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WWD CEO Summit: Ron Johnson

J.C. Penney’s chairman and ceo has a New Year’s resolution: Penney’s in 2013 will become “a happening place.”

Ron Johnson

Ron Johnson, J.C. Penney Co. Inc.’s chairman and chief executive officer, has a New Year’s resolution: Penney’s in 2013 will become “a happening place.”

This story first appeared in the January 8, 2013 issue of WWD.  Subscribe Today.

“When we start changing the menu, the store is going to happen,” Johnson said, referring to the new lineup of brands coming to Penney’s selling floors this spring, which includes Martha Stewart, Joe Fresh, Marchesa, Jonathan Adler and Michael Graves.

“In the age of the Internet, if a store can’t be a happening, if a store doesn’t deliver magic, a great experience, it is going to have trouble surviving,” Johnson said. “It’s incredible. If you walk into most stores, particularly department stores which are 10 to 20 years old, they’re maintained but haven’t been rethought.”

Since taking the reins of the 110-year-old, $15 billion Penney’s, Johnson has been leading a daring overhaul — resculpting its prosaic selling floors into a “specialty department store” with ultimately 100 individual specialty shops within the box, adding better brands to modernize the mix while culling out the losers and developing an Apple-influenced layout that’s cleaner and easier to navigate, with high-tech advancements for service as well as amenities such as coffee stops and gelato stands.

 

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He’s also introduced a controversial everyday low “fair and square” pricing scheme that eliminated coupons and the high-low price promoting Penney’s was addicted to, though clearances are still staged.

His single biggest surprise, he acknowledged, was how customers responded to Penney’s new “fair and square” pricing scheme. It wasn’t good. “Learning how the customer responds to our new vision, getting them to appreciate and embrace it, and bringing them along for the ride,” Johnson said, “has been a bigger challenge than I anticipated.”

He was also surprised to learn that just offering a great price wasn’t enough. “You have got to have more support than that. It’s how you provide a value that the customer will understand.”

Penney’s is working harder to communicate value by making it easier for consumers to do comparisons when they shop. The retailer estimates that $500 million in sales was lost because of not showcasing comparison values but has begun displaying suggested and retail prices. When brands have sale events at other retailers, Penney’s will honor those temporary reductions to stay competitive.

With brands, there’s a significant influx coming to Penney’s, as Johnson suggested, though not enough. Penney’s executives continue to reach out to designers, brands and even other retailers in its quest to reinvent the selling floors with new products, which isn’t easy considering the grip that competitors have on brands.

During his presentation, Johnson portrayed well-known brands as critical to Penney’s future, as opposed to private brands developed in-house, which he downplayed despite long being the hallmark of the Penney’s presentation and a differentiator. Private brands also represent major portions of the presentations at Kohl’s and Macy’s and a growing segment at Saks Fifth Avenue, among other stores, yet Johnson thinks that generally, at Penney’s at least, it’s a less compelling component and a strategy that is losing some relevance. “In our industry, especially department stores, private label has become way too big a part of the mix,” Johnson said. Mervyn’s, where Johnson once worked, “got to over 50 to 60 percent private label and lost its identity,” he said, and ultimately went out of business.

“Part of the answer is to get back to real brands,” Johnson said. “Otherwise, all the products tend to look the same. They tend to be in the same price points. They tend to only sell when they are promoted. We are trying to build partnerships with others. There is great value in brands that have unique identities.…Great brands are authentic. They are inspired. They have a very clear role.”

At Target Corp., where Johnson was a divisional merchandise manager before joining Apple Inc. and later Penney’s, developing unusual partnerships to establish new brands in the store was critical to elevating the image and drawing traffic. He is credited with being instrumental in developing the Michael Graves home brand at Target. “It really wasn’t how well it sold. It was about changing people’s perception. The same thing is going to happen at J.C. Penney.” Graves no longer sells at Target.

Even on a tour of a new J.C. Penney, at around the time he first joined the company, Johnson relayed to management that it looked really good, exactly like a department store would look in 1995. Everything from the aisles and organization of the categories and checkouts to the signs and the way employees were dressed looked the same as it had been for years. “It was a well-executed store, but fundamentally a 25-year-old store.

“When you think about it, in four years from now, all of our stores will be brand new. If we can accomplish that, and I think we can…think of how different we will be from our peers who are tending to maintain their stores for a long time.”

In Plano, Tex., Penney’s has created a prototype that now has 60,000 square feet of reenvisioned floor plan with new shops, aisles, displays, amenities and services that are night and day from existing Penney’s stores. “We know what we want to build. The only question is how long it’s going to take.” So far, Johnson added, the program is on track to complete the reinvent project in four years. “Every day we walk into this prototype, we want it to happen faster,” though it does take money, he noted.

While aggressively reinventing the brick-and-mortar portion of the business, Penney’s has been less aggressive to bolster its digital online business, where most retailers are seeing far greater gains. “Ninety percent of our sales are in stores today. That’s where the customer chooses to shop. Tomorrow, it will be much more of an omnichannel approach, but that’s tomorrow. You’ve got to focus on where they are shopping today, and that is the physical store,” Johnson explained. “The digital environment you can change quickly. The physical environment takes time.”

Last year, Penney’s lost money on reduced revenues, as expected being in the throes of reinvention. In the third quarter ended Oct. 27, there was a $123 million loss, compared with $143 million in the year-ago quarter, and sales dropped 26.6 percent to $2.93 billion from $4 billion last year. Even Internet sales were down, declining 37.3 percent to $214 million.

Lately, “the marketing is really starting to connect,” Johnson said, which comes after much tweaking on pricing and advertising, there were signs during the holiday of an uptick in traffic in the stores, and the stock has recently risen a couple of points, after an earlier tumble. With all the presumed pressures from stakeholders to get the business back on track, Johnson said that being chairman, “I’m sure it’s a hot seat. I don’t really feel the heat.”

There’s also been a lot of negative press and stories skeptical of Johnson’s reinvention, partly because of its rapid and sweeping character, and more specifically, the way he wiped out coupons and price promotion in favor of everyday low pricing. With the company getting little press prior to his arrival as ceo in the 2011, “I thought I could be under the radar.”

With the avalanche of press in recent months, Johnson said, “I don’t spend too much time on it.…I try to not read too much about what we are doing. I focus on doing the work that’s important.”

Wall Street, he acknowledged, has added pressure, though he pointed out that it’s not unusual for a retailer’s stock price to react during a transformative period. “You have to spend a lot of time managing stakeholders, as well as with employees, to reinforce the vision and keep people focused.”

Change had to come, Johnson suggested, and rapidly. Otherwise, there would be “a really slow demise.…Penney’s was one of those loved, well-run companies whose best days were in the rearview mirror.”

At Penney’s, Johnson is applying many of the lessons he learned in his previous jobs, especially the 12 years he spent at Apple working closely with Steve Jobs, although he also cited Mervin Morris of Mervyn’s and Bob Ulrich and Gregg Steinhafel, the former and current ceo’s of Target, respectively.

“To Steve, everything was about significance,” Johnson said, adding, “When I worked for Steve, there was never anything small to do. When he asked me to come work at Apple, he said, ‘Why don’t you reinvent retail.’ The first lesson from Steve was that you ought to be doing significant things. There is no reason to be just filling your time with ordinary things.”

Johnson also learned from Jobs that most business projects end up being like marathons. “They take a lot of time. There is no shortcut to success.…He said, ‘Every good thing I have done in my life, I have had to start over in the middle of the project.’” Johnson would talk to Jobs about Apple’s Macintosh computer and movies at Pixar (the studio that Jobs ran for six years while simultaneously running Apple) where the scripts would be changed. Johnson recalled Jobs telling him, “You’ve got to be able to look at what you’ve done and be willing to start over. To Steve, it was always about doing it the best you can.”

Johnson compared Jobs’ leadership style to a butterfly. “Steve would float in on the new things Apple was going to do, and where Apple was struggling. Everything else he left to others.” While Jobs was extremely detail-oriented, “He was the best delegator I ever met. He only invested time where he could add value. He only floated in and spent time on the things that were important to him. He accomplished so much in a lifetime that ended up so short. We spent a lot of time together. He was right there on every decision I made, pushing my thinking.”

Jobs created a sense of intimacy. “It’s an odd word when you think of Steve,” Johnson said. “Steve [formed] the deepest personal relationships of anyone I worked with. People that he chose to [let] enter his world, he really depended on. He went really deep.”

Upon joining Apple, where Johnson headed up the retail division, Jobs asked him a strange question — what time Johnson’s kids went to bed —and explained, ‘I just want to talk to you at the end of the day and see how your day went. My whole goal is that you will know me so well that you will know exactly how I would think on any decision that you have to make. And once you understand that, you are free to go do your job without needing me.’

“Steve invested time in each of his senior people to build a relationship that was so intimate that we literally knew how the other person would think.”

Jobs was also candid and truthful with his managers, and created a culture where people could say exactly what they thought. “With Steve, you knew exactly where he stood all the time. He wore his opinions on his sleeve,” Johnson said.

Another important lesson that Johnson learned from Jobs was about simplicity. “To Steve, simpler was better, whether it was product design, layout of the store, interface. To Steve you had to solve the problem before the customer experienced it.”

Apple’s first-two level was built in Manhattan’s SoHo neighborhood years ago, and that posed a challenge regarding how to get shoppers to ascend to the second level. Jobs, Johnson noted, came up with a simple solution — a beautiful glass stairway right in the center of the store, unencumbered by products and emblematic of Apple’s design aesthetic. “Everything Steve did, he got down to the essence of making it simple.”

Johnson also learned from Jobs about the power of intuition, and the importance of details in any project. “He knew if he was going to apply his intuition, it had to be grounded in some understanding.” With the SoHo staircase, “He got so involved that he put his name at the top [of the patent filings]. He loved it, but he wanted to set an example for all of us about the level of detail it takes to do truly great things. Steve tended to get the big picture right, but his passion was for the details.”

The biggest lesson Johnson said he learned from Jobs was that, “Ultimately, it’s really not about the work you do. It’s about the journey. He loved Apple, literally to his very last breath. He loved his family, and he loved Apple.”

Jobs, he said, had a “profound” impact on what the team at Penney’s is seeking to accomplish. “We are trying to reinvent the department store. It’s really hard. It’s a marathon. It’s going to take time. It’s all about the journey. It was a really tough year. Today is the first day, in 365, that we are free and clear of a promotion. This is New Year’s Day for the people of J.C. Penney.”