Monday, April 15, 2013

Lessons To Learn From J.C. Penney

I will wager if the question were asked of Wall Street brokers, bankers and analysts "When was the last time you or your family shopped at J.C. Penney?" the honest answers would be "Never," or "I don't remember."  Penney lost its way over decades, and suffered from the total neglect of its board and management.

There was a long-running experiment to become a poor shopper's Kohl's, but this experiment was an utter failure.  National branded apparel also gradually disappeared from the store, replaced by awful private label lines, including the once passable "Stafford" line.  Margin rate became the call word.  The worst private label apparel quality in the middle market segment belonged to Penney.

The stores themselves were dimly lit, understaffed, and were filled with what looked like dump tables rather than merchandise displays.  Customers armed with coupons from newspaper inserts probably felt they were getting a bit better quality and a wider assortment than at Odd Lots.  This, in my opinion, is the background against which to measure ex-CEO Ron Johnson's attempted transformation of Penney. Here are some lessons to be learned.

1. Bill Ackman was right about there being a significant opportunity to create shareholder value at Penney.  Sometimes, hedge fund managers, or other activist shareholders, are required to wake up sleepy managements who are letting their companies wither on the vine.

2. Ron Johnson's experience with Apple's retailing wasn't directly relevant to Penney, as Apple is a cult stock, a niche PC provider, and a company extracting huge economic rents from music and mobile computing.  His experience at Target should have been an asset, in terms of operational experience and relationships with suppliers, but any benefit was overwhelmed by mistakes.

3. "Every day low pricing" doesn't work in soft goods. Breaking the pricing into three tiers was a compromise and confusing for sales people to explain and for customers to understand. However, it was necessary to move customers away from the addiction of double couponing.  This transition should have taken a back seat to the remerchandising and repositioning of the stores.

4. The culture at Penney had to have been broken.  This transition takes time.  Commuting in from California and allowing senior executives to do the same was arrogant and should not have been permitted when Johnson was recruited.  The board, led by Bill Ackman, was foolish to allow this arrangement.

5. Academic studies have shown that the real advantage private equity owners provide over public ownership is not in making better decisions, but in taking them faster.  In this case, a public entity, driven by a private hedge fund owner, was driven to take decisions at "light speed," and a number of these decisions were deeply flawed.

6. Penney's operational structure was less like Target and more like a department store.  This means layers of unaccountable decision making and a bureaucratic mentality.  Communicating messages through this kind of network and weeding out the weak players takes time, and again speed probably killed here too.

7. Bill Ackman was wrong.  Hedge fund managers are really smart people: they are masters of chess, poker, and bridge.  They don't run companies very well at all.  The models for their enterprises, where they take the lion's share of their investors' cash no matter what their own performance, doesn't prepare them well for understanding who or what it takes to turn around moribund public companies.

From here, bringing back the previously ousted CEO, the company needs to clearly communicate to its investors how Penney can get back on its feet by taking the best of what's been done and rejiggering the model to adjust its profitability.  Starting a new experiment or returning to the past would be disastrous.

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