Can J.C. Penney's New CEO Reinvent the Department Store?

As engineer of Apple's winning retail strategy, Ron Johnson created a juggernaut that reaped both profits and positive buzz. But can he do the same with the department store, a retail format that many feel is becoming antiquated? As the newly named CEO of J.C. Penney, Johnson will be tasked with crafting a new niche for an American institution.

The Plano, Texas-based department store chain named Johnson, chief of Apple's retail stores, as its new CEO on June 14. Johnson will take the helm on November 1 and, for the time being, report to J.C. Penney's executive chairman and outgoing CEO, Myron E. Ullman III, who has held the top job since 2004 and will step down on February 1, 2012. In a statement, Johnson said that he has "always dreamed of leading a major retail company" and looked forward to helping J.C. Penney "re-imagine what I believe to be the single greatest opportunity in American retailing today: the department store."

Big goals aside, the future of the department store is an open question, and the jury is out on whether there is ample opportunity ahead. "Department stores are still important," says Barbara Kahn, a marketing professor and head of Wharton's Jay H. Baker Retailing Center. "The risk is that department stores will become mere showrooms where shoppers browse and then buy elsewhere."

The challenge for department stores goes beyond merely competing with mass merchandisers like Walmart and Target. Department stores have to adapt to new technologies, such as mobile devices; do a better job of targeting merchandise and services to particular customers, and find a way to stay relevant as consumer choice in retailing balloons. "Department stores have control over their futures to the extent that they can create multi-channel experiences," according to Peter Fader, a Wharton marketing professor and co-director of the Wharton Customer Analytics Initiative. "They have to triangulate the purchases of a shopper across online, offline and mobile channels."

If anyone can invigorate department stores with the help of technology, it should be Johnson. He joined Apple in 2000 from Target, where he was vice president of merchandising. Under his watch, Apple launched its retail stores in 2001 during a recession and shortly after the failure of a similar effort by PC rival Gateway. When Apple's flagship stores launched, the company's only marquee product was its Mac computer. The stores have since expanded to include the now-ubiquitous iPod, iPhone and iPad.

Johnson oversaw an Apple Store chain that delivered revenue of $710 million, with an operating loss of $22 million, in fiscal 2002, and eventually grew it into a venture that had operating profits of $2.36 billion on revenue of $9.8 billion for fiscal 2010. For the six months ended March 26, Apple's retail stores had an operating profit of $1.84 billion on revenue of $7.04 billion.

But doing the same for J.C. Penney will be challenging. Stephen Hoch, a Wharton marketing professor, says at Apple, Johnson was blessed with products that could drive a simple retail strategy. But he will not have those same assets at J.C. Penney. "Apple had a killer app and it executed on it," Hoch points out. "Johnson had to design a retail experience that was consistent with the products and delivered lots of information. The focus was on discovery, entertainment, atmospherics and design. Apple had a one-trick pony that worked great."

At J.C. Penney, however, there will be no one magic bullet because Johnson has to define a company that is more than a century old, already has 1,106 stores located across the country and sells a broad mix of products. Technology is likely to play a role in the chain's reinvention, but other factors such as culture, marketing and merchandising will matter, too. "Apple showed the importance of experience as a route to customer engagement," notes Wharton marketing professor David Bell. "The store lets Apple sell more than 'product': They sell experience, emotional connection and lifestyle. These are great differentiators. Product alone -- be it computers or clothing -- is insufficient."

Rethinking a Retail Institution

Department stores -- a retail institution that dates at least as far back as the mid 1800s -- have been trying to reinvent themselves for years, with mixed results. In the U.S., they followed shoppers from downtown areas to suburban shopping malls, and of late have branched into standalone stores at "lifestyle centers."

But Hoch says department stores are facing considerable disadvantages. For instance, the chains remain the anchor tenants in many shopping malls, with costly leases that eat into their profits. Meanwhile, there is a fine line between offering a broad assortment of products and being cluttered. "For 30 years, department stores have been shrinking as a percentage of retail," Hoch points out. "I don't even think department stores serve as a good showroom. There's so much stuff in there and not enough editing to make shopping simple."

Not only do department stores sell a lot of merchandise, but they often sell the same kinds of merchandise -- which makes it hard to stand out. For instance, J.C. Penney reported that women's apparel represented 24% of sales in 2010, followed by men's apparel at 20%. Wisconsin-based Kohl's, which has 1,089 stores in 49 states, said in its annual report that, over the past three years, women's apparel made up 32% of sales, followed by men's at 19%. The figures were much the same for New York-based Macy's, where women's apparel accounted for 26% of sales in 2010 and men's clothing represented 23%. "When you have multiple brands, it's hard to do branding for the store," Hoch says. "Target is the best example of a store experience that led to branding."

J.C. Penney has tried multiple approaches since being founded in Kemmerer, Wyo., in 1902 by James Cash Penney. The company has used catalogs and direct marketing, and increased its product assortment to target various audiences. "J.C. Penney for decades was No. 2 to Sears," Hoch says. "It was a more local, smaller version of Sears. [Among the nation's department store chains,] only Sears and J.C. Penney were national."

The company's latest incarnation has focused on growing more fashion oriented. It became the exclusive retailer for the Liz Claiborne brand in 2009 and has launched trendy women's lines in partnership with designers Michele Bohbot of Bisou Bisou and Charlotte Ronson. J.C. Penney also teamed up with Polo Ralph Lauren in 2008 to start a private label, American Living, which includes clothing for men, women and children.

Hoch suggests that Johnson may want to look abroad for a business model. Many department stores in Asia are organized by brand, and include "mini-stores" within a larger space. "In China, Korea and Japan, department stores are quite different," Hoch notes. "They lease out space to brands in the store and act more like landlords. The brands put the labor on the floor."

American department stores seem to be starting to move in that direction. Some J.C. Penney stores now house branches of cosmetics retailer Sephora using a "store within a store" concept. Macy's already has sections of its stores related to particular brands, such as Ralph Lauren and Starbucks.

The Technology Factor

In the days before the Internet, department stores used to be the primary discovery place for consumers on the hunt for a new appliance or a new wardrobe. Today, "mobile is everything," Kahn notes. "The killer app is mobile. People used to go to stores for information and research. Today, all the information is already in their hands."

The need to reach shoppers from multiple sales channels, including online, bricks-and-mortar stores and mobile, is leading to multiple technology experiments in the retailing sector. Quick response (QR) codes -- which, when scanned with a mobile phone, link consumers to information about a discount or promotion, or to a retailer's website -- and applications that allow smartphones to be used as credit cards are proving to be promising strategies for department stores, according to Kahn.

J.C. Penney and other department stores need to leverage both mobile technology and social media in ways that "reduce barriers to purchase," Bell says. "Technologies that allow for engagement, such as social shopping or virtual try-on rooms, have a lot of potential, as do technologies that simplify the shopping process." One such effort is underway at Macy's, where executives are attempting to integrate all of the retailer's shopping channels so that the customer's transition from one to another is seamless.

Personalization is critical for the department store chain, according to Peter Sachse, chief marketing officer and CEO of Macys.com, who spoke on June 21 at a Goldman Sachs investment conference. Two years ago, he said, Macy's was a multichannel operation with "a website and a bunch of stores" that did not intersect. The transition to an "omnichannel" brand included integrating inventory and tactics across all sales channels. The consumer can choose to interact on any channel she wants, on any device she wants, and can "get a very consistent experience," Sachse noted.

Ultimately, that integration leads to a personal experience, even at a large retailer, Sachse said, adding that Macy's is linking its customer databases to make it easier to determine shopper preferences and to offer product recommendations on the company's website. "If you're me, you probably don't want high heel shoes on your homepage.... I'm more interested in men's shirts and ties."

But a greater impact may come from information systems the customer rarely sees, such as customer relationship management (CRM) software. "Apple reshaped the retail landscape and combined technology with customer know-how to change the customer experience," Fader notes. "Now, every retailer wants to do that. Using technology and social media to enhance the shopping experience is all well and good, but there is lower hanging fruit by using technology to better target buyers."

According to Fader, a company like J.C. Penney should invest in back-end technology so it can better understand what individual shoppers like and figure out which types of customers are most valuable. With that knowledge, a retailer could find the right salesperson for a particular shopper, and even figure out which consumers are more susceptible to cross selling. "Being able to dissect the customer base is more about data mining," Fader notes. "Don't get me wrong. The shiny technology isn't irrelevant, but retailers should use that a little more carefully to make sure they know which customers deserve the red carpet treatment."

Targeting a Brand Identity

Given his experience at Apple, Johnson is expected to integrate a good amount of technology into his strategy for J.C. Penney. But his time at Target may also come in handy. Why? J.C. Penney has an identity problem, experts say.

Consumers know what they are going to get when they walk into a Target because the retailer has created distinct brand image -- cheap chic. But what does J.C. Penney stand for? "J.C. Penney tried to be more fashionable with moderate pricing," Hoch notes, adding that "it's almost impossible to reposition a big retailer and put it on the growth path. J.C. Penney has become burdened by its own weight."

Wharton management professor John Kimberly however, says that companies far larger than J.C. Penney have successfully redefined themselves. Johnson's first mission will be to pick a direction, strategy and image, and communicate it internally. Once employees buy into that vision, Johnson can go public with the new J.C. Penney. "Department stores as a category could go away," Kimberly notes, "so J.C. Penney needs a clear sense of who they are and what they need to be" in order to succeed.

He cites IBM under former CEO Lou Gerstner as an example of a large company that successfully repositioned itself, exiting a low-margin hardware business in favor of a focus on business services. Over the past 30 years, Danone, the French food products company best known for Dannon yogurt, sold divisions focused on glassmaking, beer and sauces in order to focus more closely on dairy products, bottled water and cereal. And after returning to the helm at Starbucks, CEO Howard Shultz spearheaded the company's shift away from being primarily a purveyor of coffee.

The theme among all of these aforementioned examples is that redefining a company takes time -- perhaps decades. "In the case of J.C. Penney, it's unclear how much time Johnson has," Kimberly notes. "Companies change their identities over long periods. Whether J.C. Penney is successful will depend on how much time the marketplace gives him."

In other words, J.C. Penney will need to deliver strong financial results to buy time for its reinvention. On June 7, the company reported disappointing same store sales, noting that it faced a "softer than anticipated selling environment," and predicted same store sales between 1% and 2% for the second quarter. Piper Jaffray analyst Jeffrey Klinefelter said in a research note that Johnson's impact on merchandising and improving the customer experience is not likely to appear until 2013. "Johnson doesn't begin as CEO until November, and it typically takes a couple of seasons before a merchant is able to make significant changes to merchandise assortments."

According to Hoch, the naming of Johnson as CEO was most likely a move pushed by investment firm Pershing Square, led by activist investor William Ackman, and Vornado Realty Trust. The two investment firms own 26.4% of J.C. Penney shares and will expect strong returns. "These investors aren't there for the next 20 years," Hoch says. "Johnson is there to shake things up quickly."

Knowledge@Wharton