By  on November 16, 2005

Myron "Mike" Ullman 3rd became chairman and chief executive of J.C. Penney Co. Inc. in December 2004, when the company was already deep into a multi-year turnaround and showing strong results. His challenge is to sustain the momentum and Penney's newfound fashion appeal, create more of a buzz around the brand so it resonates louder with a younger crowd and its middle income audience, execute the emerging off-mall strategy and find additional avenues of growth and synergies in its three channels of distribution — stores, catalogue and Internet.

Although Ullman has big shoes to fill, having succeeded Allen Questrom as ceo, he has a broad and unusual background. He was group managing director of luxury giant LVMH Moët Hennessy Louis Vuitton, ceo of Macy's during the heated takeover battle with Federated Department Stores in the early Nineties, was a White House Fellow under President Reagan, vice president of business affairs at the University of Cincinnati and managing director and chief operating officer at Wharf Holdings in Hong Kong. He also serves on the board of Starbuck's, Kendall-Jackson Wine Estates, the National Retail Federation and Polo Ralph Lauren.

In a Q&A session with Edward Nardoza, editor in chief of WWD, Ullman outlined his priorities at Penney's.

WWD: I was really surprised at how impressive the performance [at Penney's] has been — significant debt reduction, steady growth in sales, healthy profitability, an impressive cash position. There are several reasons, [the sale of] Eckerd among them. But is there one particular reason for such a sustained impressive performance?

Mike Ullman: It's fair to say that Penney's is a very unusual situation. In the late Nineties, there were four or five years of decline in performance. Some of you may not know that Penney's at that time had over 2,000 stores and was completely decentralized. Every store bought its own merchandise. Essentially a store manager got promoted to district manager, then regional manager, then you came into headquarters. Virtually all the chairmen of the company had been store managers, so it was a very decentralized culture and organization.

When Allen was hired, Vanessa [Castagna] had been there about a year setting up a process of centralizing the business. There was a terrific job done by the team that was assembled. Hundreds of millions of dollars were invested in systems to centralize the business and the improvement was dramatic. At this point they announced a five-year goal of turning around the company to get to 6 to 8 percent operating profit and last year — a year early — we ended up at 7.1 percent, with a 600 or 700 basis-point improvement in margins and reduction in costs. We needed to be consistently improving or the company wouldn't be here today. When the board approached me they said, we are interested in the next phase [and] very eager to have a growth agenda, which is quite different from a turnaround agenda.The team we have, many of whom were already there and now in new roles and many recruited, is doing well. We put together a strategy built around growth. I will not take you through the 17 initiatives. But essentially there are four strategies....The first one is to make an emotional connection with the customer, which is primarily a merchandising and marketing strategy. The second is to make J.C. Penney an easy and exciting place to shop, which is really our stores, catalogue and Internet initiative. The third is to make us a great place to work, to have our people engaged. It's kind of the Starbuck's model. And the fourth is to reach the top quartile in retail industry performance. We've got something to do in each part of our business and we are getting organized to do it.

WWD: What can an industry like this learn from an operation like Starbuck's?

M.U.: The Starbuck's culture is Howard [Schultz, chairman]. He honestly believes that there is good in everyone and in making the human connection, particularly in the Starbuck's environment where you are selling as much the experience as the quality of the product. The best Starbuck's customer comes to the store over 200 times a year, so if you are going to focus on the customer, the best way is to engage the associates because they are the ones that have a relationship with the customer. They know them by their names, the composition of their drink. They know their family. And Starbucks top to bottom, it's about making sure they are doing the right thing to equip the associate to be more effective. That hasn't been our strength in the department store industry. When Macy's failed and went into Chapter 11, it was probably the lowest point in their history and you can say the 80,000 people were collectively depressed.

How do you turn around a culture? It's not so easy. The good news is that many of [Penney's] management had shares or options. The longstanding associates really embraced the change. If they hadn't changed, there wouldn't be a J.C. Penney today.

WWD: Is that what's key to creating an ownership culture? Is it a compensation issue? A stake in the business?M.U.: Maybe I got this from hanging around Howard a long time. I honestly think there are four things that motivate people to change, to want to be engaged. The first is that they believe tomorrow is going to be better than today because why would somebody stay in a place they think is constantly going to get worse. The second is, do I really trust the person I work for? Does that person have my interest in mind? Do I feel that person has integrity and wants to do the right thing? The third is do I enjoy the people I am working with? Nobody wants to come to work every day and work with people they don't like. And fourth is am I being competitively compensated, meaning do I feel I am being fairly treated? And that goes across the whole range of benefits and cash comp and so forth. I believe Penney's is a classic situation of a group of people that really want to win. They have seen the edge of the precipice and have survived. I don't know too many companies the size of Penney's, in terms of retailers, that slipped that far down the slope and turned around and went the other direction. One of the things that attracted me to Penney's is that it can be a tremendous opportunity in the middle segment to capture the hearts and minds of the associates and the customers.

WWD: Running a company this size means you have a lot of constituents to deal with. Who takes priority? The shareholder, the customer or the employee?

M.U.: I would start with my associates because frankly, they are the most effective advocates for what we are doing. If you convince them that we have styles that inspire, that we have brands that we are focusing on, that we have marketing that is effective, that the quality of our product is unequaled in our segment, if we have smart pricing, they will articulate that to our customer and they will treat the customer differently. Obviously, we have to be customer-centric in all our channels. It's one thing to say you want sales associates to behave that way, but if someone looks at us on the Internet, they don't have that interaction, so we have to make the Internet site, which by the way will reach $1 billion next month, the largest general merchandise site on the Web. So obviously, customer centricity is important to us. Our customer tends to be right smack in the middle of America, $35,000 to $85,000 a year, 35 to 54 years old. And she is a very stressed customer. She's got too little money, too little time, too many kids and a spouse, and that's a tough place to be.WWD: I was also surprised to see that while everybody thinks of the 35- to 55-year core, you have the largest teen, juniors and young men's businesses in the country.

M.U.: I guess it was the same kind of surprise to me. I came in with the same kind of assumption that many of you have, that [Penney's] was your grandma's store, and you find out you have the largest juniors, the largest young men's business and one of the largest children's business in the country. Those businesses are fashion-driven, particularly juniors and young men's. It shows we can do it. The challenge, quite honestly, is that those businesses are bought by mom. The customer doesn't have the credit card or the car. And once the customer does have the credit card and the car, they go tripping off to American Eagle or Abercrombie or someplace else. When she has the stroller, she's back. Our goal is to get her back before she gets the stroller. I think that we can do that.

WWD: Whom do you market to? Do you try to get that teenager and build the cool factor or get to the parent?

M.U.: We have three different constituents at the moment. The catalogue business is our oldest customer, particularly the big book. We are the only ones left in the big catalogue business. We have three big books a year. A lot of that customer tends to be over 55, on average. Our store customer is in her 40s, on average. And our Internet customer is in her 30s. We market to all three in different ways. The marketing with the catalogue is the catalogue itself. We have 78 catalogues during the year. With three big books, that means that [other] 75 are very targeted, specialized books. That's the fastest-growing segment. On the Internet, the youngest customer was right there...and you do guerrilla marketing to get that customer. With the store customer, the company has done a terrific job. The reason we are here today is the sales promotion approach we put together to get people in the store. Frankly, you can do a terrific job of execution, but if you don't have any people there to see it, that's a problem. If anything, we are going to start to be more surgical about sales promotion, to take money that has been traditionally allocated to sales promotion and reinvest in marketing J.C. Penney as the brand....We have five brands of our own that each do $1 billion and we are going to market those brands more as lifestyle brands. Arizona Jeans Co. is probably the best example of one that has been marketed reasonably well, and it's growing three times the rate of the stores.WWD: The Nobel Prize in economics this year was awarded to two economists who developed the idea of "Game Theory," the notion that a lot of our behavior — tactical, strategic, personal — is based on what we think the other guy, the competition, is going to do. How much do you have to study Wal-Mart, Federated, Kohl's? Now Federated is going to make Macy's a national department store. How does that affect your thinking, your tactics and your strategy?

M.U.: My first reaction is, that is typically a prescription for failure, to follow somebody else. Just about the time you get there, they are someplace else. Federated in the Seventies and the Eighties was a classic case. Gold Triangle, Gold Circle, Gold Key, all those concepts were four or five years after the concept that actually worked....You have to decide what you what to be. You just go do it and execute it well. And be as consistent as you can. Having said that, you have to be savvy enough to recognize what is going on around you. Anybody that thinks Wal-Mart and Target are not competition is not paying attention. Sixty-five percent of our customers shop Wal-Mart. She may be buying gasoline, groceries and paper supplies at Wal-Mart and her career fashion with us. But to think we can ignore that they are going after the juniors business or the kids' business in an important way — we have to deal with it. But I am quite confident that we have a legitimate reason for being in our segment — great quality at a great price and we are right smack in the middle between Target and Federated and there is plenty of gap between those two.

WWD: A lot of people in this audience might agree that consolidation is really not a good thing. Do you share that view? Is there a silver lining? Who wins?

M.U.: It depends if you are the consolidator or the consolidated. I have been both. It's more fun to be the consolidator. I think it is inevitable because frankly, in the old days you had brand loyalty because you extended credit and that was pretty much the only credit the consumer had. If you were a Sears customer, you had a Sears card. If you were a Lazarus customer, you had a Lazarus card. And it was quite clear what the differences were. [However] that's blurred considerably because department stores end up looking the same. The customer is now equipped with their own credit through a third party typically. There are so many other alternatives so you've got to be more cost-effective. I think Federated is smart to realize that they have to be a national franchise. They can't afford the luxury of having separate brands, by market....The people who do their business well will not be consolidated.WWD: From the standpoint of your personal management style, what skills transcend the luxury sector and the moderate sector. Is it essentially just dealing with supply and demand.

M.U.: One of the things that I really enjoy is change. Every time I had an opportunity to do something new and different, that was the motivation. I really believe my job is more leadership than management. A lot of people know how to do management. That's basically doing the agenda of to-dos for this year or whatever. A more interesting topic is what's around the corner and how do we prepare ourselves. I think you have to be pretty paranoid in this business to be successful. Particularly as a ceo, you have to always ask the questions nobody wants to deal with and try to think where are we going to be five years from now if we don't do anything....I've run a big business in Asia, a big business in Europe, a big business in the U.S. I have found that what I have done is essentially the same. It's really working with people. I think if you care more about their success than you do your own, you seem to do pretty well. Every time I focus on something that is good for me, it doesn't work out very well.

WWD: You have worked with a lot of interesting people, two in particular, Ed Finkelstein and Bernard Arnault. Were they vastly different and what did you take away from both those individuals?

M.U.: Well, they are certainly different profiles. Ed is a very bright guy. Probably, the most interesting year and a half of my career was when I first got to Macy's. Ed would tell you it was the most exciting year and a half of his career. I think the last year and a half we worked together were not exciting for either of us because things were not going well and it was not so easy to figure out how to stop the decline. But Ed was a very creative guy. He thought outside the box. Creating The Cellar, creating the petites, creating Macy's to what it is today was largely Ed. We worked very closely. It was not fun to watch the company get into trouble.People want to know what it's like to work for Bernard Arnault. When he approached me about running the business, he asked me to come to Paris because everybody was reporting to him at the time. First of all, I said I do not speak French. Cathy [his wife] is not moving to Paris. We have moved eight times. And I have a health issue. He said, 'Yeah I know that, but I still need you to run the business.' I said, OK, if you understand that, I will consider it. I said, 'What do you want to accomplish?' And he said 'I would like nobody to report to me because I want to focus on the creative part of the business and I want somebody to kind of pull it together.'

The best way to describe Bernard Arnault is here is a guy who graduated number one in his class from the toughest engineering school in France. At the same time he was an amateur tennis champion and a concert pianist. You are dealing with a renaissance person. Terrifically intelligent. Very self-demanding. He has very high standards for himself. And we had a great partnership. We filled each other's gaps. I was running the day-to-day business and thinking about how we were going to get more profitable. We bought 25 companies when I was there. Probably more than we should have at the time. But it was a different era. It was the dot-com craziness. But I never had a bad day with Bernard Arnault. One of the reasons was we didn't have a contract. Our contract was any day he got up and didn't want to talk to me, he would go home. Any day I got up and didn't want to talk to him, I would go home. That seemed to work pretty well. It was kind of a constructive pressure to be sure we liked each other.

WWD: Wasn't that too risky for you?

M.U.: What was the risk? If I am not happy, I wasn't stuck there. I was supposed to go for a year and I ended up staying for two and a half years. Commuting back and forth to Paris got to be a bit much.WWD: Vendor allowances and markdowns have been hot buttons for 20 years and are particularly strident now. Can the situation be salvaged? How?

M.U.: The whole markdown dialogue has been very unstructured for decades. It allows itself to get into a situation where it can be abused or at least misunderstood between the parties. One of the things I like about the Penney's culture is that it has always been very straightforward. If we have an order, we have a contract. We are going to honor it and we expect our partners to honor it. On the chargeback issue, in terms of noncompliance, Penney's approach is we rank all of our suppliers based on their compliance. We don't want any chargebacks, because frankly we see it as cost when it is not done properly so even the ones that are unhappy, we can show them where they rank.

WWD: Can you describe the off-the-mall concept that you're developing?

M.U.: I don't think it's a big secret that Kohl's has the advantage of building the business around moving outside the radius of many malls. It's fair to say that mall construction in the Eighties and Nineties [was] excessive. The capital was there to build all these regional malls. As a result, there is too much space. There is a big slowdown in the construction of new malls to only three, four or five regional malls a year. So when Kohl's started, they essentially [went] outside the radius of the existing mall and captured the emerging suburban growth. We have the same opportunity. It's just that Penney's was not in a wonderful situation during this period — declining business in the late Nineties and the turnaround in the last four or five years. [Off the mall] we can do as much sales per square foot as anybody else in the format. We intend to grow aggressively. We have 22 [off-mall stores] open today. This is the first year we have actually had net new store growth in 20 years. We will open 18 stores this year. I think that they are all open as of this week. Next year we will have 25 to 30. There is no reason to slow down that expansion if we can find opportunities where we build a 100,000-square-foot store, pretty much the same store we would build in a mall, the same layout except that it's largely on one level rather than two.We are the only mall anchor that actually increased productivity in the last five years, every year. Having said that, our number is not as competitive as it needs to be. We are at $150 a foot at the moment ... Our-long range plan shows us picking up another 20 percent in sales productivity in the next four, five years.

Questions From The Audience

Question: What opportunities to grow the business are presented with the Federated merger?

M.U.: I accepted the responsibility just about a year ago this week and I felt the opportunity to grow the business was excellent, but that was before the Federated-May announcement. It was also before the Sears-Kmart announcement. So I think we are very well positioned. You've got one merger [Federated-May] actually moving the [business] up market a bit and hopefully they will leave some of the May customers behind. And you can argue that with Sears merging with Kmart, it's likely to be a bit more budget-oriented. Various people have calculated what it means to us, but it means nothing to us unless we do a good job. One of the observations I had when I got to the company is it was turned around with its existing customers. If you look at the $1.1 billion a year we spend on sales promotion, it's direct mail and preprints. I would argue those are your customers. You are sending it to their home, you know them by name, and preprints...you don't usually open other people's preprints. You're either interested in the store or you're not. So our opportunity is to start marketing more in different media, obviously television, Internet and so forth to attract new customers and we have used some big platforms to do that. We pretty much own the Academy Awards, on the fashion side. Sixty-five percent of the women in the U.S. watch the Academy Awards. It's the Super Bowl for women. We reach something like 75 to 80 percent of all women in the U.S. four or five times in a 30-day period after that event. And we are going to use stages like that whether it's the Teen Choice awards in the summer or gift-giving time during Christmas, to try to attract the May and Sears customers and virtually anyone else out there that would like to come and see what's happened inside J.C. Penney.Question: What is your outlook for Christmas. Is it going to be promotional, with rising fuel prices, soft sales?

M.U.: It was announced this morning that gasoline prices went up 30 percent in October. That obviously has an effect on customer psyche, if not their pocketbook. And as I said, our customer tends to have too little money, too little time, too many kids and one spouse. I think it is going to affect their way of thinking. Penney's is particularly well situated for the holiday because the holiday is mall time. People migrate back to the mall at key gift-giving times. We are the anchor in the mall that is growing. Our sales promotion strategy is set six, eight, nine months in advance. That won't change. We feel we are very well positioned for holiday. We have had good growth every month. We have essentially met or exceeded our guidance and our guidance for November is to be up versus last year. We had a very aggressive Christmas period last year and did well. So I am not smarter than anyone else about what is going to happen tomorrow. I can tell you that we will be very well prepared and we will be very competitive. We will not add sales promotion if things get soft....One of the things that has been a huge advantage for J.C. Penney during this turnaround is the investment in planning and allocation technology and people. We can deliver the right merchandise at the right time in the right quantity in the right place. We believe we will end the season on stock plan and we will run the business the way we planned it.

Question: What characteristics are important in building a team? Share an example, or a mistake.

M.U.: In general, people are risk-averse and the biggest mistake in retailing is taking no risks. Keep in mind that the stock went down 11 percent on my announcement. It wasn't exactly a ringing endorsement on my arrival. One of my kids said, 'It doesn't surprise me, but I am surprised the market figured it out.' I am pleased to say we have done much better since then, but I think what I look for is someone you can trust who is focused on the collective team effort. In retailing you look for superstars in their own category but they also have to be able to play on the team. One of the things that most attracted me to Penney's, and it might not be obvious, is we have a lot of legacy. People had been there a long time. But all the planning and allocation people had to be brought in from the outside. We didn't have anything in that area. And no one had done central merchandising. So you had a lot of people that were hired new to the company. The fact is the stock got down to $8 or $9 a share and a year ago it was $34 and today it's $51 or something like that and that is something that will unite a team. Essentially, it's turned around. There is a future, there is an opportunity for growth. I don't do very well with people who are not transparent. Part of the deal is, that if I am going to help you, then you have to be honest with me.

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