Today brought the news that many expected, at least I did. Ron Johnson let go at JcPenney. He was a terrible CEO, Al Dunlop bad, Roger Smith (GM) bad (the inspiration for Roger and Me.)
Why? He was successful at Apple. Apple pretty much prints money with iEverything, you could almost sell iCrapper toilet seats with an Apple logo for $100. When people go to the Apple store they basically know what they want. I want an iPad, I know it costs $600, and I will wait in line for the next new release, the next shiny thing.
I have argued for some time that Apple is a very arrogant company. Very arrogant. Knowing that the cute Apple stamp is likely to sell almost anything. Ok, maybe not Newtons or Apple TV (Roku is far, far superior and cheaper).
It’s not that hard to have a bunch of shiny floor models for a fixed price that people want, NOW!
JcPenney is entirely different. It’s a discount store. Goes far, far back to James Cash Penney in the late 19th Century I think. Times of catalogs, and mass merchandise for a fair price.
Working class people look for sales. They know money is tight. If you make $40,000 a year and have 3 kids, a mortgage and bills you mainly only have $1,000/year for things like clothing, sheets, towels, shoes etc. It’s a tight, tight budget.
It’s a budget of coupons. Of Goodwill. Of knowing what colors are on sale what day. Double coupons at Shaw’s. Time spent on Sunday, on grocery lists, of what we need, not what we want.
Apple customers are entirely different. Often young professionals, most are used to having money. They may be childless as a couple and have $100,000 in income. Sometimes rent poor, often not. Often if young today, a mountain of student loan debt, but that is another issue. They may have $1,000/month in spending money for shiny things. Need the new, need the best, feel uncool if they still have an iPhone 3. It’s kind of ridiculous what advertising and brands due to some people. See things like Saul Colt and others that workship sneakers like the Air Force One. Again, entirely different market. Not only wanting the newest but sometimes waiting in line to have a picture of an iPad on the first day of release.
Meanwhile in working class America, people are seeing that a 12 pack of macaroni and cheese is $2 instead of $3 this week. They are seeing that a family pack of thighs and drumsticks is 89 cents a pound at Hannaford (just bought 5 pounds of those today). Money is tight, and getting tighter. Wages aren’t increasing. Net worth is negligible.
So when JcPenney has a white sale in February and towels that were $15 and now $4/20 with a $5 coupon for literally a quarter the price of retail, they flock to the stores. They need the towels, probably desperately. The ones they have are totally wrecked. They need socks, new shoes, clothes that fit their growing children. This was JcPenney’s audience before Ron Johnson.
Fixed Price? Good price? Big huge block lettering? These customers aren’t looking to buy a dress shirt for $25, they are looking in the clearance rack in January and February buying sweaters for this year and next year, sometimes even guessing sizes, because a $30 sweater is now only 3 bucks. This is your customer base.
They get the Sunday paper not for the news but for the coupons and ads.
Ron Johnson sees this and wonders why all the paper is wasted. Wonders why a Van Huesen sweater may be $30 in November and $5 bucks in March. Why the waste? Let’s just call it $25 for the entire product cycle. But here’s the thing. Let’s say you buy 1,000 Van Heusen sweaters for $10 from the manufacturer. There is a lot of profit margin on the full price there.
With the old JcPenney’s system, let say you sell 200 at full price in November, have a Christmas sale for $20 and sell 600 items, and then 50 at $10, and the other 150 at $5. You have no inventory you did lose unless you realize the sunk cost fallacy, that you lost $750 on the clearance items. The near clearance was break even. The Christmas sales was $6,000 profit, the early sales were $4,000 in profit. You made $9,250 in profit while spending $10,000. Any business was love that 92.5% profit margin. It’s awesome.
The new system sees 1,000 sweaters at $25. It November you say sell 300, In Christmas no one cares and you sell 100, By February you get desperate and go down to $10 and sell 300, and since you don’t want to be a “discount” store you don’t want to go lower than that so waste 300 items. so you make $2,000 at full price, and lose $3,000 because you didn’t want to go below cost, making nothing on the sweaters. So what was a $9,250 profit becomes a $1,000 loss. Huge, huge difference.
Ron Johnson thinks this should work. He thinks people will be happy that they get a “square deal” by having it $5 cheaper to begin with he’s simply wrong. If you have $250 for a family to spend on durable good for a season, you are thrifty about it. His customers simply left. They said if I can’t get this sweater for $5, I will just go to Goodwill.
And that’s why the place failed.
Besides that the merchandising just looks terrible. The Joe Smart thing is branding and advertising at it’s worse. And no one likes the terrible font. I was at a JcPenney at the Maine Mall in South Portland, ME yesterday. I did try on some running shoes, and might go back and see if a $50 shoes goes on sale for $20. I like to spend my money on art. I like to spend my money on poetry. I like to support artists.
I don’t need the newest shiny fancy iPad. I do like my expensive Evo phone but it’s 2 years old now, and definitely needs an upgrade. Why? Because no one, even with smartphones conserves bandwidth anymore. Used to be you could go to the moon with a little bit of memory and a small chip. Now you have a state of the art phone and the Google Play store gets bigger, shinier and takes up more memory. Facebook gets bigger and shinier and takes up more memory. The Amazon app store of something decided it deserved 4GB of my 8GB smart card. I need a new phone because the background noise and space is taken up by new, shiny!
That’s an upper middle class shopping mentality. That’s what Ron Johnson was used to at the Apple Store.
That’s not the JCPenney family. That’s not their customer. That’s the J Crew customer. It’s a big, big, enormous, ginormous difference.
The JcPenney customer sometimes cannot afford $10 on a sweater. They used to look for sales and clearance and go to JcPenney, now they skip the mall completely and go to Goodwill, Marden’s or Wal-Mart.
Please contact me with any questions on the piece on the comments. I will be happy to here feedback for my first time trying this. It’s funny, I was thinking of doing a piece on JcPenney in the near future anyway, but the Ron Johnson firing, made that time today.
(c) 2013 Edmund Charles Davis-Quinn, MBA, The Peter F. Drucker School of Management, Claremont, California.