OESTERREICHER’S AIM: J.C. PENNEY AS NO. 1 IN EVERY CLASSIFICATION
Byline: Holly Haber
PLANO, Tex. — James E. Oesterreicher, a genial man who grew up on a Midwest farm and is considered “humble” by his colleagues, is sitting atop arguably the most successful department store in the country.
Yet J.C. Penney’s affable new chief executive officer and vice chairman appears restless. And according to people who know him, he harbors a killer instinct for merchandising and is bent on pushing Penney’s reputation as an industry leader in global expansion and new technologies.
“We’re not number-one in everything,” said Oesterreicher. “It is our objective to have the customer think of J.C. Penney first for every category of merchandise we compete in.”
His wish list even includes cosmetics, which some cite as the biggest shortfall in Penney’s merchandising. The chain’s most prestigious line is Ultima II, a major department store brand.
“We’d love to get more of the cosmetic brands, and frankly we can’t understand why some of these folks don’t want to sell their brand where most of their customers want to buy it, and that’s J.C. Penney,” Oesterreicher said. However, “In most of the other areas, we’re getting the brands we want.”
In his first interview since succeeding William H. Howell as ceo on Jan. 1, Oesterreicher (pronounced “Oh-striker”) claimed that Penney’s is the nation’s volume leader in jeans, doing $500 million in annual sales with its own Arizona label, and is also Levi Strauss’s biggest customer.
He also maintained that Penney’s is the leader in sales of window coverings, claiming one-third of the U.S. market, and that the chain is among the top diamond merchants in the world.
Shoppers have indeed been streaming into Penney’s, which is perceived as offering more value for the dollar than most stores. In the five weeks ended Dec. 31, the chain achieved a 5.3 percent jump in store and catalog sales to $3.5 billion, a point or two higher than most of its competitors.
For the 48 weeks ended Jan. 5, total company sales rose 7.2 percent to $19.3 billion, including $1.4 billion from drug stores. The company is expected to complete fiscal 1994, ending Jan. 28, with $20 billion in volume.
This month, Penney’s has been racking up double-digit gains in women’s, led by casual sportswear, accessories and junior sportswear.
But all that is not good enough for Oesterreicher, a veteran Penney’s executive, who said, “Whether our sales growth is in the low or mid single digits, we plan on improving our market share.” He projected sales in 1995 will grow about 5 percent.
“Part of our opportunity right now is to continue to stay with the changing customer,” he observed, noting the population is aging, disposable income has declined over the last three years, and they’re mentally conditioned to buying things as close to zero as they can.
“We were the first retailer to really grab hold and understand the value equation of price, quality and selection,” he continued. “We’ve been working religiously to continue to take the costs out of our operation and to develop products with the consumer in mind. We are trying to give the customers the most outstanding value that we can possibly get, realizing that they want constantly improving quality and styles.”
Oesterreicher sees opportunity in women’s apparel, especially casual clothing, because apparel sales have not been stellar in the past two to three years. “I think many customers are going to look in their closets and say ‘I’d like something new,” he theorized, adding that Penney’s apparel business during that period outpaced the industry.
Bids to improve its image in soft-goods by chasing national brands, like Liz Claiborne and Evan-Picone, have mostly flopped, so Penney’s has put its energies into developing its own, competing brands.
In women’s classic sportswear and accessories, Penney’s claims its Worthington brand is the second largest label in the nation, topped only by Liz Claiborne. Worthington exceeds $450 million in annual sales.
Penney’s Hunt Club women’s casual line and related accessories business swelled to over $350 million last year. Those and other private labels are designed to wardrobe the customer from head to toe.
As Penney’s private labels strengthen, consumer loyalties to national brands wane, Oesterreicher asserted. “The customer is going to buy what they want at a price they want to pay regardless of what the brand is, though an exception might be cosmetics,” he said. Penney’s sells some top cosmetics lines in its Puerto Rico stores, including Estée Lauder, Elizabeth Arden and Lancôme, but not in the U.S.
Private brands account for about half of Penney’s merchandise, though saturation varies by category. In bras, for example, Penney’s Adonna and Delicates labels do a hefty 75 percent of the business. In women’s sportswear, the mix is about 50/50.
In dresses, where styles change too fast for the long lead times required in private brand development, 95 percent of the goods are national brands.
“They use private label, like the Worthington and Arizona brands, to gain control over product development and to use as promotional vehicles,” observed Keith Cook, chief operating officer of The Napier Co., a fashion jewelry supplier to Penney’s. “They are pretty clean when it comes to brand discounting and one reason is they have a big private label program.”
Penney’s quality criteria, say suppliers, are the most demanding in the industry and critical to the success of its private brands.
“People use them as a standard and say, ‘If it passes Penney’s standards, it will pass anybody’s,”‘ said Jim Carr, vice president and general manager of private label at Vanity Fair Mills.
Makers of private label dresses, for example, are required to sew a sample in every size and present them at a meeting with Penney’s merchandisers, where fit models in every corresponding size don the garments for inspection.
Now Penney’s is seen as having the leverage to attract brands that have long stayed away.
“I think we’ll see more brands make their way into Penney’s stores,” predicted Richard Nelson, an analyst with Duff & Phelps in Chicago. “A brand like Liz Claiborne would help Penney’s tremendously, and there is some opportunity in cosmetics also.”
“I think in the next five years they’ll have anything they want” in sportswear, predicted Norton Sperling, president of Norton McNaughton sportswear. “They’re becoming recognized by the apparel industry as a major player.”
Norton McNaughton first shipped Penney’s in 1990 and last year did $20 million wholesale with the chain.
Other vendors are also likely to sign on, considering the efforts Penney’s is making to update the look of its stores. After investing $1.95 billion over six years through 1990 to update its 1,250 stores, Penney’s continues to spend $120 million to $150 million annually on remodeling. Its latest design de-emphasizes shop concepts, tears down walls and makes it easier to see more merchandise.
Like other retailers, Penney’s has been scoping out international markets and plans to open two stores in Mexico in May and five more by 1997. Despite economic tumult south of the border, Oesterreicher sees the stores as long-term investments and Mexico as a potentially strong trading partner.
Further, a unit scheduled to bow March 15 in Santiago, Chile, will test Penney’s ability to expand in South America.
In other parts of the world, including the Mideast and Japan, Penney’s sells its women’s and men’s private brand apparel to other retailers. China is under study.
“Opening our own stores is not a priority other than in Mexico and South America,” Oesterreicher noted. “It’s the J.C. Penney product that they want (in other parts of the world), and we think the best way to do that is by providing it to strong retailers. Mexican customers are used to shopping our stores here, so it makes sense for us to have stores there.”
Such visions of the future, as well as his extensive store experience and friendly personality helped bring Oesterreicher to the ceo spot, and likely to also succeed Howell as chairman, if he can sustain Penney’s momentum.
A company man to the core, Oesterreicher buys his wardrobe at Penney’s and often wears $295 suits by the firm’s Stafford Executive label.
“I’ve always referred to him as the Ike Eisenhower of the retail industry,” pointed out David Miller, who worked closely with Oesterreicher for 20 years before retiring as vice chairman in 1990. “He’s always up, always positive. In a company like Penney’s, we pride ourselves on being a partnership, and Jim is a very goal-oriented team player.”
“Jim Oesterreicher is very analytical and good at understanding what are the deep issues as opposed to just the things that are on the surface,” observed Dr. Barton Weitz, director of the Center for Retailing Education and Research at the University of Florida, who serves with Oesterreicher on the board of the center.
“Penney’s people really are trying to plan for the future,” he continued. “Jim is very interested in how future managers will have to manage very diverse work forces, and how will we train people to do that? What kind of changes are occurring in information technology and communications technology that we need to consider?”
Penney’s is experimenting with CD ROM technology as a supplement to the video-based broadcast system it uses to present select merchandise to merchants in the stores, who place orders from what’s shown. CD ROM offers a clearer picture of the goods.
Penney’s also plans to open a studio in New York where dress vendors can bring their lines to be digitally photographed and shown to buyers via CD ROM at the Texas headquarters.
Further, Penney’s has been a leader in using electronic communications and has almost all suppliers on line. Automatic replenishment, a strategic tool to keep sizes and colors in stock, has been steadily expanded: Computers now dispatch orders for about one-third of women’s apparel and accessories, according to an industry source.
“Penney’s history is that they like strong general management types who have a wide variety of experience and a gut sense for merchandising,” observed Harold Reiter, president of Herbert Mines executive search. “It’s stood them well in the past several years, and they wanted to succeed Howell with somebody from a similar background.”
Oesterreicher’s long tenure in store management has put him in tune with consumer needs, Weitz pointed out. “Jim has a very keen sense of what needs to be done to keep customers coming back to Penney’s,” he noted.
“Jim is a very humble person, but underneath that he’s very competitive and he knows how to get business,” observed Walter Neppl, a former vice chairman and president of Penney’s who supervised Oesterreicher. “He also realizes and knows the importance of every Penney associate and will give credit where it’s due.”
Penney’s new ceo isn’t well known in the industry and has had little contact with suppliers. But that’s changing, as Oesterreicher assumes a higher profile. Last December, for example, he gave a speech at an American Apparel Manufacturers Association seminar, and last week he received the group’s Green Thumb award for excellence in retailing.
Like most Penney’s executives, Oesterreicher has been with the company his entire career. Retail pundits joke about Penney’s clones in gray suits, but the corporate inbreeding hasn’t failed the company.
“The consistent success they’ve had is due to their management structure,” asserted Carr of Vanity Fair Mills. “They’re pretty introspective. You may find some negatives, and they may miss some trends, but they move pretty quickly and have good relationships with suppliers.”
“Penney’s executives are different,” noted Sperling. “They have a very good corporate spirit. That’s Penney’s way of life. People work very hard for Penney’s. They develop their own talent.”
In fact, Mines Associates has rarely been able to lure Penney’s executives away from the fold. Reiter explained, “They say they’re happy there.”