monet. This exclusivity

and the exclusivity of partnerships with other famous brands either through the sale of existing brands or the

creation of new brands like Supergirl, it was hoped, would prove a strength, as J.C. Penney tried to differen-

tiate its products. The company’s staple sections within its store included Levi’s, Arizona Jean Co., I jeans by

buffalo, MNG by Mango and Sephora. Other brands offered included: The jcpenney, Okie Dokie, Worthing-

ton, east15th, a.n.a, St. John’s Bay, Ambrielle, Decree, Linden Street, Article 365, Uproar, Stafford, J. Ferrar,

jcpenney Home Collection, Studio by jcpenney (MarketLine, 2012) [Exhibit 2].

In addition, the company re-focused on jcp.com or jcpenney.com where sales of home goods were strongest,

followed by women’s, men’s, and children’s clothing. Creating jcp.com as a home fashion hub, offering sea-

sonal “catalog” type campaigns/sales, and really capitalizing on what sells well— the home goods —were

seen as the best strategies to reposition J.C. Penney for future competitive advantage (J.C. Penney, 2013),

especially as a Mintel Survey of 2,000 U.S. retail shoppers over 18 conducted online, revealed that 52% of re-

spondents had shopped at J.C. Penney, second only to Kohl’s, and, 50% of respondents had shopped online.

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Thus J.C. Penney was beginning to transition to an online retailer from a brick-and-mortar catalog solution

(Mintel, 2013) [Exhibit 3]. In particular, J.C. Penney capitalized on holiday promotions offering QR code gift

messages attached to gift purchases during the holiday season (Mintel, 2013). In 2012, for the holidays, J.C.

Penney demonstrated digital innovation with email footers to click to gift ideas, gift cards, and store hours.

The footer was used as a best practice in documentation from ExactTarget, an email service provider (2013

Holiday Inspirations.) In addition, a holiday TV promotion using music focusing on the holiday spirit was rec-

ognized for being upbeat and focusing on the fun meanings of Christmas rather than sales and gimmicks

(Mintel, 2013).

With regard to social media engagement, J.C. Penney ranked in the middle in relation to other department

stores, gaining a market share of 12% of online discussion. Customers interacting with J.C. Penney on Face-

book, specifically 18-24 year olds, liked salon services and complained about product cuts. (Mintel, 2013).

Store layout “Shops”, “Street”, “Square”

The new store layout, designed to improve customer flow around “shops” within the larger store and imple-

mented with renovations earlier in 2013, yielded some positive results, especially merchandising opportunities

and pleased consumers. The Home department added furniture and small shops featuring an entire line from

one brand, like the Liz Claiborne shop or the Levi jean shop elsewhere in the store. If a customer liked the

colors featured in the Royal Velvet collection or those in the Studio line, all the matching towels and bedding

products could be found together (Lindeman, 2013). This made it more convenient for the customer, rather

than having items spread throughout the store, and had the added benefit of helping to move inventory. J.C.

Penney store customers, Ms. Sullivan and Ms. Pinti, said they “like the wider aisles and the brighter, cleaner

look of the store” (Lindeman, 2013). Even Mr. Ullman commented, “From my perspective, J.C. Penney has

made very good progress over the last 18 months, improving how our stores look, and how our brand assort-

ments, like Joe Fresh and Happy Chic by Jonathan Adler, look in our stores” (Lindeman, 2013).

This new layout of “Shops”, “Street”, and “Square” was designed to present “a streamlined visual display for

our customers” (J.C. Penney Company, 2013). However, although it was inviting to customers, and made the

merchandising of products from the same brand easier for customers to find, it reduced the amount of space

for merchandise display. Diminished space for display meant that the Operations team needed to tighten

processes and execute with more precision; the Store staff needed to keep the shops organized and stocked

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Page 15 of 33 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era

with merchandise in the correct locations; and the sourcing and inventory management teams needed to en-

sure merchandise was restocked quickly, as an empty displays earned no revenue. Management also recog-

nized that the new layout might only work in its larger stores, not in its smaller stores.

RFID system

In July 2012 former CEO Johnson announced that by February 2013 J.C. Penney would implement new RFID

technology to automate transactions and enhance its inventory and supply chain network, replacing its cur-

rent bar coding system. In addition, he said that RFID would support self–checkout by customers so that the

company could save the big expense of running cash registers, and re-deploy resources to customer service.

“About 10 percent of all the money we spend—half a billion dollars a year—goes to transactions for labor” –

said former CEO Ron Johnson (Swedberg, 2013). However, given J.C. Penney’s financial situation and man-

agement changeover, it had to defer the RFID investment, as it required too large an initial outlay, not just for

tags, but the installation of readers throughout the stores.

In the interim, RFID technology was installed in certain departments: bras, footwear, fashion jewelry, and

men’s and women’s denim but not in others (Swedberg, 2013). Security tags were removed from merchan-

dise in anticipation of the move to the new RFID system even in those departments because they would have

interfered with the radio frequency devices. However, that turned out to be a big mistake as that, in combina-

tion with a change to a “friendlier” returns policy which did not require receipts to return items, resulted in a

spike in theft in the third quarter, as “shoplifting took a full percentage point off the department store chain’s

profit margins” according to CEO Ullman (Kapner, 2013).

The Ron Johnson Legacy: Disastrous Financials

J. C. Penney always operated in a highly competitive industry, serving a wide range of customers. Its sales

were dependent on the ability to predict and respond to changes in fashion trends and customer preferences.

In order to capture a broad range of customers the company offered several types of products. Percentage of

sales from 2008-2012 segregated by different lines of businesses were as follows:

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All divisions experienced a decline in sales from 2011 to 2012. The Home division posted the largest decline,

while women’s and men’s apparel posted the lowest. Importantly, the changes in marketing that occurred dur-

ing this time period were focused on trendy clothing and barely touched home goods.

After its failed attempt in 2012, J.C. Penney continued to try to turn-around its business. From 2008-2012 the

company did not performed well. In 2010 sales decreased by approximately $930 million or 5%, compared to

2009. The company recovered in 2011, however it declined again in 2012. As noted in the following table the

total net sales decreased between 20% and 30% each quarter during 2011 and 2012:

2012 2011 2010 2009 2008

Women’s apparel 23% 25% 24% 24% 24%

Men’s apparel and accessories 21% 20% 20% 19% 20%

Home 12% 15% 18% 19% 19%

Women’s accessories, including Sephora 13% 12% 12% 11% 11%

Children’s apparel 12% 12% 11% 11% 10%

Family footwear 7% 7% 7% 7% 6%

Fine jewelry 7% 4% 4% 4% 5%

Services and other 5% 5% 4% 5% 5%

100% 100% 100% 100% 100%

($ in millions) First Quarter Second Quarter Third Quarter Fourth Quarter

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Source: J.C. Penney Company, 2013

For the 26 weeks ending August 3, 2013 revenues from retail sales decreased by 14% to $4.87 billion and

online sales decreased by approximately 12% to $432 million. In fact, sales had fallen short of expectations

for the four consecutive quarters (Morning Star, 2013), as indicated below in a comparison of actual to esti-

mated sales ($ in millions):

Gross Margins

The company’s gross margins depended highly on the ability to manage appropriate inventory levels and

quickly respond to both customers’ demands and fashion trends. J.C. Penney’s profit margin declined in 2011

2012 $3,152 $3,022 $2,927 $3,884

2011 $3,943 $3,906 $3,986 $5,425

Decrease

$(791) $(884) $(1,059) $(1,541)

−20% −23% −27% −28%

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Page 18 of 33 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era

and 2012 due to the change in its business model and lower consumer confidence. From the period 2009

through 2013 gross margins declined from 39% to 29%, as shown here:

The same pattern of decrease in gross margins persisted in quarterly gross margins for the first three quarters

of 2013 compared to 2012. In the first quarter in 2013 gross margins decreased by 6%; in the second quar-

ter they decreased by 7%; and third quarter by 4% when compared to the corresponding quarters in 2012.

Decreases in gross margins during 2012 were directly related to the high markdown of inventory and lower

margins achieved on clearance items (Morning Star, 2013).

Net Income

J.C Penny did not respond quickly to the continuous drop in sales even though it was in the process of im-

plementing cost savings initiatives, resulting in net income decreasing at a higher rate than sales. Operating

expenses as percent of sales were 41%, 36%, 35%, 36%, and 31% for the period 2012 to 2009. The high-

er percentages toward 2012 were attributable to the inability of the company to leverage expense reduction

against lower sales (Exhibit 4). Also interest expenses increased by approximately 19% during 2012 com-

pared to 2011.

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Net income in 2012 was also affected by onetime costs like markdowns related to alignment of inventory with

the new business model introduced in 2011 and 2012; restructuring; management transition charges; and

non-cash primary pension plan expenses. These costs were offset by a net gain on the sale of non-operating

assets (Morning Star, 2013).

Long-term Debt & Cash

As illustrated in the table below, J.C. Penney’s long-term debt over five years ranged in 2009 to 2010 from

$3.5B to $2.9B. During 2013 the company increased proceeds from financing activities and by mid-2013 it

held $4.9 billion in long-term debt.

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The long-term debt to equity ratio steadily increased from .65 in April 2011 to 2.09 in July 2013. The increase

in long-term debt was intended to fund working capital requirements, invest in capital improvement plans,

and service the outstanding indebtedness. In 2012 the company spent considerable resources developing a

new everyday low pricing strategy that was then abandoned, requiring stores to be re-merchandised (Morning

Star, 2013).

In 2009 and 2010, J.C. Penney had $2.4B and $3B in cash and $3.5B and $3B in long-term debt, which

approximated 67% and 100% cash to long-term debt, respectively, indicating that the company was well po-

sitioned to pay off its long-term obligations from operating cash flow with sufficient funds remaining to fund its

working capital and invest in properties, acquisitions, or other expansion plans. The cash to long-term debt

changed in 2010 and 2011 as the company implemented a repurchase of its own stock and also planned to

change its business model. In 2010 the company bought back 900 million shares under the belief that the

company’s stock was undervalued. From 2010 to 2012, the cash to long-term debt decreased from 100% to

30%, and remained in the 30% level each quarter in 2013.

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As shown above, the company had a difficult time generating cash from its operations in the five quarters

from mid-2012 to mid-2013; the cash on hand at year’s end came from financing and investing activities. The

last two quarters ending in April 2013 and July 2013, were the worst, as the company had to borrow money

to meet its cash requirements. J.C. Penney’s inability to generate cash, it was felt, could adversely impact its

business, requiring the company to satisfy more restrictive covenants, which could lead to higher financing

costs or be dilutive for current shareholders (Morning Star, 2013).

Inventory

Year-to-year inventory levels from 2009 to July 2013 grew in proportion to sales levels. Even though the

above ratios did not indicate any issues with inventory, the company wrote off an unusually large amount of

inventory resulting from the failure of it new business model in 2012, indicating that the company was not able

to manage inventory efficiently during the business model change. The significant write down was offset by

restocking of inventory based on the new specialty business model (Morning Star, 2013).

JCP Stock Performance

J.C. Penney’s financial performance in the five years from 2008-2012 dictated its stock price. During 2011

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Page 22 of 33 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era

the board approved the repurchasing of 900 million shares, suggesting the company believed its shares were

undervalued, and the turnaround would succeed. As shown below, J.C. Penney’s stock value fell significantly,

reaching a five year low of $6.42 per share on October 21, 2013.

The stock price in 2013 was even lower than during the recession, when many stocks hit bottom. Toward the

end of 2013, J.C. Penny’s stock began to show signs of life as the company stated that its sales outlook had

improved (Morning Star, 2013).

Morale Problems: Layoffs, Opacity, Instability

J.C. Penney had always striven to maintain a positive work environment and treat its employees well. Howev-

er, the Johnson management team made some changes that had a negative impact on company employees,

mainly in the form of layoffs. J.C. Penney let go 19,000 employees throughout its transformation, according

to CNBC’s Courtney Reagan, including in-store associates, middle managers, salon receptionists, call cen-

ter workers, corporate employees, and others (Bhasin, 2013). Under Johnson, supervisors in stores were

reportedly instructed to color-code their employees in preparation for future firings. “Red” meant the worker

should be eliminated; “yellow” was the designation for employees who needed more coaching; “green” signi-

fied strong employee performance (Bhasin, 2013).

When the new management team was installed at J.C. Penney and Johnson was made CEO in 2011, the

internal culture of the company became opaque, rather than transparent. As an executive who had worked in

the previous era claimed, “Corporate culture is very different than it was one year ago. There is no protocol

or process in the company anymore. The direction given on product changes very frequently.” “There are no

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Page 23 of 33 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era

memos or written directives anymore,” another J.C. Penney home office executive stated. “Last one I saw

was almost eight months ago. Everything gets communicated verbally and without too much detail. They do

not leave any opportunity for anyone to ask questions,” the executive continued. “While working at the home

office, we do not get any insight to store operations and changes” (Bhasin, 2013). This opacity created a hu-

man resources opportunity to improve employee morale and communication and to standardize processes to

decrease fears. As it was felt that explaining decisions and involving employees more in the decision-making

process could help revitalize the company, more open communication with employees was implemented after

Johnson’s departure.

Under Johnson, the J.C. Penney’s dress code changed to reflect a more casual environment, but upon his

return, Ullman found that customers had trouble locating store workers and reinstated a business-casual re-

quirement in May 2013. Name tags for store workers were changed from paper lanyards to small magnetic

pieces in 2012, and by late 2013 to newly designed larger name tags to identify team members. Analysts

considered the lack of a consistent appearance for store workers a weakness that would not be overcome

until J.C. Penney codified what store associates wore.

Under Johnson, morale at J.C. Penney headquarters was undermined by having to deal with a distant man-

agement staff: Johnson and former executive vice presidents Ben Fay and Laurie Miller all commuted by

private plane from California to Plano, Texas; the former CCO Michael Fisher and senior design and trends

executive Nick Wooster flew from New York; and the construction executive Bob Laughrea commuted from

Boston. The company paid for all of these commutes, which company employees resented, as the company

was paying for these expensive commutes while struggling financially (Maheshwari, 2013).

To obtain a competitive advantage J.C. Penney adopted a location-oriented strategy early on, selecting and

accumulating store locations over a long period and adapting its locations to changing consumer behaviors,

especially keeping in mind shoppers’ preference for short travel and easy access. By 1922 the company had

371 stores in 27 states and by the late 1920s the company had expanded to approximately 1,400 stores. As

of 2013 the company operated over 1,100 department stores across United States and Puerto Rico, mostly

in malls. Replicating its location advantage would be very difficult and costly for new entrants.

The company also focused on differentiation, adding value through distinctive private label brands. For ex-

ample, Arizona Jeans saw a spike in popularity when they were first introduced. In moving forward after the

Johnson debacle J.C. Penney needed to assess these private brands and capitalize on their potential mar-

kets. Moreover, as home goods were a sales leader online, adding private label brands to its Home depart-

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ment, it was felt, would fuel future online sales, while focusing on private label Women’s apparel would boost

in-store sales as women’s apparel drove sales in stores.

Operationally, J.C. Penney was always a store that gave back to the community. While this was not always

marketed as a source of competitive advantage, positioning the company behind the Golden Rule and high-

lighting its corporate giving and sustainability initiatives, it was considered, could resonate with the consumer

and become a point of differentiation particularly if the company invested in being even more progressive in

this arena. At the same time, the company’s supplier communications and oversight proved to be core com-

petencies in maintaining effective relationships and practices.

While J.C. Penney continued to develop its overall market segments and marketing messaging, it also suc-

cessfully targeted Hispanics, gaining operational knowledge of Hispanic consumers through opening its first

Mexican department store in Monterrey in 1995, and continuing to expand in Mexico till it sold its six Mexican

department stores to Groupo Sanborns S.A. de C.V. of Mexico City in 2003. The growth of the Hispanic pop-

ulation in the US, their high frequency of departments store visits, and the company’s knowledge of Hispanic

shopping habits helped J.C. Penney, as market research confirmed that Hispanics were more likely to shop

at J.C. Penney than Kohl’s or Sears. Continuing to court this demographic by putting up signs in both Spanish

and English and using bilingual sales representatives and cashier was considered crucial to future growth.

J.C. Penney’s over 100 years of successful business strategy was attributable to establishment and under-

standing its primary demographic; customer profiling, and outperforming its competition by developing ap-

pealing products and services that appealed to its core customers. The company changed and adapted as

preferences and the competitive environment changed. In recent years, the company lost its focus on align-

ing its business with its customer profile, in particular, the female demographic. Under Johnson, the company

lost 10% of its female customers, because they were looking for discounts, not every day pricing. In 2012, the

company also shifted its efforts to focus on reaching 18-24 year olds, alienating its bread and butter demo-

graphic of female heads of households. It became clear that if the company did not re-invent itself by catering

to both its core customer and other market segmentations, it would be selected out. It was imperative, there-

fore, for J.C. Penney to determine its key customer segments, and then provide merchandise and messaging

that reached all of them effectively without alienating any of them.

Moreover, effective management of inventory was also key to sustaining profitability; merchandise had to be

distributed among the stores in an efficient and timely manner. If the company overestimated customer de-

mand, it had to markdown its inventory, thus taking a loss; yet if the company underestimated customer de-

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mand it experienced inventory shortage, thereby missing sales opportunities and eventually losing customers.

In 2012, the company marked down its inventory by $155 million, indicating that the company had not man-

aged its inventory effectively.

Uncertainty Going Forward

In trying to change too quickly at too great a cost at a time when the economy was weak in the aftermath

of the recession, J.C. Penney suffered an identity crisis, no longer able to answer to the question, “Who are

we?” In 2009, the economy was down but J.C. Penney was still doing relatively well compared to other stores.

Growth and profits were flattening during this time period, however, and for any public company, that was dis-

heartening. Trying to determine how to increase growth, J.C. Penney’s radical board member, Mr. Ackman,

advocated re-branding the company through the leadership of a new CEO, Ron Johnson.

Ron Johnson spent a lot of money at an inopportune time. In 2005, J.C. Penney’s debt was equal to its cash.

By 2013, the company had only 30% cash on hand compared to its long-term debt. This horrendous financial

situation was brought on by large debts incurred to rebrand the company at a time when operations were

shrinking. Rather than revitalizing the company, the rebranding confused customers who couldn’t tell any-

more if J.C. Penney was a higher end store or a lower priced store. The company reconceived its inventory to

incorporate higher end boutique items, yet it was still effectively discounting its clothing. The “fair and square”

three-tiered pricing system worked against psychological research about pricing, as customers confirmed

when they saw these “low prices” as high and the lack of sales/discounts as off-putting. At the same time that

J.C. Penney incurred high interest expenses to pay for its overhauls, it also bought back shares—this poor

timing resulted in lingering weak financials.

Had J.C. Penney changed slowly over time, responding to market trends and testing the waters for new set

ups the outcome could have been different, but the company failed to test its changes – for instance, its initial

logo change was designed by a competition and then immediately implemented, without market research.

Even before the major changes of 2011 to 2012, J.C. Penney still needed to develop a strategy for growth in

an increasingly competitive environment and in a middle of the market position highly dependent on econom-

ic conditions for sales. Analysts saw that to survive, J.C. Penney would need to develop and closely monitor

an effective turnaround strategy to regain the trust of both customers and Wall Street. Only time would tell if

they would be successful.

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On January 15, 2014, J. C. Penney announced its plan to close 33 stores and eliminate 2,000 jobs, potentially

saving the retail giant $65 million a year. The move came as chief executive Mike Ullman worked desperately

to bolster a company that had gone nine straight quarters without a profit.

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