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Ron Johnson’s JCPenney: Anatomy of a Retail Failure

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In a stunning end to one of the most aggressively unsuccessful tenures in retail history, JCPenney (JCP) last night announced that CEO Ron Johnson would be leaving effective immediately. Myron Ullman, Johnson's predecessor at JCPenney, takes office as CEO.

When Johnson was initially wooed by JCPenney, it was to serve as CEO with Ullman as Chairman. In January 2012, Ullman was unceremoniously removed from the board. Gone with Ullman was any control the Board of Directors had over Ron Johnson and his control of JCPenney resources.

Without Ullman or anyone else to hold his ambitions in check, Johnson made public promises to change department stores as we knew them. He said he would parse his stores into little baby stores, making JCPenney sort of a flea market landlord to other brands. Johnson didn’t invent the idea (see: Dick’s), but he was going to blow it out like no one ever fathomed in department stores.

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Beyond the merchandising, Johnson planned to make JCPenney a cool place to hang out. He planned to put wi-fi and coffee shops in the stores and do away with cash stands. He promised hair salons for kids and courtyards and dining. JCPenney was going to be the new model of everything we once thought to be merchandising. To analysts and employees, Johnson was Willy Wonka asking us go with him on a trip through his retail imagination.

It sounded cool. Very cool. Had the new plan been given a little time, JCPenney would have been fascinating to watch. Sadly, the visionary had no idea about allocating and conserving resources and core customers. He made promises neither his stores nor his cash flows would allow him to keep.

But Johnson didn’t even consider a staged roll-out. He immediately rejected everything existing customers believed about the chain and stuffed it in their faces. The first TV campaign is as painful to watch as it is a foreshadowing of Ron Johnson’s fate. Intentionally or not, the ads mocked his existing customers before he’d even started remodeling the roughly 1,100 appalling existing stores.

JCPenney’s dwindling, aging customer base left in droves. Sales were down a jaw- dropping 32% in the 4th quarter of 2012; an almost impossible feat for a company like JCPenney. The company was boring but not widely feared to be heading for a financial meltdown as recently as 2011. Now it’s pure excitement but not of the right kind.

Sowing the Seeds of His Own Destruction

The misstep that led to Johnson’s downfall was likely made within weeks of his arrival when he tried to snatch Martha Stewart (MSO) away from Macy’s (M). As revealed in emails, Johnson planned to buy Martha and trust that overtime (Macy’s) would move somewhere else. The key ingredients for the heist were JCPenney offering Martha Stewart Living Omnimedia a $200mm merchandising deal and an investment of $38.5 million in exchange for 16% of the company.

Johnson’s strategy was this: Take a massive stake in a Macy’s vendor then try to use that leverage over Macy’s to encourage the department store kingpin to give up without a fight. The flies in the ointment were that Macy’s had no intention of giving up the fight and had deeper pockets with which to litigate the matter. Also, the investment in Martha Stewart Living Omnimedia meant any collateral damage to Stewart’s brand or sales as a result of JCPenney’s actions against Macy’s would hit not just MSO but also damage JCPenney’s own investment.

JCPenney’s investment in implied a stock price for Martha Stewart Living Omnimedia shares of $3.50. MSO shares closed trading on Monday at $2.36 putting paper losses at $12.5 million, nearly 10x what JCPenney earned in 2012.

Martha Stewart Living Omnimedia’s dependence on Macy’s can’t be overstated. In the fourth quarter of 2012, MSO earned $1,360,000. Operating income from merchandising was $11,330,000 with Publishing and Broadcasting combined breaking even. Martha Stewart's very existence depends on revenues and profits from the Macy’s relationship. Merchandising was the only division of MSO to grow revenues in 2012 and the first thing Johnson did after buying 16% of the company was take actions that would kill that growth stream for the foreseeable future.

Trying to steal Martha Stewart from Macy’s was Johnson’s first major move as CEO of JCPenney. He did it in December of 2011, less than a month after taking office and a time when Ullman was still Chairman.

Ron Johnson proved at Apple that he has an uncanny eye with merchandising. But at Apple, Johnson had an unlimited budget, a product in high demand and Steve Jobs as a business partner. Ron Johnson had neither cash nor a genius mentor at JCPenney and the results exposed his limitations in a large way immediately.

What’s next for JCPenney’s customers and what can Myron Ullman possibly do to save a company that now has limited cash, almost no core customer base, a huge lawsuit and defection employees?

Stayed tuned to Breakout.

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