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A Recap of What Went Wrong at JCPenney under Ron Johnson

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Management changes in 2011

In November 2011, JCPenney (JCP) appointed Ron Johnson as the new CEO of the company, replacing Myron E. Ullman III. Johnson was highly regarded for making the Apple (AAPL) retail stores a success. The news of Johnson’s appointment in June 2011 led its stock to rise by 17.5% as investors became optimistic about the prospects of JCPenney, which had underperformed its peer group until then. However, Johnson’s attempt to reinvent the company did not go as planned.

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Strategic decisions that went wrong

Ron Johnson implemented a series of changes at JCPenney to transform the department stores. These initiatives included:

  • implementing a new pricing strategy called “Fair and Square”, which replaced the company’s sales, coupons, and rebate offers (this was a three-tier pricing strategy that included regular everyday prices, month-long values, and best prices)
  • discontinuing private brands like St. John’s Bay to make way for more national brands
  • introducing a service center called Town Square within each store
  • revamping the home department to give it an upscale look

Why the initiatives backfired

Ron Johnson’s pricing strategy alienated loyal JCPenney customers instead of attracting them. Johnson tried to transform a mid-tier department store to a specialty store. His initiatives did not go down well with JCPenney’s core customers—the American middle class, who liked the coupon deals and markdowns offered by the department store.

JCPenney’s private brands differentiated its stores from other department stores. Ignoring in-house private brands like St. John’s Bay disappointed their buyers, and reflected in the company’s falling sales. Also, the concept of Town Square replaced the traditional center core of a department store that houses products like jewelry, which provide cross-selling opportunities.

Overall, the timing of such aggressive strategies was poor as the economic conditions in the country were not favorable. Also, too many changes were implemented too quickly.

In fiscal 2010 ended January 29, 2011, JCPenney’s sales increased by 1.2% after falling for three fiscal years. After Johnson assumed control at JCPenney, sales in fiscal 2011 fell by 2.8%. The company underperformed peers like Kohl’s (KSS), Macy’s (M), and Nordstrom (JWN), which posted sales growth of 2.2%, 5.6%, and 12.1%, respectively in fiscal 2011. JCPenney along with Kohl’s and Macy’s constitutes 0.6% of the iShares Russell Mid-Cap Value ETF (IWS).

In April 2013, Ron Johnson stepped down as CEO and JCPenney brought back Mike Ullman to make things right. The next part of this series will discuss the turnaround efforts under the leadership of Mike Ullman.

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