Shiny New Penney

Five years ago J.C. Penney was a stodgy, tired department store chain that also had a Website and mailed a general merchandise “big book” catalog. Fast-forward to 2006 and Penney has been reborn as a fashion-forward apparel and home goods multichannel merchant that’s become a darling from Wall Street to Middle America.

The Plano, TX-based Penney’s net direct and retail sales, which
had dropped in fiscal 2002 and 2003 below its 2001 total of $17.8 billion, rebounded to $18.1 billion in 2004 and $18.8 billion last fiscal year. And Lizabeth Dunn, a senior analyst with New York-based Prudential Equity Group, expects revenue to hit $19.7 billion this fiscal year and $21.0 billion in 2007.

How did Penney manage to do it? It began with a few key hires. Former Wal-Mart exec Vanessa Castagna joined Penney in 1999 as chief operating officer of J.C. Penney stores, merchandising, and catalog (She subsequently became chairman/CEO of the company’s stores, catalog, and Internet division before resigning in November 2004.) Two years later the company brought on turnaround specialist and the former head of Federated Department Stores Allen Questrom as chairman/CEO (who retired in late 2004, to be replaced by Myron “Mike” Ullman); former Spiegel president/CEO John Irvin, now executive vice president of the company at large and president of J.C. Penney Direct; and Bernie Feiwus, formerly of Neiman Marcus Direct, now senior vice president/chief operating officer of J.C. Penney Direct. The new guard took several giant steps that put Penney on the path to success.

Founded in 1902 by James Cash Penney as Golden Rule, a Kemmerer, WY, dry goods store, J.C. Penney today is headquartered in a sprawling 1 million-sq.-ft. brick-and-glass structure. On this particular July morning it is hot even by Texas standards — 113 degrees — but nobody inside Penney’s headquarters is sweating. That’s no doubt due to the air-conditioning, but it could serve as a metaphor of sorts as well. John Irvin, for instance, is as cool as the proverbial cucumber as he discusses Penney’s turnaround.

Brand-new brands

Shortly after arriving at Penney in March 2001, Irvin noticed, as he was thumbing through the core catalog, that there were hundreds of pages of bedding and window treatments, yet just four pages of kitchen products. “I assumed, looking at those bedding pages, that not only did our customers have a bedroom in their house, but they probably also had a kitchen,” says Irvin with a hint of irony. “We got some of our merchandise, marketing, and creative teams together and asked, ‘Could we build a business around people who like to cook?’”

They could, and did. Penney launched the private-label Cooks line of housewares and a specialty catalog showcasing it in late 2002. Not only has Cooks been a success in and of itself for Penney, but as Irvin explains, the brand represents the importance of understanding the customer, and having the merchandising expertise to find or develop what she needs.

“There might be a strong affinity for a product or a style,” Irvin says. “If there’s enough of a flash point, then we say that this probably supports the idea of starting up a special catalog or a business strategy around that product category.”

Seven of Penney’s private brands — apparel brands Arizona Jeans Co., Worthington, Stafford, St. John’s Bay, Delicates, and Okie-Dokie, and J.C. Penney Home Collection — make up 80% of its private-label sales, and three of them, J.C. Penney Home Collection, St. John’s Bay, and Arizona, have sales of more than $1 billion. All told, Penney’s private brands account for more than 40% of its revenue. But Penney, struggling to shed its dowdy image, had to do more than develop its own brands; it had to partner with designers and labels that would up its cool quotient.

In 2003, J.C. Penney became the exclusive North American retailer for Bisou Bisou, a manufacturer of contemporary women’s sportswear. The next year Penney partnered with designer Chris Madden, who creates an exclusive home furnishings collection and serves as a Penney spokesperson. And this past April the retailer announced that it was partnering with high-end beauty merchant Sephora to launch a store-within-a-store concept beginning this fall.

Another part of Penney’s strategy was aligning the channels. The company today includes about 1,026 stores in the U.S. and Puerto Rico; its catalog division, which was launched in 1963 and includes some 94 niche catalogs; and its Website, founded in 1994.

Mastering multichannel

“We had a network, structure, and relationship between the store and print channels back then that we’ve been able to build off of,” Irvin says. “That was one of the things Bernie and I felt good about when we got here. It wasn’t like somebody was trying to start up a direct-to-consumer business.”

Issues that other large retailers are now agonizing over are fundamentals Penney has had in place for four decades — Feiwus ticks off “store referrals off the POS [point-of sale] system, in-store deliveries, having our catalogs in the stores, accepting [catalog] returns in the stores” as a few of the company’s long-time cross-channel amenities.

Penney’s experience on the fulfillment side, Feiwus says, really helped it extend its multichannel presence into cyberspace. “If you just think of fulfillment as one section of that, most companies have to make a big decision,” explains Feiwus, his Brooklyn accent tinged with a Texas twang. “Do they outsource it and then live within the confines of whoever they choose? Or do they build it themselves and go through the pain of a start-up? That’s one thing we didn’t have to do. Fulfillment and call centers have been around here for 40 years.”

Still, when Irvin and Feiwus arrived, Penney’s direct sales had been on the decline. In 2001 alone they’d fallen 20%, to $3.3 billion; in 2002 they tumbled an additional 22%, to $2.6 billion. The direct division was neither productive nor profitable. There was a heavy reliance on the catalog as a source of sales, but consumer interest in the big book was fading. The company decided it would reap a better return on investment if it beefed up its Website and created niche titles to support it.

Using customer data, Penney began creating and mailing targeted media to specific customers, based on buying habits and recency/frequncy/monetary value (RFM). “We had the database, but we didn’t have the catalogs to take advantage of what we had in the database,” Feiwus says. The company’s master file includes more than 6 million names.

Penney’s specialty books include the furniture titles Rooms Kids Love and Rooms Babies Love; Organized, which provides storage and organization products not found in the traditional store environment; Maternity; Bra Solutions; and School Uniforms.

The catalogs drive customers to the Website, which topped $1 billion in sales in 2005 and is Penney’s fastest-growing sales channel. Last year the site averaged about 450,000 unique visits and 12 million page views a day. What’s more, it has a conversion rate of almost 10%, far above what Irvin estmates is the department-store average of 2%-4%.

The high conversion levels “means she is more than likely finding what she came for and what is of interest to her,” says Irvin. By “she,” Irvin means Penney’s core online customer, female between the ages of 30 and 50.

One key to the site’s impressive conversion rate may be its effective search function, which enables shoppers to quickly filter results by size, color, and price. It also helps that “we haven’t had to overcome the trust factor other companies will have to overcome to convince the customers to take a chance with their e-commerce sites,” Feiwus says. “There is a consumer trust built into the brand we’ve got, so we’ve been able to concentrate more on creative product, building better assortments, and focusing business as opposed to building a new business.”

That’s not to say that Penney hasn’t had channel challenges. In 1999 it was a decentralized retailer — each location ordered its own initial inventory, which contributed to low operating margins, says Irvin. The direct side had no merchants, no advertising, and no marketing.

“We didn’t do any pricing; it was all done at the store side,” Feiwus says. “One of the first things we had to do was get that back under our authority so that we could look at it and do it in a direct perspective.”

Irvin agrees: “We really started to apply good fundamentals to the business that was already here. And because Bernie and I had different experiences in our backgrounds, we knew that some of the benchmarks Penney used weren’t appropriate… But all three channels had independent strengths.”

Last year Penney put into its department stores 35,000 POS registers designed to reduce transaction time and give customers quick and easy access to the company’s online assortment, which is broader than what’s available at retail. The $250 million investment, says Irvin, has helped position the Website as the hub of its multichannel strategy. When the rollout was completed in August, each of Penney’s 1,026 stores had high-speed broadband access to the entire line of goods (see “POS power,” below).

Integration now

Not only does the upgrade and integration of the Website in the store environment extend product offerings, but it also enables clerks to provide better service by providing additional information and even advice on topics related to the customer’s purchase. For example, if a store customer is buying several baby items, the sales associate can print out advice on parenting or on decorating a baby’s room from the Penney Website or suggest products that are available only online.

This helps bring out the emotional connection with the customer, says Kevin Gebhardt, director of multichannel coordination and implementation for catalog and Internet. “It is beyond just trying to sell something. It’s about us trying to understand you, and because you find that this is a store for you, you’re going to spend more at J.C. Penney.”

More integration strategies are being tested. Self-serve price-check scanners have been replaced with touch-screen ones that also allow store customers to shop online for, say, a pair of shoes in a size not available in the store. And in one Texas store Penney is testing flat-panel LCD screens that hang from the ceiling to act as revolving billboards, emphasizing hot items and educating customers about the Website.

“We have a fairly large and robust customer base; we’re looking at ways to go into these segments and affinities and make the experience as easy and friendly and relevant and fast as possible,” Irvin says. “Most of our competition aspires to do the same thing. But the difference between aspiring and the ability to execute against that is a whole different ballgame.”

Just how multichannel has J.C. Penney Co. become? Kevin Gebhardt, the Plano, TX-based general merchant’s director of multichannel coordination and implementation for catalog and Internet, has a story about a customer who was shopping at a Penney store in Plano’s Collin Creek Mall. Browsing in the men’s department, the customer announced to his sales associate, “I really would like to buy a guitar. Do you carry musical instruments?”

POS power

Penney does sell guitars online; its stores do not stock them, however. But thanks to the company’s recent $250 million upgrade of its point-of-sale systems, which includes direct access to its Website, the store clerk was able to recommend 30 guitars that could be shipped to the customer’s home or delivered to the store for pick up. “The associate didn’t have to look around the store, have to try to filter through a 1,000-page catalog or any of other 90 catalogs that may be in store,” says Gebhardt. “She just had to understand how to use the search capability on the POS.”

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