By  on February 12, 2007

NEW YORK — Watch out Macy's, J.C. Penney is breathing down your neck.

Myron E. Ullman 3rd, Penney's chairman and chief executive officer, said there is ample opportunity for the department store chain to capture market share from Macy's, which is owned by Federated Department Stores. Macy's has an average unit retail sale of $28, whereas Penney's is $16.

But Ullman believes that by emphasizing service and introducing more aspirational brands, Penney's can attract a higher-spending customer. Part of the service emphasis will be unveiled Tuesday, when Penney's reveals a new brand positioning.

"We're rebranding the company because of our service," he said. "We were running nice advertising, but it wasn't building on itself. Our associates are engaged enough" to make them part of the brand.

Ullman made the remarks during a speech to members of the Retail Strategy Council, an elite group of 15 to 20 senior executives that meets twice a year to shape the retail industry's agenda through innovation and promoting best practices. The council is shrouded in secrecy. Other than the founding members — Oracle Retail, Harvard Business School, Loeb Associates and Bain & Co. — member companies and their representatives insist on remaining anonymous.

Service was one of many topics Ullman discussed in a wide-ranging talk during a dinner at the St. Regis Hotel here last Thursday. Ticking off a list of achievements and goals attained during his two-year leadership of Penney's, Ullman recalled a conversation he had with the board of directors when he was being wooed for the top job. "The turnaround's not enough to get me back into the fray," said Ullman, who was retired at the time. He was referring to the improvements under his predecessor, Allen Questrom. What excited Ullman was reimagining the company in a new way. "Why don't we start with a clean piece of paper and reinvent" ourselves, he told the board.

"[Analysts] might say we've achieved our five-year goal," Ullman said last week. "The reaction of the team was not, ‘Great, let's take the next three years off.' Our 2007-11 plan to be announced at the [next] analyst meeting aspires to a different level. The team feels good about stretching themselves."That stretching includes reaching for more affluent customers with products such as Penney's recently revealed deal with Polo Ralph Lauren's Global Brand Concepts division for an exclusive lifestyle brand called American Lifestyle, to be launched in 2008, as well as its agreement last year to put Sephora shops into selected Penney's units.

Ullman said there's more opportunity to capture market share from higher-priced competitors such as Macy's, with its average unit retail sale of $28, compared with Penney's $16 and Target's $10. Penney's can provide "better styling and quality" by layering more expensive products into the mix. "Things that are infrequently purchased are aspirational."

But the term "aspirational" is relative. "I'm not the type of person who wants to pay 5 cents more for paper towels, but I'll pay $600 for an Hermès cashmere sweater," said Ullman. "In Greenwich, Conn., Starbucks coffee is coffee. In South Central Los Angeles, it's aspirational."

The ceo indicated that Penney's doesn't want to be a high-end store. Asked whether Penney's engages in clienteling in the same way that stores such as Neiman Marcus and Nordstrom do, he said, "We don't do that. The challenge is to exceed customer expectations. We shouldn't delude ourselves [into thinking] that we can do that for our customers. Unlike the competition, we have staffing in hosiery, etc. It's working for us. We're hiring extra staff. The underlying reason we exist is because we're in the middle. The battle is in the middle."

While Penney's can steal shoppers from the ailing Sears and Kmart, the retailer has some challenges of its own. Penney's core 30- to 45-year-old customer group is diminishing, according to Ullman. In fact, he said, the entire retail landscape is shifting. "Customers have no patience for things that don't work. The ones that have no money need solutions and price performance. What attracted customers to department stores used to be credit cards. Now they have lots of choices: online, discounters, factory outlets. To return J.C. Penney to the place it was 10 years ago is irrelevant."

So Ullman began throwing out the rule book. The retailer in October reached an agreement with Liz Claiborne to launch Liz & Co. for women and Concepts by Claiborne for men. Penney's now sells Nicole by Nicole Miller and Bisou Bisou. The collections East 5th, Arizona Jean Co. and a.n.a contribute to the retailer's $3 billion private-label business, which Ullman would like to build to $5 billion.At the same time Penney's is going after shoppers with higher incomes, the chain is trying to meet the needs of those on tight budgets. "We'll have other brands below Penney's," Ullman said. "We like to say our customer has two kids, too little time and too little money."

Ullman revealed his strategy for winning over shoppers and improving the company's culture. He arrived at the Plano, Tex.-based retailer with the idea of "engaging the customer in an emotional way, not a logical way," he said, adding that he wanted to make Penney's "a great place to work and an easy place to shop. That's the antithesis of what a department store is. Traditionally, there's lots of employee turnover. There's been a lot of talk about department stores being dead."

Because Ullman believes a company is only as good as its employees, he sends them to Penney's retail university, where for one course students spend two days in a classroom with Ullman and the head of human resources. "We're invested in the associates and store managers," he said. "We see a 200 basis-point [increase in] profit when we engage the associates."

Associates today care about different things than they did a decade ago, including corporate responsibility, the environment and career opportunities. "They have expectations of us," Ullman said. "We need to engage them in a noble cause. They need to have the tools and the wherewithal to make decisions. If not, they're clerks." They also want to be paid fairly, so Ullman admonished the group to "be competitive with compensation. Pay the median and no less for talent."

He directed buyers to "take some risks. We want you to make some mistakes so you can learn something. The wrong thing is to offer the same styles as last year. People don't want to buy last year's styles."

Ullman is aware consumers don't want to shop in antiquated stores. "We have lots of stores that haven't had any investment for years," he said. "We didn't have any money for 15 years. We're going to renovate 70 stores a year and build 50 new stores a year. We're spending $1 billion a year."A council member asked if any of the new units will be green stores. "We're looking at it centrally and saying, ‘How do we measure this?'" Ullman said. "Will the customer pay for it? It's hard to accomplish at today's economics. The consumer expects you to do the right thing. I'm not sure our customer cares that much at the moment, but the associates do. They're younger."

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