JCPenney COO: ‘I Hated The JCPenney Culture, It Was Pathetic’

JCPenney COO: ‘I Hated The JCPenney Culture, It Was Pathetic’

Kim Bhasin | Feb. 25, 2013, 11:51 AM | 16,278 | 13


JCPenney experienced a seismic shift on corporate culture when CEO Ron Johnson took the helm of the company more than a year ago.

The new guard didn’t like JCPenney’s old way of doing things at headquarters.

Not one bit.

Dana Mattioli at The Wall Street Journal spoke with JCPenney COO Michael Kramer about the company’s culture and the mass layoffs at the company’s headquarters. He’s one of the execs brought in by Johnson, who he’d previously worked with at Apple.

“I hated the JCPenney culture,” Kramer told the WSJ. “It was pathetic.”

Senior management thought that the headquarters in Plano had become “overstaffed and underproductive” and something had to be done about it.

Kramer shared an example: There were 4,800 employees at the HQ in January 2012, and in one month they had watched five million YouTube videos during work hours. He said that 35 percent of bandwidth at HQ was used for “loafing off.”

One big consequence was the culling of staff. Now, a little more than a year later, 1,600 of those workers have been sent packing.

Another was the total destruction of the company’s old corporate culture, which led to dissent among the ranks of executives at the home office who didn’t agree with the changes.

For Penney’s Heralded Boss, the Shine Is Off the Apple


As he toured a J.C. Penney JCP -4.27% store before undertaking one of retailing’s most ambitious overhauls, Chief Executive Officer Ron Johnson bristled when a colleague suggested that he test his new no-discounts strategy at a few stores before rolling it out at all 1,100.

“We didn’t test at AppleAAPL -1.78% ” the executive recalled Mr. Johnson, hired away from the gadget maker, saying.

Seven months later, sales at the new Penney had dropped by double-digits. By the end of 2012, analysts were warning the company could run short on cash. Penney’s stock, which got a boost when the former Apple retailing chief took the job, finished last year down more than 40%.

Things weren’t supposed to go this way. Mr. Johnson was viewed as something of a savior when he was hired in 2011—an Apple innovator who could help revive the chain’s tired stores and merchandise.

But many people close to the company said Mr. Johnson ignored conventional industry wisdom and moved too abruptly to impose practices inspired by his time at Apple—a very different type of retail animal. Declaring the department-store system broken, he eliminated coupons entirely and did away with most of Penney’s sales—popular customer incentives that often drove seasonal traffic.

The new CEO also set out to physically refashion stores by installing dozens of branded boutiques. Clearance racks were banished.

Investors will get a look at how things are going on Wednesday when Penney reports its results for the all important holiday quarter. For the first three quarters, nine months after putting those and other changes into motion, sales fell by 23%, depriving the company of $2.7 billion in revenue. People familiar with the results said the drop in sales has deepened to around 30%.

Today, Mr. Johnson is in the process of reversing some of the key decisions he made just over a year ago. Penney, for instance, has reissued some coupons, reinstated some sales and wheeled back in the clearance racks. Several internal practices have been reinstated, too.

The executive, though, blanches at the suggestion that his philosophy has changed. “I feel we’re executing very closely to the strategy,” he said in a recent interview. “It’s more like the old J.C. Penney, but it’s not.”

Mr. Johnson is still betting that overall sales can turn around as he rolls out fresher merchandise and carves up the traditional department-store template into a pavilion of more intimate shops and boutiques.

A few signs are encouraging. Sales per square foot in areas converted to the new store format are so far outperforming the old Penney, he said, and Mr. Johnson has managed to lure popular brands like Joe Fresh and Jonathan Adler. (One deal has taken a detour, though: The company signed lifestyle doyenne Martha Stewart, rankling competitor Macy’s, where Ms. Stewart is a top-selling label. Macy’s sued, and a trial began last week in New York State Supreme Court.)

If Mr. Johnson can’t stem the sales slide soon, shareholders and directors may lose patience and move to shift strategic direction, people familiar with the board’s thinking said. Mr. Johnson acknowledges that the situation is do or die.

“This is the year we will find out if the vision we articulated is right or wrong,” he said. The 54-year-old CEO’s goal is to show sales growth sometime this year, even if not immediately. “I’m not caught up in Q1, Q2 or Q3.”

Mr. Johnson had previously won praise for his bold retail strokes. He helped develop Apple’s sleek, hands-on retail stores. Prior to that, he served as Target Corp.’sTGT -1.12% vice president of merchandising, where he is credited for spearheading the designer collaborations that have become Target’s forte.

Such a pedigree led directors at Penney to grant him $52.7 million in restricted-stock awards on the day he arrived to make up for what he left behind at Apple. They also allowed him to continue living in the San Francisco Bay area where he still attends church on Sundays. He works Monday through Wednesday at the company’s Plano, Texas, headquarters and spends the rest of the week at a satellite office or traveling to visit vendors and stores.

The new CEO assembled a team of executives with backgrounds at Apple, Target and Abercrombie & Fitch ANF -3.61% . They toured warehouses and found stacks of dust-covered boxes filled with unsold merchandise. They walked stores that had grown cluttered and stale compared with competitors like Macy’s and Kohl’s KSS -1.47% .

They also decided that the headquarters had grown overstaffed and underproductive. During January 2012, the 4,800 employees in Plano had watched five million YouTube videos during work hours, said Michael Kramer, a former Apple executive brought in by Mr. Johnson as chief operating officer. Thirty-five percent of the bandwidth at headquarters was routinely used for such loafing off.

“I hated the J.C. Penney culture,” Mr. Kramer said. “It was pathetic.”

Penney brought in Bain & Co. to assist with rounds of layoffs; there are now 1,600 fewer workers at headquarters.

Meanwhile, the top line was suffering. Sales fell to nearly $17 billion in the 2011 fiscal year from $20 billion four years earlier.

Mr. Johnson and his team diagnosed Penney as having “analysis paralysis.” The CEO slashed the number of meetings to review data, store results and other metrics that managers had used to stay on the same wavelength, said people familiar with the matter. He also wanted Penney to stop peppering customers with email several times a week—a standard practice even among luxury retailers. Apple, he said, sent only a few such missives per year.

Mr. Johnson spent more than six months thinking about his vision for overhauling the chain. In January 2012, the company spent $15 million to roll it out for investors, analysts and the media at two-day conference in New York.

Pacing in front of a giant screen showing a blue sky, Mr. Johnson said Penney would fill its stores with name-brand clothes highlighted in as many as 100 separate boutiques. The center of the stores would be converted into hangout areas where Penney would have activities or freebies like kids’ haircuts or ice cream. New ads tried to convey a hipper identity.

Perhaps most daring of all, Mr. Johnson eliminated hundreds of annual discounts. Before he arrived, nearly three-quarters of all Penney items were sold at reductions of 50% or more, and he was resolved to restore some integrity to pricing.

The new prices took effect on Feb. 1, 2012, and sales immediately dropped. Mr. Johnson and his team had anticipated a sales decline of 10% to 12% in the first quarter, Mr. Kramer said. Instead, they fell by 20%, leading the company to a $163 million loss. The second quarter would prove an even bigger disappointment, with sales tanking by nearly 23%.

Some retail veterans, including former Penney CEO Allen Questrom, watched with disapproval. “The customer has said she’s very much into value, and coupons and sales are very much part of her vocabulary,” he said. “It’s hard to tell people another way to do something when they like to do it a certain way.”

Retailers, having long ago learned it can be difficult to predict how shoppers might react to changes in format, regularly try out new ideas in a few locations before committing them to all their stores. Penney had been particularly rigorous, using a system it called Jtest.

Mr. Johnson, however, had seen a different approach pay off at Apple, where Steve Jobs famously once said, “A lot of times, people don’t know what they want until you show it to them.”

The CEO decided to go with his gut—in one case shifting more men’s dress shirts to all cotton from cotton/polyester blends. Sales fell, said people familiar with the results. Mr. Johnson is still plunging ahead with a goal to make 20% of the chain’s dress shirts all cotton this year.

“We’re trying to attract over time a slightly different customer, and so our assortments are going to change,” he said.

With sales figures looking bleak, directors tried to encourage Mr. Johnson to test parts of his strategy that had yet to be rolled out. At one meeting during the summer, board member Burl Osborne, the former executive editor and publisher of The Dallas Morning News who died in August, suggested testing Mr. Johnson’s idea of turning the center of stores into “Town Squares,” said a person who attended the meeting.

“I think not testing was a mistake,” said Penney board member Colleen Barrett.

Instead, Mr. Johnson used a more Apple-like approach to vet ideas. Secretive innovation teams were set up shortly after he arrived to explore ideas from customer service to store layout. The groups, which came to be known as iTeams, were told to scour various retail innovations around the globe—and to keep their efforts to themselves. While iTeam members were to request information from other departments, they weren’t supposed to tell them why.

All told, the results were daunting. Between 2011 and 2012, Penney’s market share declined from 12% to 9.1%, according to market research firm Euromonitor International. Over the same period, Macy’s, Kohl’s, Dillard’s and Belk all gained share. “We’re definitely benefiting from Penney,” said Belk CEO Thomas Belk Jr.

Standard & Poor’s downgraded Penney’s credit rating in March, May and again in July, leaving it at B-plus—four steps below investment grade. The drop in sales, S&P said, left Penney with less money to cover its debts.

“I was disappointed,” Mr. Johnson said. “My dream was that we’d go through a six-month transition, people would realize we have great everyday prices and that they like shopping on their terms, and the business would get better.”

Restoring the luster of James Cash Penney’s stores proved much more difficult. Mr. Penney had founded the chain in 1902 at the age of 26. Over the next 15 years he built a 22-state empire by selling low-price clothes to middle-America shoppers looking for bargains. But by the end of the century, the chain was showing its age.

Penney came close to filing for bankruptcy protection and in 2000 turned to Mr. Questrom—whose resume spanned Macy’s to Barneys New York—to fix up its balance sheet. In 2004, the company hired Myron E. Ullman III, a former CEO of R.H. Macy & Co. He set up in-store boutiques with cosmetics company Sephora and fast-fashion retailer Mango and led the company to its most profitable year ever in 2006. But then the recession blunted results.

The most recent shake-up had came in 2010, when hedge-fund manager William Ackman and Vornado Realty Trust Chairman Steve Roth quietly amassed a 27% holding in Penney. “The New Yorkers,” as the board referred to them, joined the Penney board and started to agitate for change. Several months later, the company announced that Mr. Johnson would replace Mr. Ullman.

Senior Penney employees had long voiced the need to bring back clearance goods. But month after month, Mr. Johnson would shoot the idea down in meetings. The discount vocabulary itself became taboo. Even when Penney did conduct sales, it avoided the term, using “best prices” instead.

The company’s directors grew concerned about the drop in sales and started to meet more frequently in person and by phone, a person familiar with the matter said. Mr. Johnson began sending the board weekly updates by email.

Facing pressure from the board on down, Mr. Johnson relented last summer. Clearance racks became visible every day, often drawing crowds. When it became clear that managers needed to be more connected, the CEO reinstated many of the meetings he had eliminated, said people familiar with the matter.

Mr. Johnson moved to make Penney’s price cuts even clearer. In October, the chain began to show manufacturers’ suggested prices on tags to give customers a reference point. The following month, it introduced “price slash,” which lowers the price of items that aren’t selling.

Mr. Johnson is particular about the terminology.

“That’s not a sale,” he said recently, while holding up an Arizona V-neck T-shirt. “It’s an in-season markdown or a new lower price.”

In February, the company said it would hold even more sales. The push kicked off with Valentine’s Day, when Penney advertised 20% off fine jewelry. Additional sales will be timed to events and holidays, although Mr. Johnson won’t say how frequently they will occur.

“Ron’s got tremendous vision, yet the willingness to change course when he realizes he’s made a mistake,” Mr. Ackman said.

While Mr. Ackman has come off as patient, his partner in the investment, Mr. Roth, has expressed more disappointment, people close to the investor said. Mr. Roth declined to comment through a spokeswoman.

The Vornado chairman has piped up at board meetings and mentioned losses on his investment, people familiar with the matter said. One of his major concerns has been getting traffic back into stores and not letting sales slide too long without making strategic changes, a person familiar with the matter said.

Mr. Johnson knows investors won’t be patient forever. “I think Bill’s concerned with his investment. I think Steve’s concerned,” he said. “I’m concerned with everyone’s investment.”

Throughout his learning curve, though, Mr. Johnson hasn’t budged on one key aspect of his strategy: store testing. Asked if he would do things differently a second time, the CEO’s answer was decisive.

“No, of course not.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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