I listened to the webcast presentation JC Penney CEO Ron Johnson gave to analysts and investors last week after a prototype tour of the new JC Penney.
I must say, the guy is pretty mesmerizing, and definitely has a vision.
He also has an approach to working with vendors that I’m sure is appealing for industry brands that are under extreme pressure to grow, and are looking for some high volume accounts.
Johnson was the mastermind of Apple’s retail strategy and was responsible for turning Target into a cheap chic shopping destination.
Promotional model is over
What he’s trying to do at JC Penney is audacious – transform one of the most tired, old and lower end department stores into a specialty destination with the best products at “fair and square” prices without promotions.
“The promotional model runs its course,” Johnson said in his talk. “Because the more you promote, the only way to beat a promotion is a bigger promotion, and ultimately, you don’t have access to any new ideas from a merchandise perspective … Because nobody’s going to put their brand in a place that they’ll devalue it. So ultimately, stores are about merchandise, and if you want to win, you’ve got to reinvent the content and the service and the presentation.”
Vans has had a healthy business with JC Penney for years, and DC Shoes recently launched at the store. I have heard that another large brand is poised to go there in the future, though I do not know which brand yet.
This is Johnson’s plan in a nutshell: Create 100 shop-in-shops at JC Penney with exciting brands and retailers that showcase their best merchandise at the stores. To put that number in perspective, an average mall has 100 stores.
“And each of (the shops) will be pure,” Johnson said in his talk. “Meaning if you’re in the Disney shop, you’re going to feel like you’re in the Disney store. If you’re in the Joe Fresh shop, you’re going to believe you’re in the Joe Fresh store. Everything down to the people, how they’re trained, the signing, the experience, the hangers, the hang tag are 100% the shop.”
Currently, JC Penney has rolled out about 10 shop-in-shops to most stores, and a year from now there will be 40.
So far, the new shops collectively are comping 20% better than the rest of the store.
Levi shops generate vendor interest
The new Levi’s store at JC PenneyThe Levi shops are the showcase thus far. The shops look cool, carry nearly every fit, finish and style of Levi’s, and are staffed with specially trained employees. Even during back to school, traditionally a time when big stores discount Levi’s, Levi’s comped up double digits at JC Penney, Johnson said – and JC Penney did not discount.
Both the Levi men’s and women’s shops are performing well above plan.
And, when other vendors saw those Levi shops, the phone began ringing, Johnson said.
Disney, Dockers and Haggar all signed on after the Levi’s shop debuted. And with Dockers, the brand will not showcase brown pants in the shops, but tops and bottoms and shirts – “It’s giving Dockers a chance to build their brand,” he said.
Not only are brands anxious to get in, now retailers are interested after learning that Canadian fast fashion retailer Joe Fresh will add 700 shops at Penney’s stores by April 1. Joe Fresh is choosing this route rather than undertaking the massive investment it would need to penetrate America.
Other new brands and retailers that have signed on: Bodum, the European maker of coffee, tea and kitchen goods currently carried at Crate & Barrel and Starbucks in the U.S.; Caribou Coffee, a boutique Italian yogurt shop, and the candy store Sugar Shack, all designed as places to relax and entice; and Giggle, a startup retailer that sells baby products and gifts at boutiques in New York, LA and San Francisco.
See Page 2 for Johnson’s approach to vendors is different from some other department stores – and why he thinks being greedy backfires
New approach with vendors – greed is bad
During his talk, Johnson also explained his philosophy with working with vendors, which I’m sure is appealing, especially compared to Macy’s, which is infamous for demanding charge backs and concessions which makes it hard for brands to have a profitable business with them.
Here’s what Johnson had to say about his approach:
“We want a Fair and Square return for our vendors and ourselves, and in a perfect world we’re going to share the proceeds of all the innovation we do. We are committed to having gross margins over 40%.
“But there’s a lot of margin to go around, because a lot of these (companies) that have to do their own specialty stores, they need 60 to 70 points of markup to be able to deliver their profit, because there’s a lot of expense going into that store. So if we need 40%, and they start at 60%, 70%, there’s a lot of room to share the profit.
“Vendors provide capital to help build the shops. That’s really important to us. We buy things at wholesale. There’s no funny money. There’s no promotional allowance, markdown money, because all that does is lead to more inventory than you need. We’ve got to make the whole pipeline efficient. And then fairly and squarely share in the profits. And that’s why (vendors are) lining up.
“Greed is a really bad thing. We can’t say we’re the power, therefore we’re going to take money out of the vendor’s product and put it in ours. If we don’t share long-term, we aren’t going to have partners. And all I care about is when they have a new idea, they put it in our store. So if Levi’s has a new fit or a new finish, and say I’m going to JC Penney because I earn more money selling through JC Penney.
“ … So we’re going to treat our vendors fairly, we’re going to treat them squarely, and we’re going to share in the profit of what we create together. It’s a principle thing.”
Technology and experiences
Coming from Apple, Johnson is not shying away from using technology. Eventually, all staff will have iPods in their pockets to check out customers anywhere, and cash wraps will be removed over time.
JC Penney will use the space to add couches, Caribou Coffee cafes, the yogurt stand, the candy store, and more.
High speed internet will also allow shoppers to sit down and check sport scores if they’d like.
Other experiences being added are Lego tables for kids in the children’s area, visits with Santa, Christmas cookies, and card making activities during the holidays, and free haircuts for kids during back to school, most of which will be held in an area of the store called The Square.
“We’re going to create that new imprint, long-term in customers’ minds,” Johnson said. “We did that back-to-school, 1.6 million free haircuts. Santa Claus, Christmas portraits, Legos, Sugar Shack. This is building a relationship with the customer. We’re not selling stuff (at The Square). We’re transforming retail.”
Painful transformation
All of these changes have been difficult on Penney’s financials, and its stock price, and Johnson has described this year as “a year of transformation.”
“… It’s all about the goods, and we’re getting the goods,” he told analysts. “But it’s because we’re willing to go through pain. Running sales down is painful. Reducing your expenses $1 billion to get to a new business model is really painful.
“But I want you to understand, there was no choice than to choose a year of transformation to get to here, and in the long run we’re going to be better off, because we’re going to jump start on the new JCP.”
That is one tall order, and it will be fascinating to see if he can pull it off, and if any more industry brands will take part.
