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Maybe Ron Johnson Was Right About J.C. Penney After All

By Rich Duprey – Updated Apr 20, 2019 at 12:39AM

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His ideas for changing how department stores operated were radical, but they might also be essential.

Although investors rallied behind J.C. Penney (JCPN.Q) after its holiday sales update indicated it would be free-cash-flow-positive for the year, despite a dismal Christmas showing, the ailing retailer is still in a downward spiral and could yet find itself in Sears Holdings' barely-hanging-on predicament.

Because both Macy's and Kohl's also reported weaker-than-expected holiday sales, indicating this is more of an industrywide problem, it also suggests there are still deep issues in the department-store model. Perhaps we should ask whether former J.C. Penney CEO Ron Johnson -- who served for almost a year and a half starting in late 2011 -- indeed had the right idea for turning around the company.

A Nike boutique inside a J.C. Penney story has shirts and jackets on sale.

A Nike boutique inside of J.C. Penney. Image source: J.C. Penney.

History is written by the winners

It has become retail lore that Johnson's brief tenure at J.C. Penney was a disaster. Brought on to modernize the stodgy chain, he is instead seen as having lit a match to it, nearly burning the business to the ground.

He did away with popular "doorbuster" sales, which he called "fake prices," in favor of a strategy referred to as everyday low pricing. He brought in more national name brands and eliminated many in-house brands. He introduced more technology into the store. (OK, eliminating cash registers in favor of roaming employees with iPads to check out customers may have been a bit much).

The results were disastrous. Sales that had been falling before he came aboard dramatically plunged, as the company's classic customer -- a middle-class mom -- didn't know what to make of this former Apple executive's retailing innovations and fled for the competition. J.C. Penney's board panicked and ousted Johnson, eventually undoing almost every idea he implemented.

On the surface it may have appeared there was a return to normalcy, but the foundation underneath J.C. Penney is still being eroded, and the department-store chain once again finds itself in peril. The Christmas sales report may give new CEO Jill Soltau a little breathing room, but it's clear J.C. Penney is living on borrowed time, and much of the department-store business model, also atrophying, needs to be reinvented.

It could be that Johnson was the executive the retailer needed.

The future of retailing

Johnson understood that the retail landscape had changed. Department stores were still essentially operating on the same model they had adopted over 150 years ago, and were trying to use it to compete against (NASDAQ: AMZN) and the internet. Johnson sought to change that.

His vision of the new J.C. Penney was a store with "streets" of 100 boutiques that converged on a "town center" where customers could meet, eat, and interact with friends. The retailer would be more than a place to shop -- it would be a destination in itself, attracting younger, more affluent customers. The stores were streamlined: They were made cleaner, neater, and more orderly. And the pricing policy change meant employees were able to focus on customers and not on marking down merchandise.

It was a revolutionary idea, but one customers didn't quite understand. Without a promotional stimulus to get them in the door, J.C. Penney tumbled. And its board lost its nerve, throwing out Johnson, the baby, and the bathwater.

But Johnson was onto something that is only now becoming apparent. Had he rolled out the changes in test markets to give customers time to acclimate to his new ideas, instead of launching them nationally all at once, he'd have had time to see which were more appropriate for the store and which were maybe too radical.

Of course, J.C. Penney was in free fall before he got there -- it's why he was hired; to make big changes -- so he needed to act quickly. Now, his ideas are being tested by other retailers who are being lauded as innovators.

A new way of doing business

Walmart (NYSE: WMT) announced late last year it was introducing "town centers" into a dozen locations. And while Johnson was thinking of a town center inside the store and Walmart is thinking of parcels of real estate that include entertainment, shopping, dining, and more, the notions share a focus on making shopping about more than buying things. Meanwhile, Amazon's Whole Foods Market began introducing outside vendors into its stores to create a communal atmosphere.

Nike (NYSE: NKE) has introduced its "store of the future," which is chock-full of technological innovations to enhance the in-store experience.

What J.C. Penney arguably needed most was time: time to test new ideas and give shoppers a chance to understand them. It's true the retailer's financial condition was a lot more precarious back then, and Johnson came from a culture at Apple where customers were more accepting of change. But if Soltau is going to save J.C. Penney from the fate of Sears, then it may be time to revisit her predecessor's ideas. Dragging the department-store chain into the 21st century, kicking and screaming if necessary, could be what ultimately saves it.

Check out the latest J.C. Penney earnings call transcript.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and AAPL. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends Nike. The Motley Fool has a disclosure policy.

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