Microsoft Word

Journal of Business Cases and Applications Volume 18

JCP 2017: A Light at the end of the Tunnel or a Train?

James Harbin

Texas A&M University-Texarkana

Brian Matthews

Texas A&M University-Texarkana

Patricia Humphrey

Texas A&M University-Texarkana

ABSTRACT

J. C. Penney Company, Inc., sells merchandise through department stores in the United

States. The company sells family apparel and footwear, accessories, fine and fashion jewelry,

beauty products, and home furnishings, as well as provides various services, including styling

salon, optical, portrait photography, and custom decorating. As of January 2016, it operated

approximately 1021 department stores in 49 states and Puerto Rico. The company also sells its

products through its website, jcpenney.com. Its headquarters is in Plano, Texas. They currently

have approximately 105,000 full-time employees.

Following the recession of 2009, J. C. Penney was a stable, but struggling retail chain. In

an effort to reverse course, the company’s Board brought in a new CEO, Ron Johnson. His tenure

(2011-13) and vision for revamping the company proved to be a failure, with sales falling to $13

billion a year from a previous $17 billion. In 2013, the Board brought back the previous CEO,

Mark Ullman, who immediately reinstituted old strategies. His appointment was to be a temporary

fix until a new permanent CEO could be found. In 2015, Marvin Ellison assumed the CEO’s role.

This case gives students the opportunity to evaluate the company’s turnaround strategies

implemented by Ellison.

Keywords: Strategic analysis, SWOT analysis, Marketing, Retailing, Promotion

Please see the AABRI Copyright Policy at http://www.aabri.com/copyright.html

Journal of Business Cases and Applications Volume 18

A BRIEF HISTORY OF J. C. PENNEY

J. C. Penney has a long history going back to its beginning in 1902 with a single store in a

small Wyoming town. By the 21st Century, it had truly become an American icon and a dominant

force in the retail business. In 2011, the company had over 1,100 stores, $17+ billion in sales, and

160,000 employees (J.C. Penney, 2011), (Steffy, 2013).

But starting in the early in the 2000's, the company found itself struggling to find a niche

in the retail apparel industry. Competition was heating up, from both brick and mortar retailers to

the rapidly increasing internet industry. Wal-Mart and Target were attracting discount shoppers

and Macy’s and Kohl’s were attracting the more affluent shoppers squeezing J. C. Penney’s profit.

Their sales were stagnating and the company stock was going nowhere, leaving shareholders

unhappy. Many retail analysts and even their own customers, particularly the younger ones, often

described the company as having evolved into one with a dowdy, stodgy, boring image. To draw

in customers, the company had begun using ever increasing promotional discounts to attract

customers. By 2011, over 75% of their revenue was from merchandise that had been discounted

by 50%. The target market could best be described as a middle-class, price-conscious shopper

who as a Morgan Stanly analyst observed “is triggered by perceived discounts or percent’s off, not

absolute price points.” (Cheng, 2012). Many of these customers shopped for the thrill of the deal.

J. C. Penney had become so dependent upon sales to drive traffic in the stores, they were

conducting up to 600 sales per year. Management knew they needed to wean customers off of

constant sales, but were unsure of how to do it. They were also losing money with their 400-page

catalog and in early 2011, discontinued the catalog to reduce costs. The one bright spot was the

store’s popular brands such as St. John’s Bay, Worthington, and Cabin Creek that accounted for

more than 50% of its sales.

THE RON JOHNSON ERA (2011-2013)

By the summer of 2011, Penney’s Board of Directors came under strong pressure to do

something. William Ackman had joined the board earlier that year. Ackman had a long history

of being a “hedge fund guy” – a wealthy individual who seeks to buy a large share in a company

usually with the objective of using his influence on the Board for a turnaround. Mr. Ackman

encouraged the Board to hire Ron Johnson as CEO in late 2011. Johnson had a degree from

Stanford and a MBA from Harvard. He had served as the CEO of Target and had worked directly

under Steve Jobs as the Vice President of Retailing at Apple. (Reingold, 2012). Johnson's vision

for J. C. Penney was to transform its current boring image to one of being a cool place to shop.

Within weeks of his hire, without research or testing, he unveiled his vision which encompassed

every area of the store including the target market, products, pricing, promotion and store layout.

In a drastic attempt to totally revamp the struggling retailer during a Great Recession

(Aisner, 2013), Johnson, not only eliminated 40,000 jobs (Wahba, 2016b), but immediately

abolished a promotion policy that customers had grown accustomed to for decades (Ailawadi,

2013). For example, the traditional J.C. Penney customer habitually waited until merchandise was

reduced reasonably before making a purchase. While this was conscientious and astute on the part

of the customer, because 50 to 70 percent of J.C. Penney’s sales were discounted prices (Aisner,

2013), Johnson believed that merchandise should be sold at the markdown price from the

beginning Known as “value pricing”, Johnson cut promotions and coupons and advertised “fair

and square” pricing and customers revolted (Ailawadi, 2013; Mourdoukoutas, 2013).

Journal of Business Cases and Applications Volume 18

Johnson also wanted to create an environment for a more modern customer which disrupted

the monotony of J.C. Penney as it historically competed against Walmart and other low-end

discounters like TJ Maxx, Kohl’s, Macy’s, and Target (Aisner, 2013) and, now, Amazon

(Ailawadi, 2013). Instead of continuing to focus on its core customers comprised of low- to

middle-income families, or the “modern American mom” (Purdy, 2016) , Johnson agressively

pursued a more affluent, modern demographic who desired unique boutiques, wi-fi, and nail shops

(Aisner, 2013; Mourdoukoutas, 2013). While his perservance, ambition, and imagination lead to

success at Apple and Target, the application of the same business model proved detrimental for

J.C. Penney as it reported a $552 million reported Q4 loss in 2012 while simultaneoulsy losing its

core customers to other competitors (Gibson, n.d.). Sales dropped from $17 billion to $11 billion

in the 17 months of his tenure at J.C. Penney. In April 2013, the Board terminated Ron Johnson.

THE RETURN OF MARK ULLMAN (2013-15)

Following the ousting of Johnson after 18 months as CEO, J.C. Penney’s Board decided to

reinstate their former CEO, Mike Ullman, in an attempt to secure its future. His main goal from

day one was to undo almost all of Johnson’s changes (Townsend, 2015). Before Ullman’s

departure in November 2011, he had been a strong proponent for discounting and couponing, while

Ron Johnson viewed it as a major problem for the retailer. Johnson’s efforts to totally overhaul

J.C. Penney’s staid image to attract new customers by using “mini shops” failed to move the

financial needle. Ullman returned during a time in which the once prominent retailer found itself

facing financial ruin. During his comeback tenure, he was expected to serve as a stabalizing force

during an unsteady transitional period, and which did not include the responsibility of completely

turning the company around (d'Innocenzio, 2013). This was an overt indication that Ullman’s

tenure would be short-lived. As stated by Craig Johnson, president of Customer Growth Partners,

“What they (J.C. Penney) need is a little bit of stability and essentially adult supervision. Ullman

was to do some nip-and-tuck surgery, but utlimaely this was a place that needed radical surgery”

(d'Innocenzio, 2013).

THE TURNAROUND STRATEGY OF MARVIN ELLISON (2015 – PRESENT)

Following Mike Ullman, Marvin Ellison became the company’s CEO in 2015. Ellison was

51 at the time and had earned a MBA from Emory in 2005. He had built his reputation in retail at

Home Depot where he had helped engineer their turnaround by focusing on the supply chain and

the integration of stores and e-commerce. In 2014, he was passed over in the CEO’s slot for Home

Depot by Craig Menear, who the company felt had more merchandising experience.

With Ellison as CEO, the company’s goal became winning back its core constituency of

customers. This was to be accomplished in part by reinstating sales promotions and couponing,

as well as bringing back its private-labeled brands which had been ousted by Johnson (J. C. Penney

unveils turnaround stategy as it warns of weak sales, 2014). Ellison felt strongly that J.C. Penney’s

resurgence would be contingent upon the continued loyalty of their core customer base.

As stated in Tables 1 and 2 (Appendix) that revenue was declining before Johnson assumed

the role of CEO in 2011. During Johnson’s tenure between 2011 and 2013, year over year growth

dramatically declined by approximately 25%. In 2014, the company experienced a net income

loss of almost $1.3 billion. By 2016, net income loss had narrowed to a little over half a billion.

Journal of Business Cases and Applications Volume 18

J.C. Penney stock had been as high as the mid $70 range in 2007, by 2013 it was $20 and by 2015

had dipped to as low as $6. Under Ellison it has risen as high as $11.

PRIVATE BRANDS

Private or exclusive brands allow a company to differentiate itself while offering products

that typically sell for lower prices and generate higher gross margins than national brands. For

stores that focus on providing value to its customers, they can play an important role. In 2015,

52% of J. C. Penney’s sales came from private brands. Ellison goal is to increase this percentage

to 70% by the year 2019. This 18% of additional sales in private brands represents more than $2

billion in possible sales. Getting the proper mix of private and national brands can be a tricky

thing. Kohl’s tried recently to raise its percent of private brands from 30% to over 50% which

turned out to be too high. Sales actually decreased as customers are often attracted to the store by

national brands.

A FOCUS ON MERCHANDISING MIX

“We are doing the equivalent of an Oreo display”, says J.C. Penney’s Chief Marketing

Officer Mary Beth West regarding the basic standardization of their redirected approach to

merchandising (Purdy, 2016). The shift from employing “gut feeling” decisions as opposed to

evidence-based decisions comes as no surprise given Ellison’s methodical approach to electing

recourses that closely match customers’ shopping patterns. As mentioned, sales per square foot

has dramatically declined since its peak in 2006. Ellison’s focus on strategically shifting the

merchandising mix will better correlate with where customers are spending the greater percent of

their dollars. For example, Ellison tested the selling of men’s shoes next to women’s footwear and

actually found that men’s shoes sold faster next to men’s suits. Consequently, J.C. Penney saw a

double-digit increase in footwear simply by responding to shopping patterns and entrusting men

to buy their own shoes instead of women who make up 80 percent of their clientele (Wahba, 2016).

The retailer is also seeing a favorable increase in the relaunch of Liz Claiborne handbags. In

projecting future growth, capturing big data will be instrucmental in learning from current buying

patterns and in anticipating future buying behaviors (Garcia, T., 2016).

THE REVITALIZATON OF JCPENNEY HAIR SALON

Ellison decided to reinvigorate J.C. Penney’s once thriving hair salons. Still hailed as the

largest salon chains in the country, J.C. Penney salons generate approximately 5% of sales and and

had become the premier destination for proms and weddings (Wahba, 2016). Interestingly, salon

customers contribute two times the revenue of the average customer while visiting the store eight

times a year. Unfortunately, the majority of their salons lacked the luster needed to attract new

customers; thus losing out on an opportunity to increase foot traffic and compliment other in-store

franchises like Sephora.

THE NECESSITY OF E-COMMERCE

J.C. Penney and other retailers are feeling the pressure of alternate substitutes, mainly in

the form of online sales. What is more, the overall decline of American malls with the projection

that a third of them will close soon, only heightens the hurdle. About 635 of J.C. Penney’s 1,020

Journal of Business Cases and Applications Volume 18

stores are in traditional malls which are characterized as C- and D-malls (Wahba, 2016b).

Meaning, these malls have a lot of unoccupied real estate. Accordingly, the absence of viable

tenants and the lower-grade integrity of the mall adversely affects neighboring incumbents. If the

diminution of foot traffic was not enough, adding Amazon.com to the retail equation only burdens

traditional apparel retailers.

Ellison has plans to dedicate 29% of its capital expense budget to revitalizing its online

procurement (Wahba, 2015). Moreover, Ellison corroborates his commitment to improving online

viability by stating, “We went out and we recruited one of the best e-commerce executives in

retail…” (Garcia, D., 2016). With the addition of Michael Amend, Executive Vice President of

Omnichannel, and Ellison’s supply chain management experience, the company is looking to find

the delicate balance between digital and physcial shopping (Nash, 2015). However, J.C. Penney

continues to trails the retail industry by failing to execute “same-day pick up” like Walmart and

other competitors.

A LUCRATIVE PARTNERSHIP BETWEEN J.C. PENNEY AND SEPHORA

The partnership between J.C. Penney and the European beauty retailer, Sephora, began in

2006 during Mike Ullman’s tenure. In a continuing effort to appeal to their core customers, Ullman

believed that Sephora would add a degree of excitement, prestige, and inspiration to J.C. Penney’s

brand while attracting new customers in the process. As of 2015, J.C. Penney housed 518 Sephora

boutiques despite plummeting sales and rumors of stores closing (Levine-Weinberg, 2016). The

decision to open 60 additional Sephora shops in small and rural areas comes at no surprise given

that the boutiques constantly outperform the entire store.

Although Johnson, during his stint as CEO, attempted to change J.C. Penney’s value

proposition by focusing on affluent customers, Sephora reflects this agenda but in a different

perspective. More concretely, J.C. Penney is attracting Millennials. And, while these new

customers are entering into the store for an aspirational experience, their stay is temporal with no

additional money spent in other areas. Ellison attributes this failure to poor product

departmentalization. To combat this, J.C. Penney, through its adoption of the “cross shop”

concept, hopes to compliment Sephora sales through better product presentation in categories such

as accessories and handbags (Levine-Weinberg, 2016) to increase the likelihood of cross-selling

opportunities (Bailey, 2015). Table 3 vividly depicts the positive correlation between Sephora as

it relates to proportionate sales of women’s accessories. Ending 2015, net sales increased to 12%

as opposed to 11% and 10% in 2013 and 2012, respectively. In a cluster of closely-related

substitutes, J.C. Penney is heavily dependent on Sephora to assist in offering amentities that will

encourage customers to stay longer and shop.

THE RELAUNCHING OF THE APPLIANCE BUSINESS

Following a 33 year hiatus, J.C. Penney became a direct rival with Sears, Home Depot,

Lowes and several others by relaunching appliances to their product mix. The appliance industry

is expected to grow by 32% to over $50 billion by the year 2020. As a result of those projections,

J.C. Penney’s goal was to capture and improve sales per square footage with this product addition

(Wahba, 2016a). To outperform other rivals, J.C. Penney aggressively lowered prices in an

attempt to articulate to its customers that appliances were now available, including on the jcp.com

web site. What is interesting is the extent to which the retailer offers price-matching, free delivery

and installation on appliances $299 or more (Wahba, 2016a). Not only is J.C. Penney looking to

Journal of Business Cases and Applications Volume 18

revive its sluggish sales, but also hoping that customers will apply for J. C. Penney credit cards

since appliances are big ticket items.

ADDITONAL EFFORTS TO SURVIVE AND THRIVE

J.C. Penney under Ellison’s direction is undertaking several additional measures in an

attempt to return to its glory days. They have created a partnership with Ashley Furniture to sell

their products in certain Penney stores. Another partnership with Empire Flooring will gain the

company sales in an effort to be a place to furnish your home. In their apparel line, they are

emphasizing becoming the place for special sizes to shop. Sizes like Junior Plus, Husky, Girl’s

Plus are examples. Currently, the special size community is 38% of the U.S. population and is

expected to grow to 50% in the next ten years. They have even changed their mission from being

“America’s favorite store” to that of “helping our customers find what she loves for less time,

money, and effort.” Note the “she” in the new mission, 72% of J.C. Penney’s customers are

females.

THE EXTERNAL ENVIRONMENT

While an argument can be made both ways, a large group of proponents including Harvard

professor of strategy, Michael Porter, contend that organizational performance will be primarily

determined by industry forces. The retail industry is being impacted by various economic,

technological and social changes which have created a challenging environment for J.C. Penney

and its competitors.

THE 2009 RECESSION

Traditional department stores were hit hard during the 2009 recession as consumers cut

back their spending, especially on apparel such as clothing and shoes. Consumer expenditures on

clothing and apparel dropped from $1881 per household before the recession in 2007 to a low of

$1700 in 2010. It took until 2015 for consumer spending to reach prerecession levels at $1846 per

household (Consumer Expenditures--2015, 2016). The recession and the resulting slow economy

have made consumers more price-conscious. Even years after the recession, U.S. consumers are

uncertain about the economy and holding tight to their wallets. A recent survey found that

approximately 73% of shoppers considered sales and price discounts important factors when

choosing where to shop (Allen, 2015).

TECHNOLOGY

Technology has also played a major role in changing consumers’ shopping habits.

Consumers are connected with their mobile phones and social media. A recent survey found that

79% of smartphone owners used their smartphone to shop (How Mobile is Transforming the

Shopping Experience in Stores, 2013). With 67% of U.S. consumers now owning a smartphone

(Smith, 2015), consumers can purchase products whenever and wherever they want using a

desktop, laptop, smartphone or tablet. They also expect brick-and-mortar stores to offer online

shopping along with free home delivery or in-store pickup with easy return policies. Most of the

major retailers are investing heavily in technology improvements and infrastructure to meet those

expectations.

Journal of Business Cases and Applications Volume 18

Millennials, at 75 million strong, are finally overtaking the Baby Boomers as the largest

generational group and their influence will be felt for years to come. Millennials, defined as adults

under 35, are digital savvy and more likely to purchase experiences than things. (Lee, 2016).

COMPETITION

Traditional department store retailers such as J.C. Penney, Macy’s and Kohl’s are not only

competing with each other, they are fighting for an increasingly smaller piece of the retail pie with

online retailers such as Amazon and off-price discounters such as TJMaxx and Ross Dress for

Less. Competition is intense and some analysts believe that the retail space is oversaturated.

According to Morningstar analysts, "The abundance of space, the growth of e-commerce, and other

factors are forcing retailers to reconsider their physical store strategy," (Peterson, 2016). The

analysts are concerned that if Sears, Macy’s and J.C. Penney continue to close anchor stores, the

other tenants will leave, leaving the malls deserted with massive losses.

Macy’s is an upscale department store with over 880 stores including Bloomingdales,

Backstage and Bluemercury. Since 2012, Macy’s sales have stagnated around $27 billion. In

2015, they closed 36 stores and plan to close another 100 to remain profitable while increasing

their multi-channel fulfilment strategies. In 2015, in order to better compete with off-price stores,

Macy’s opened six off-price stores, under the Backstage name. They plan to expand this concept

in 2016, including locating the Backstage stores within selected Macy’s stores. They also are

entering into an agreement with BestBuy to sell electronics within Macy’s (Macy's Inc., 2016).

Kohl’s has approximately 1150 department stores, 773 stores are located in strip malls and

293 stores that are freestanding. Only 84 stores are in community or regional malls. Their sales

have increased from $18.8 billion in 2012 to 19.2 billion in 2016. They plan to close 18

unprofitable stores in 2016 (Kohl's, 2016).

Sears operates 705 full-line Sears stores located mostly in mall settings. Their sales have

plummeted from $40 billion in 2012 to just over $25 billion in 2016. Recently, they have closed

68 of their Kmart stores and 10 Sears stores (Sears, 2015).

Amazon represents 26% of all online sales in the United States (Loeb, 2016). Online sales

have been increasing every year and in 2016, Amazon became the number two seller of apparel in

the United States. In a recent consumer survey, 46% of shoppers said their holiday browsing and

buying would be conducted online (Allen, 2015). Amazon is the most popular website for online

searches with over 55% of online searches beginning at their website (Bloomreach, 2016)

Off-price discount stores are one of the fastest growing segments in the retail space.

TJMaxx and Ross Dress for Less stores offer national brands at discounts of 20% to 60% along

with their own exclusive brands. Since the recession, their sales have increased in the high digits

as shoppers looked for bargains. TJX is the largest off-price retailer with sales increasing from

$23.19 billion in 2012 to over $30 billion in 2016. Currently operating over 2,600 stores in the

United States under the names T.J. Maxx, Marshalls, and HomeGoods, they plan to open another

2,000 stores. Ross stores sales have increased from $8.61 billion in 2012 to $11.9 Billion in 2016.

They operate over 1200 stores in the United States.

J. C. PENNEY’S FUTURE GOALS

J. C. Penney’s future looks much brighter now than it did following Johnson’s tenure.

Sales are up, costs are down, and customers are returning. However, the company lost $513

Journal of Business Cases and Applications Volume 18

million last year and over $3.5 billion in the last 4 years, while at the same time carrying nearly $5

billion in long-term debt. Obviously, what the company can do in the future is financially limited.

The company has an ambitious long-term plan with specific strategies to return the

company to profitability. The goal is to grow comparable sales by 3% annually through 2019,

improve gross margins by 75-100 basis points, reduce SG&A expenses as a percentage of revenue

by 215 to 240 basis points, and produce as much as $500 million in net income by 2019.

CASE QUESTIONS

It is still unclear if Marvin Ellison’s turnaround plan will work or fail as miserably as Ron

Johnson’s plan.. Based on the case answer the following questions.

1. What is your assessment of the individual turnaround strategies CEO Marvin Ellison has

put into place?

2. What other possible strategies do you think they might employ?

3. Regardless of what Ellison does at J.C. Penney, is it possible that the company’s fate rests

more in the hands of what transpires in the industry?

4. What is your opinion as to the future of J.C. Penney?

REFERENCES

Ailawadi, K. (2013, April 12). The reason for Ron Johnson's JC Penney fiasco . Retrieved from

US News Web Site: http://www.usnews.com/opinion/blogs/economic-

intelligence/2013/04/12/why-jc-penney-failed-under-ron-johnson

Aisner, J. (2013, August 21). What went wrong at J.C. Penney? Retrieved October 2016, from

Harvard Business School Web Site: http://hbswk.hbs.edu/item/what-went-wrong-at-j-c-

penney

Allen, K. (2015, October 20). Retailers in for a Very Digital Holiday Season, According to NRF

Survey. Retrieved from National Retail Federation: https://nrf.com/media/press-

releases/retailers-very-digital-holiday-season-according-nrf-survey

Amazon is about to overtake Macy’s as biggest seller of clothing in U.S. (2016, May 14).

Retrieved from Market Watch Web Site: http://www.marketwatch.com/story/traditional-

retailers-stumble-in-their-efforts-to-compete-with-amazon-2016-05-12

Bailey, S. (2015, July 7). Why Sephora was key to JCPenney’s same-store sales growth in 2014 .

Retrieved from Market Realist Web Site: http://marketrealist.com/2015/07/sephora-key-

jcpenneys-store-sales-growth/

Bailey, S. (2016, August 18). 2Q16 sales growth: JCPenney outperformed it peers. Retrieved

from Market Realist Web Site: http://marketrealist.com/2016/08/2q16-sales-growth-

jcpenneys-strategies-help-outperform-peers/

Bloomreach. (2016). Bloomreach. Retrieved from State of Amazon 2016:

http://bloomreach.com/amazon/

Journal of Business Cases and Applications Volume 18

Cheng, A. (2012, February 24). Penney still has to show new strategy works. Retrieved 2 24,

2012, from MarketWatch: http://www.marketwatch.com/story/jc-penney-swings-to-

quarterly-loss-2012-02-24

Cohen, M. (2016, January 20). JC Penney to reenter the major appliance business: Who do they

think they are, Sears? Retrieved from Forbes Web Site:

http://www.forbes.com/sites/markcohen/2016/01/20/jc-penney-to-reenter-the-major-

appliance-business-who-do-they-think-they-are-sears/#4bc032b8e3d0

Consumer Expenditures--2015. (2016, August 30). Retrieved from Bureau of Labor Statictics:

http://www.bls.gov/news.release/cesan.nr0.htm

d'Innocenzio, A. (2013). JC Penney looks to old CEO to secure its future. Retrieved from

Yahoo! News Website: http://news.yahoo.com/news/jc-penney-looks-old-ceo-

040240747.html

Garcia, D. (2016, March 1). JC Penney CEO: This is our comeback strategy. Retrieved October

2016, from CNBC Web Site: http://www.cnbc.com/2016/02/29/jc-penney-ceothis-is-our-

comeback-strategy.html

Garcia, T. (2016, May 17). J.C. Penney upgraded on turnaround strategy that steers away from

apparel. Retrieved from Market Watch Web Site: http://www.marketwatch.com/story/jc-

penney-upgraded-on-turnaround-strategy-that-steers-away-from-apparel-2016-05-16

Gibson, A. (n.d.). JC Penney CEO failing because he used gut and not data. Retrieved from

Aabaco Small Business Web Site: https://www.aabacosmallbusiness.com/advisor/jc-

penney-ceo-failing-because-used-gut-not-151721905.html

How Mobile is Transforming the Shopping Experience in Stores. (2013, April). Retrieved from

ThinkwithGoogle: https://www.thinkwithgoogle.com/research-studies/mobile-in-

store.html

J. C. Penney unveils turnaround stategy as it warns of weak sales. (2014, October 4). Retrieved

from Los Angeles Times Website: http://www.latimes.com/business/la-fi-penney-sales-

20141008-story.html

J.C. Penney. (2011, January). J.C. Penney, Inc. 2011 Annual Report. Retrieved August 20, 2014,

from JCPenney: http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-sec

Kohl's. (2016). Kohl's Fact Book. Retrieved from Kohl's:

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-reportsannual

Lee, D. (2016, October 10). Millennials aren't big spenders or risk-takers, and that's going to

reshape the economy. Retrieved from Los Angeles Times Web site:

http://www.latimes.com/business/la-fi-the-millennial-factor-20161010-snap-story.html

Levine-Weinberg, A. (2016, March 22). J.C. Penney is leaning on Sephora to lead its comeback.

Retrieved from Motley Fool Web Site:

http://www.google.com/amp/www.fool.com/amp/investing/general/2016/03/22/jc-

penney-is-leaning-on-sephora-to-lead-its-comeba.asp

Loeb, W. (2016, January 4). Why Retailers Must Restructure in 2016. Retrieved from Forbes:

http://www.forbes.com/sites/walterloeb/2016/01/04/every-sign-is-saying-retailers-must-

restructure-in-2016/#3c5f05d45f94

Macy's Inc. (2016, April 2). Macy's Inc. 2016 Fact Book. Retrieved from Macy's:

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-reportsannual

Macy's, Inc. (n.d.). Retrieved from MarketWatch:

http://www.marketwatch.com/investing/stock/M/financials

Journal of Business Cases and Applications Volume 18

Marcus, A. A. (2011). Management strategy: Achieving sustained competitive advantage (2nd

ed.). New York: McGraw-Hill/Irwin.

McLymore, A. (2016, August 17). JC Penney's CEO maps out three-year turnaround plan.

Retrieved from CNBC Web Site: http://www.cnbc.com/2016/08/17/jc-penneys-ceo-

maps-out-three-year-turnaround-plan.html

Mourdoukoutas, P. (2013, September 17). A strategic mistake that haunts JC Penney. Retrieved

from Forbes Web Site: http://www.forbes.com/sites/panosmourdoukoutas/2013/09/27/a-

strategic-mistake-that-haunts-j-c-penney/#6cbf04ee3a6c

Nash, K. S. (2015, August 27). J.C. Penney plays catch up in e-commerce. Retrieved from Wall

Street Journal Web Site: http://blogs.wsj.com/cio/2015/08/27/j-c-penney-plays-catch-up-

in-e-commerce/

Peterson, H. (2016, October 10). Sears, Macy's, and JCPenney are fueling a $48 billion crisis in

the retail industry. Retrieved from Business Insider:

http://www.businessinsider.com/shopping-malls-at-risk-of-shutting-down-2016-10

Purdy, C. (2016, February 26). JC Penney’s turnaround plan includes selling clothes for actual

pennies. Retrieved from Quartz Web Site: http://qz.com/625284/jc-penneys-turnaround-

plan-includes-selling-clothes-for-actual-pennies/

Reingold, J. (2012, March 19). Retail's New radical. Fortune, pp. 125-131.

Robbins, S., Coulter, M., DeCenzo, D. (2017). Fundamentals fo Management. Boston, MA:

Pearson.

Sears. (2015). Sears Holdings Annual Report. Retrieved from Sears Holdings:

http://searsholdings.com/docs/investor/SHC_2015_Form_10-K.pdf

Smith, A. (2015, April 1). U.S. Smartphone Use in 2015. Retrieved from Pew Research Center

Web site: http://www.pewinternet.org/2015/04/01/us-smartphone-use-in-2015/

Steffy, L. (2013, January 4). Unlucky Penney. Texas Monthly, p. 54+.

Townsend, M. (2015, April 9). J.C. Penney marks two years since Johnson nearly ruined it.

Retrieved from Yahoo Finance Website: http://finanace.yahoo.com/news/j-c-penney-

marks-two-203612079.html

Wahba, P. (2015, August 14). J. C. Penney's plan to catch up in the e-commerce wars. Retrieved

from Fortune Web Site: http://fortune.com/2015/08/14/jcpenney-ecommerce/

Wahba, P. (2016a, July 18). J.C. Penney gets aggressive in appliance war with Sears. Retrieved

from Fortune Web Site: http://fortune.com/2016/07/18/jcpenney-sears-appliances/

Wahba, P. (2016b, February 24). The CEO who's reinventing J. C. Penney. Retrieved October

2016, from Fortune Web site: http://fortune.com/j-c-penney-reinvention/

Wahba, P. (2016c, March 6). Why J.C. Penney's CEO isn't closing more stores. Retrieved from

Fortune Web Site: http://fortune.com/2016/03/06/jcpenney-stores/

Journal of Business Cases and Applications Volume 18

APPENDIX

Table 1

JCPenney

Income

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Revenue

USD MIL

Net

Income

USD

Mil

19,903

1,153

19,860

1,111

18,486

572

17,556

251

17,759

389

17260

-152

12985

-985

11,859

-1278

12,257

-717

12,625

-513

Year over

year

5.97 -0.22 -6.92 -5.03 1.16 -2.81 -24.77

-8.67 3.36 3

Table 2

2012 2013 2014 2015 2016 2016 Q1 2016 Q3

Stock Price

34.76 20.62 8.74 6.29 6.66 11.57 8.79

Stock Price

Stock Performance

Journal of Business Cases and Applications Volume 18

Table 3

Table 4

Sales 2016 2015 2014 2013 2012

Macy’s 27.08B 28.11B 27.93B 27.69B 26.41B

Kohl’s 19.2 19.02 19.03 19.28 18.8

JCP 12.63 12.26 11.86 12.99 17.26

Sears 25.15 31.2 36.19 39.85 41.67

TJMaxx 30.94 29.08 27.42 25.88 23.10

Source: MarketWatch

Journal of Business Cases and Applications Volume 18

Instructor Notes for:

JCP 2017: A Light at the End of the Tunnel or a Train?

Question 1: What is your assessment of the individual turnaround strategies CEO Marvin

Ellison has put into place?

With the return of Ullman and eventually Ellison, JCP has installed several turnaround strategies

that will hopefully allow JCP to not only stop the financial losses but to return it to its better days.

The following looks at those individual strategies.

Private Brands: There are definitely pros and cons for increasing the percentage of private brands

a retailer might sell. JCP’s private brands are affordable and that would appeal to their customer

base. They are the ones that most of their sales promotion key on. In addition to being an exclusive

offering thus differentiating themselves from other retailers, they provide for a bigger margin. On

the other hand, private brands have to appeal to their customers, if customers feel they are second-

best, they won’t buy or even shop for them. National brands often are more appealing and are

what oftentimes draw customers to your store in the first place. The proper mix of private versus

national is often a tricky decision, and only settled through trial and error.

Merchandising Mix and Sales Promotions: Part of Ellison’s turnaround strategy involves

methodically understanding the attributes of the typical J. C. Penney customer. Their

merchandising mix revamp and return to heavy sales promotion would seem to be a necessary

ingredient to appeal to their customers. While customers love bargains and many still love the

shopping experience, constant promotion can cheapen your brands. A retailer wants to avoid

customers who only spend money on sale items and never buy full-price or impulse items.

An additional problem is created with price anchoring, or comparing a sale price to an

original price that is never really available. Anchoring itself is fine, as long as the original price

is real; but when the retailer doesn’t ever sell its merchandise at that higher original price, it is

deceiving to consumers.

The possibilities of innovative merchandising mix, to include location of those items, are

endless. Their movement of men’s shoes is but one example of something small yet effective –

similar to milk and bread at grocery stores.

JCP Hair Salons: While JCP salon sales are only 5% of sales, that represents $600+ million in

2016 alone. Hair salons can definitely draw in potential customers (maybe 8-10 times a year) who

might seldom otherwise frequent malls. One cannot get a haircut online, and the key is to get that

customer to visit other parts of the store.

Journal of Business Cases and Applications Volume 18

E-Commerce: Relative to its online business, J.C. Penney continues to follow behind its

cohorts, like Nordstrom’s and Macy, who have been aggressively invested heavily in growing

online channels. Accordingly, Ellison emphasized a renewed focus on J.C. Penney’s omnichannel

strategy which includes affording customers the opporunity to buy products online and pick them

up the same day in store. With an acute focus on product assortment, this significant improvement

to its online business not only begins the process of closing the gap that existed among other mid-

tier retailers, but it generates higher store traffic which can lead to additional purchases and cross-

departmental selling.

Sephora: Ellison plans to fully leverage J.C. Penney’s relationship with the Sephora shops which

generates 3 to 4 times the sales of the rest of the store. This partnership creates a differentiation

approach that employs the appeal and product quality of Sephora shops to create distinction among

other mid-tier department stores. Sephora is a relevant name in multiple demographics which

should benefit JCP. In addition, Ellison has been instrumental in lauching a Sephora e-commerce

business on the company’s website. This, in turn, will attract a new millennial customer who is an

early adopter of technology and are more prone to utilize phone apps and purchasing products

online.

The Appliance Relauch: With the appliance market expected to grow 30 percent over the next

three years, Ellison believes that adding appliances to its product depth will prove lucrative. As

big-ticket items, appliances are likely to be purchased on a credit card, which can be of additional

benefit. Moreover, one-third of customers buying appliacnes are anticipated to be new to J.C.

Penney.

J. C. Penney’s relauch of appliances comes at the same time that Sears is looking to sell its

Kenmore brand. Their Kenmore appliances was once an area of dominance. In 2013, Sears held

28% of the US appliance market, nearly as much as Lowes and Home Deport combined. By 2015,

Sears had lost $1 billion in appliance revenue and had fell behind both Lowes and Home Depot.

It could further complicate JCP’s entry into appliances if Sears sells Kenmore depending on where

the brand is sold.

Additional Turnaround Efforts: The partnerships with Ashley Furniture and Empire Flooring

are highly questionable. They could prove positive additions in an attempt to round out their home

furnishing efforts, but both will require added store space, increase their inventory carrying costs,

and entail new tasks such as delivery and warranties. The emphasis on special sizes in apparel

combined with a renewed effort to appeal to the woman shopper would both seem to be welcome

additions.

Journal of Business Cases and Applications Volume 18

Question 2: What other possible strategies do you think they might employ?

With other stores, such as Sears and Macy’s, that are closing due to underperformance, J.C.

Penney can capitalize on such store closures and proactively implement strategies to ensure that

customer traffic flows in their direction to increase market share. Also, J.C. Penney can continue

to evaluate stores that are not profitable in order to focus on stores that will help enhance its

onmichannel efforts. Because 50 percent of customers who purchase items online actually visit

brick-and-mortar locations, this significant outcome proves advantageous for J.C. Penney in that

it drives store traffic resulting in customers shopping multiple categories which increases time

spent in the store and items purchased per transaction.

Johnson was right about one thing – JCP needed modernization. Written off as their

grandmother’s favorite store just a few years ago, the company desperately needs to attract new

generations of shoppers. Hopefully their partnership with Sephora will bring in newer, younger,

more affluent customers. Upgrading and renovating their salons could prove advantageous. While

mall traffic is down, people still have to get their hair cut and styled, and with their many locations

and readily accessible side doors to pick up online orders, they can entice people into their stores.

Question 3: Regardless of what Ellison does at J. C. Penney, is it possible that the company’s

fate rests more in the hands of what transpires in the industry?

Many believe that the retail industry, particularly apparel, is over-stored with too many

locations for existing demand. Aeropostale, Pacific Sunwear, American Apparel, Quicksilver,

Sports Authority, and Gander Mountain have all filed for bankruptcy recently. Gap continues to

have decreasing sales every quarter. Macy’s, probably JCP’s nearest competitor, is closing

multiple stores. Sear’s is on the verge of going under. Obviously, to some degree, the closing of

other chains’ stores bodes well for the survivors.

Stores in malls are especially vulnerable. Experts anticipate that a third of all malls will

close soon. What with customers, especially the younger ones, losing interest in browsing at the

mall, combined with the onslaught of internet shopping, department stores face an increasingly

bleak future.

Question 4: What is your opinion as to the future of J. C. Penney?

Although the figure may be over-inflated, JCP believes that it has some 87 million active

shoppers. That combined with the fact that 90% of all retail sales are still made in store, provides

a solid base to rebuild on. Customers like to shop online – but more often than not, they like to

see and feel first-hand apparel. They also want immediate access to their purchase.

Although they still may need to close some unprofitable stores, they should be very

judicious in so doing. Closing more stores could actually hurt their business, both in store and

online. JCP’s long-term debt is over a half billion dollars currently, so that is going to limit what

Journal of Business Cases and Applications Volume 18

the company can do in the future. They cannot afford massive remodeling nor huge increases in

inventory carrying costs like appliances and credit card debt might necessitate.

While department store market share has dropped significantly due to the Internet and fast-

fashion retailers, like Forever 21 and H&M, the future of J.C. Penney will depend on 1) using big

data to acutely delineate its own millennial customer and associative spending patterns, 2)

continuing to monitor store closures of its peers which can possibly increase store traffic, 3)

tracking in-store purchases, like appliances, to determine positive correlations with other product

categories, 4) vastly improving e-commerce channels to accommodate habitual online spending,

5) improving the merchandising mix and marketing innovations, and 6) creating value by offering

high quality private-label brands and its Sephora shops.