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How JCPenney Sailed into a Red Ocean
JCPENNEY WAS once one of the top department stores in the United States, with more than 2,000 locations at its peak. Indeed, the
retailer was so common in the suburbs that one could not imagine a shopping mall without a JCPenney. Generations of America’s children
were mesmerized by its annual holiday catalog. As recent as 2007, JCPenney had enjoyed a market valuation of $18 billion. In a bit over a
decade, JCPenney’s market cap had fallen to a mere $269 million. Thus, the retailer lost 98.5 percent of its valuation or $17.7 billion in a
bit over decade. Many observers expect JCPenney to follow Sears-once the leading American retailer-to also file for bankruptcy, which
Sears did in 2018. What went wrong?
Of course, all retailers are exposed to the same threat, Amazon, which has become synonymous with online shopping. Although Walmart,
Target, and Best Buy all have become more competitive in recent years, JCPenney sped up its own demise with a bad business strategy. In
particular, JCPenney under former CEO Ron Johnson learned the hard way how difficult it is to change a strategic position. When hired as
JCPenney’s CEO in 2011, Johnson was hailed as a star executive. Johnson was poached from Apple, where he had created and led Apple’s
retail stores since 2000. Apple’s stores are the most successful retail outlets globally in terms of sales per square foot. No other retail outlet,
not even luxury jewelers, achieves more. This poaching didn’t come cheap: JCPenney paid Ron Johnson close to $53 million in total
compensation in 2011, even though he didn’t start until November of that year.
Once on board with JCPenney, Johnson immediately began to change the company’s strategic position from a cost-leadership to a blue
ocean strategy, attempting to combine its traditional cost-leadership position with a differentiation position. In particular, he tried to
reposition the department store more toward the high end by providing an improved customer experience and more exclusive merchandise
through in-store boutiques. Johnson ordered all clearance racks with steeply discounted merchandise, common in JCPenney stores, to be
removed. He also did away with JCPenney’s long-standing practice of mailing discount coupons to its customers. Rather than following
industry best practice by testing the more drastic strategic moves in a small number of selected stores, Johnson implemented them in all of
the then 1,800 stores at once. When one executive raised the issue of pretesting, Johnson bristled and responded: “We didn’t test at
Apple. Under his leadership, JCPenney also got embroiled in a legal battle with Macy’s because of Johnson’s attempt to lure away
homemaking maven Martha Stewart and her exclusive merchandise collection.
The envisioned blue ocean strategy failed badly, and JCPenney ended up being stuck in the middle. Within 12 months with Johnson at the
helm, JCPenney’s sales dropped by 25 percent. In a hypercompetitive industry such as retailing where every single percent of market share
counts, this was a landslide. Things went from bad to worse. In 2013, JCPenney’s stock performed so poorly it was dropped from the S&P
500 index. Less than IS months into his new job, Johnson was fired. JCPenney had lost over two-thirds of its market valuation (or $6
billion) under Johnson’s leadership. The attempted overhaul of JCPenney under Johnson also left the company burdened with more than
$4 billion in debt. Myron Ullman, his predecessor, was brought out of retirement as a temporary replacement. L Exhibit MC6.1 shows
JCPenney’s stock market valuation and CEO appointments over time.
Under Johnson’s leadership, JCPenney failed at its attempted blue ocean strategy and instead sailed deeper into the red ocean of Page 490
bloody competition. This highlights the perils of attempting a blue ocean strategy because of the inherent trade-offs in the
underlying generic business strategies of cost leadership and differentiation. As a result, JCPenney continues to experience a sustained
competitive disadvantage and may go out of business.
To turn around the 120-year-old icon, the board appointed Marvin Ellison as CEO in 2015. With a strong background in operations
management and leadership skills honed at The Home Depot, he focused on lowering JCPenney’s cost structure while increasing perceived
value offered to its customers. In an attempt to stem losses, in 2017 JCPenney closed some 140 retail stores across the United States out of
a total of 1,000 remaining outlets. Marvin Ellison was lured back into the home improvement industry when he was appointed CEO of
Lowe’s in 2018
In October 2018, Jill Soltau was appointed CEO of JCPenney. She was previously the CEO of Jo-Ann Stores, a fabric-and-craft retailer. Her
new business strategy is not yet clear, and several top executive positions were still vacant as of spring 2019. Soltau retained McKinsey, a
strategy consulting firm, to help with the turnaround. One question she faces is whether to continue selling appliances, which her
predecessor brought back in 2016 to take away sales from failing Sears, JCPenney had discontinued sales of appliances in 1983 to focus on
apparel, and the majority of JCPenney’s sales still come from apparel, an area the retailer has neglected in recent years, even though
JCPenney was once the go-to apparel retailer for American middle-class famities, Whether Soltau will successfully sharpen JCPenney’s
strategic position and thus make the American icon competitive again remains to be seen.
Study the case and do what the picture says.