In Defense of Ron Johnson

JC Penney knew it was in trouble.  That’s why it took the bold risk of bringing on Ron Johnson, who had worked wonders at Apple’s retail operations and Target before that.  Johnson tackled the task with aplomb, attempting a revolutionary “one price” strategy which I wrote about at the time.  Well, the results are in and it has been an absolute disaster – in 2012Q4, comp-store sales fell an absolutely staggering 32%, which may have been the worst quarter for any large retailer.  Ever.  And this afternoon, Ron Johnson was fired.  Matt Yglesias, touring the “new” JCP in early March, put it succinctly:

“Instead of building on what the people who like JCPenney liked about JCPenney, he undertook a series of essentially arbitrary changes that alienated some without drawing anyone new in.”

John Hempton, a hedge fund manager who specializes in shorting, described the logic in the new pricing strategy and “hip” rebranding as such:

We must do something.
This is something.
Therefore we must do it.

It’s very easy to mock Johnson, but I have yet to see anyone articulate a coherent strategy for saving mid-market retailers in America today.  Companies like JC Penney are getting hammered from the low-end by mass merchandisers like Target (Johnson’s old company) and Amazon.  Over the past few years, JCP’s gross margin has been whittled down to around 25% (for 2013Q1), which means it doesn’t generate the cash needed for serious strategic investment – in fact it has been bleeding cash for years.  JCP’s costs are mostly fixed (long-term commercial leases, minimum staffing levels, etc.) while sales are stagnant and their margins are being whittled away.  The writing is clearly on the wall for JCP’s “business as usual”.

In this situation, Hempton’s logic makes perfect sense.  JCP has a few standard options – move upscale, move downscale, or cut costs.  Well, moving upscale is hard to do – this was a subcomponent of Johnson’s strategy, and it doesn’t seem to have worked well.  Moving downscale is easier, but how much further downscale can JCP go?  It is already bleeding cash and can’t suffer further hits to its gross margin.  It can also cut costs – but personnel costs have been cut to the bone and there’s really not much else fat to trim on a big retailer.  It could also cut underperforming stores, which just delays the inevitable and also drives up merchandising costs.

Conventional wisdom argued against Johnson’s pricing strategy – but conventional wisdom is sometimes wrong!  Decades of experience in the department store industry argued that the optimum pricing strategy is in high pricing and frequent sales for effective price discrimination, but the alternative “one price” strategy had the merit of having never been tried at scale.  It turns out that the conventional wisdom on pricing was correct, but regardless I would suggest this was a perfectly rational experiment for JC Penney and Ron Johnson to run.  When the status quo is leading to ruin, and there are no clearly good options, what else can a responsible leader do other than something crazy?

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