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A PENNEY SAVED

Rejuvenated JCPenney ready to take on Target, Kohl’s

BY JOEL GROOVER

JCPenney seems to have got hold of the boldness thing.

For starters, the company is rolling out a bodacious strategy this month to confront the likes of Target and Kohl’s with off-the-mall stores right on their own suburban turf.

The Plano, Texas-based chain also plans to spend billions on ads to show off stylish but affordable collections by such big-name designers as Chris Madden and Nicole Miller.

This, observers say, is brass. This is the right stuff. And this is clearly not your granddaddy’s J.C. Penney Corp.

Nearly five years ago the century-old American icon faced bankruptcy and was just about given up for dead. Today its shares trade at more than four times what they did then.

That sound you hear is retail analysts sputtering for superlatives.

“It was a miracle, it really was,” said Bernard Sosnick, an analyst at Oppenheimer, a New York City-based financial services firm. “Penney was adrift; it hadn’t seen a sales increase in five years.”

These ambitious plans were born of a company overhaul by Allen Questrom, former chairman and CEO, and Vanessa Castagna, former head of JCPenney’s store, catalog and Internet teams. The two left the company late last year amid high praise for their work.

Questrom’s replacement, Myron E. Ullman III, who most recently headed LVMH Möet Hennessy Louis Vuitton, now must build on that success. “Penney had a franchise of traditional shoppers who were perhaps waiting for it to awaken,” Sosnick said. “I don’t know that Penney has yet reached the broader base of shoppers, and I think that’s where its opportunities lie in the future.”

Ullman appears intent on reaching that broader base, by opening suburban stores closer to its middle-American customers and by paying for high-profile media exposure. The chain used the Academy Awards broadcast on ABC to kick off the Nicole Miller ad campaign. (Some 43 million viewers tune in to the event.)

Part of the challenge will be to show just how much JCPenney’s 1,020 stores have changed. The chain lost touch with its customers a decade ago because it failed to recognize their growing preference for discount merchandise, said Gordon Lindsey, a former communications manager who retired last year after 22 years with the company. “During the 1980s, JCPenney tried to reposition itself as a department store and at times went fairly upscale with some of its merchandise selections,” Lindsey said. “This was in the spirit of the 1980s, which was a decade when people were gravitating toward fashion, but in the 1990s customers started to veer toward value. We just didn’t keep up. We weren’t offering them a fashionable look at a value price.”

The company’s tradition of filling top positions from within may have contributed to that failure to adapt. A common business mistake — made worse by insularity — is to cling to outdated perceptions and thus underestimate rivals, says turnaround expert Charles W. Hofer, a professor of strategic management and entrepreneurship at the University of Georgia.

“What happens is, slowly that competitor gets better and better, and yet you don’t recognize it, because it happens gradually,” he said. “One day you wake up and your customers are gone.”

JCPenney’s closed culture came to an abrupt end in July 1999, when its board, feeling the heat from Kohl’s, Target and Wal-Mart, decided to go outside the company and hire Castagna, then a Wal-Mart senior vice president, as COO.

Castagna immediately set to work on one of JCPenney’s biggest weaknesses: a bloated, decentralized merchandising operation that paled against Wal-Mart’s speedy, high-tech system. “Centralization of merchandising made all the difference,” said Howard Davidowitz, chairman of Davidowitz & Associates, a New York City-based retail consulting and investment banking firm. “When you’re centralized, you can react 10 times faster to markdowns, 10 times faster to trends.”

Under the old system, JCPenney’s store buyers decided which assortments they would offer, and so the merchandise mix differed from one store to the next. That meant the retailer could advertise “all blouses 30 percent off” in its national ad campaigns, but could not highlight a specific blouse, says Sosnick.

With centralization, however, the chain could buy the same assortments for all its stores, creating economies of scale that enabled it to slash prices. Those lower prices in turn helped JCPenney shed inventory more quickly. “With this new system, they started to play six or seven seasons instead of just three,” Davidowitz said. “It improved their whole fashion cycle.”

Merchandise mainspring
The merchandise itself changed no less dramatically. In September 2000 the board broke with tradition a second time to hire Questrom, then head of Barneys New York, as JCPenney’s eighth chairman — the first from outside the company.

A merchandise expert known for leading successful turnarounds at Neiman Marcus in the 1980s and Federated Department Stores in the 1990s, Questrom aimed to bring discipline and style to JCPenney’s assortments. He lured outside talent to revamp key departments, including Beryl Raff, former CEO of Zales Corp., in jewelry, and Charles Chinni, former CEO of specialty retailer Strouds, in home goods.

Under Questrom’s leadership, JCPenney became the exclusive North American retailer for Michele Bohbot’s Bisou Bisou line of contemporary sportswear, launched the Chris Madden collection of home decor and furnishings and added a wedding registry by nationally known wedding planner Colin Cowie. Customers responded, and now the company’s stock price, which dipped to $9 in late 2000, hovers at around $43 per share. “Merchandise improvements played a key roll in the turnaround,” Sosnick says. “Penney had always had a reputation for quality, but not necessarily for being on trend.”

The retailer has also updated its stores, with full-service salons, expedient customer-service areas, wider aisles, brighter lighting, cleaner floors and less clutter. “The stores are actually beautiful — just an airier and lighter feel,” said Gwen MacKenzie, CLS, a senior vice president at Irvine, Calif.-based Sperry Van Ness.

Meanwhile, JCPenney has rolled out 10 freestanding stores in several states and plans to open between 75 and 100 more in the near term. These units have rows of checkout areas at the front — a feature familiar to any Target shopper — rather than separate checkouts in each department.

The similarities reflect JCPenney’s strategy of taking the fight to its value-oriented competitors in the suburbs. Indeed, Ullman has stressed the importance of capturing customer loyalty before the new formats of the merged Kmart-Sears hit the market. “Everyone is a competitor,” he said recently to a conference of Wall Street investors.

That may be true, but Target in particular could give JCPenney trouble, both on the mall and off, Davidowitz says. “As department stores continue to consolidate and close stores, Target will get more opportunities on the mall,” Davidowitz said. “Sears is very weak in apparel, but JCPenney will have big problems with Target.”

JCPenney’s momentum is undeniable. But the departures of the talented Questrom and Castagna, MacKenzie says, are of no little consequence. Leadership aside, the larger question is whether the storied retailer can regain its identity in the confusion of the contemporary retail environment. “Consumers don’t know which stores to go to because the lines have been so blurred,” MacKenzie said.

But that’s where JCPenney’s long history could provide an edge. The chain continues to enjoy a strong reputation among consumers, and its new value-oriented focus represents not so much a radical change as a return to its roots.

“It was the only retailer that made very good profits during the Great Depression,” said Bill Hare, a former JCPenney speechwriter and author of Celebration of Fools: An Inside Look at the Rise and Fall of JCPenney, which covers company history up to Questrom’s arrival. “That’s because middle- and lower-class Americans all embraced JCPenney and trusted the company. It had the best values and the best service.”

Ullman’s challenge, then, could be described this way: to rekindle those traditional values in a modernized JCPenney that somehow competes with today’s hard-hitting discounters on their own terms but without becoming exactly like them.

Hey, how tough could that be?