In front of a glowing blue video wall set up to evoke fresh air and clear skies, Ron Johnson made the case for why he was the man to revitalise JC Penney, the fusty US department store. “I feel like this is the exact time at JC Penney as when I joined Apple,” he said, recounting his explanation to Steve Jobs when he announced he was leaving the technology company. To the 700 or so in the audience, the message was clear: Apple came back from a death spiral, and JC Penney could do the same.
It was a compelling sales pitch. Mr Johnson launched Apple’s first store in 2001, and during the 10 years he served as its retail chief oversaw a wildly successful network of sleek, sparkly staffed shops. An amiable Minnesotan, who combines a homey turn-of-phrase with iron self-confidence, Mr Johnson wowed the retail industry with minimalist design and Genius Bar advice zones.
When he made his pitch in January 2012, JC Penney had a 3 per cent share of the clothes and housewares market – comparable to Apple’s position in the PC market in 2001. “Well, that turned out OK,” Mr Johnson said. “And here we go again . . . Just like Apple, we’re going to learn that the best days aren’t in the rear-view mirror. They’re right down the road.”
How wrong he was. The declining retailer that Mr Johnson inherited was rock-solid compared to the collapsing business he left behind. He was ejected this week by JC Penney’s board, which rehired his predecessor Mike Ullman, and the boldest experiment in US retail ended in failure.
In only 17 months Mr Johnson alienated customers and investors, triggering worries over whether the company had enough cash – and goodwill with bankers and suppliers – to survive. He wiped out 25 per cent of its sales, which plunged from $17.3bn in 2011 to $13bn last year, a collapse with few retail precedents.
It is a startling comedown for Mr Johnson, who forged a reputation for innovation first at Target, a “cheap chic” discount chain, then at Apple. It was this record that got him handpicked for JC Penney by the hedge fund manager Bill Ackman, whose Pershing Square Capital owns nearly 18 per cent of the retailer.
Mr Johnson’s optimism captivated the retail industry, which has struggled to adjust to crisis-scarred consumers and online rivals, led by Amazon. But he appeared blinded by his own hubris. He put his instincts ahead of the consumer research that is retail’s lifeblood, and he rushed to change the group’s core strategy. Worse, he confused the success of Apple’s iPods, iPhones and iPads with his own. “Ron Johnson seemed to overestimate his retailing capabilities and underestimate the strength of Apple’s products to drive the retail business,” says Ken Favaro, a consultant at Booz & Co. “What made the difference for Apple stores was the sheer power of products. It wasn’t retailing expertise.”
Founded in 1902, JC Penney grew into a network of 1,100 stores that occupied a plain, budget-conscious niche similar to BHS in the UK. It was less dowdy than Walmart, but less stylish than Macy’s, a rival department store. JC Penney was where Middle America went for unexciting, form-flattering clothes.
The group’s headquarters in Plano, Texas, about 20 miles from Dallas, had also become stale, and Mr Johnson shook it up. He replaced the old guard with colleagues from Apple and Target, as well as recruits from Abercrombie & Fitch, a teen fashion store.
Three months into his tenure, Mr Johnson declared his plans. One of JC Penney’s problems, he said, was that it sold clothes from racks like commodities. This could be fixed by applying lessons from Apple to make JC Penney “young and vibrant”. Its merchandise would be more fashionable, pricing would be simpler and its eager-to-help staff would rove around with iPads. Stores would be split into shop-in-shop boutiques, carrying brands such as Levi’s, and dotted with chairs and other comforts that would make people want to linger.
But he did not dwell on the two weaknesses that JC Penney shares with many of its peers: limited ecommerce skills and a surfeit of bricks-and-mortar space.
“He is very articulate, very much a visionary,” says one person who knows the company. “He’s very clear as far as what he wants, what’s important for him.” But there is a catch. “He really did not tolerate people who had different points of view. Even if they could back up those points of view with a solid fact base.”
The person linked that to Mr Johnson’s Apple heritage. “One of the things that was the hallmark of the Apple culture is that [consumers] really don’t know what they want until you show them, until you give them the product,” he says. “That’s fine with high-tech gadgets. It’s less fine with shoes and socks and bras.”
Pricing was central to Mr Johnson’s strategy. Like many US retailers, JC Penney relied on a nonstop blizzard of special offers and discount coupons that held out the promise of a bargain. Mr Johnson said this confused consumers and undermined their trust. So he vowed: “No more pricing games.” Instead, on February 1 2012, he would introduce stable, predictable “fair and square” pricing.
Three weeks later, signs of trouble emerged. “February sales are trending below last year,” Mr Johnson said. He expressed confidence about the new approach, but three months later the company published results for the full quarter: like-for-like sales were down 19 per cent. “It’s really hard,” Mr Johnson said. “But the transformation is ahead of schedule.”
Botched marketing did not help either. JC Penney launched a series of baffling television adverts, which included the comedian Ellen DeGeneres in a Victorian hat shop, but did not tell consumers how the store was changing. In June, Mr Johnson ousted Michael Francis, whom he had hired from Target to run marketing.
There was an even deeper problem. Retail evolves slowly because shoppers are creatures of habit. When executives have a new idea, they test it out in a few stores to see how consumers react before going any further.
Mr Johnson wanted to move faster with his new pricing strategy. This proved fatal. He did not see that customers enjoy the “treasure hunting” in the game of mark-ups and markdowns. So when JC Penney dropped it, shoppers dropped JC Penney.
Allen Questrom, the group’s chief executive from 2000-04, says that if Mr Johnson had tested ideas, listened to customers and rolled out the ones they liked over, say, five years he would have had a better chance. “But he didn’t want to do that. He wanted to do all his ideas at once,” he says. “You can lead [the customer], but you can’t be so far out in front of the band that they can’t see you.”
The fall in sales accelerated as the year progressed, eroding JC Penney’s share price – and confidence in Mr Johnson. By October 2012, he reintroduced coupons, but did not acknowledge the U-turn until last month.
He had also sparked a legal dust-up with Macy’s, whose customers he coveted. His most trumpeted shop-in-shop boutique was going to sell housewares from Martha Stewart, the lifestyle guru. But Macy’s had its own contract for Martha-branded products and filed a lawsuit that forced him to freeze his plans. (A judge dismissed part of the complaint on Friday.)
By the time JC Penney published results for the first year of Mr Johnson’s reforms in February, its market value had shrivelled from over $7bn when he arrived to $4bn. That was enough for Vornado Realty Trust, which had taken a stake alongside Mr Ackman. It unloaded half its shares.
Mr Johnson was humble and said he was learning from his mistakes. “I told you transformations are unpredictable and can be bumpy, and this one has been,” he told analysts. But he said customers would love his next move. Two weeks later, he opened 681 shop-in-shops from Joe Fresh, a Canadian brand of bright, flowery clothes. Yet rather than staunching the bleeding, analysts expect sales in the three months to the end of April will be lower than in the first quarter of Mr Johnson’s transformation.
Steven Dennis, president of SageBerry Consulting, says Mr Johnson was too aggressive in trying to move away from JC Penney’s traditional shoppers towards younger, more fashionable consumers. “You are not going to cultivate $2bn dollars in new customer sales in 17 months,” he says. “It’s a crazy assumption.”
Mr Johnson overplayed the analogies between Apple and JC Penney so that “it seemed to blind him to some incredibly important differences”, Mr Dennis says. Apple invented new products; JC Penney did not. Apple sold a limited range of items; JC Penney sold thousands.
After Mr Johnson’s departure, Mr Ackman highlighted a source of contention: his decision to commute to Plano from California rather than relocate his wife and children to Texas. In addition to the $388,587 bill for corporate jet use, it was seen as evidence of a lack of commitment. It also hurt morale, Mr Ackman said.
Mr Johnson had kept his home in Silicon Valley, 20-odd miles from Apple’s headquarters, because he was on the road so much it made no sense to uproot his family. With hindsight, that looks like the best decision of the past 17 months.