It may seem like a decade ago when J.C. Penney’s newly crowned wunderkind, CEO Ron Johnson, announced several revolutionary and rather bold changes for the more than century-old retailer. Johnson officially began operations as corporate CEO in November 2011. Just three months later, the company announced a completely new merchandising system among other proposed changes which caught retailing by surprise, to say the least. This resulted in an anxious but respectful wait and see attitude among savvy retail stalwarts, competitors, brick and mortar retailers in general and of course the financial markets headed up by Wall Street analysts.
The JCP plan going forth was to include a radical overhaul of store design, pricing and promotions. As good as these ideas may have sounded, it seems that many long-time Penney’s customers were turned off and/or confused by the new policies. Sales quickly plummeted and continued to consistently decline throughout 2012.
Many retail insiders theorize that current JCP management was less than in love with the traditional customers they inherited. This theory states that as many of these customers were maturing, they were a less lucrative market than the more youthful groups that waited on JCP to make the right invitational moves.
A Lesson from the Annals of The Home Depot
Parts of this J.C. Penney scenario remind me somewhat of the time when Home Depot’s founders decided to step down and devote their considerable energies to other exploits, such as owning an NFL team. The company’s hand-picked successor was GE executive Robert Nardelli. Nardelli too had some almost larger than life ideas about running his new company and quickly proceeded to create a Home Depot that pretty much all but abandoned its founder’s roots to become essentially all things to all people.
Previously The Home Depot had been built on a foundation of primarily serving do it yourselfers, while also welcoming professional builders and contractors. The company’s founders were well aware that these customer types are essentially two distinctly different audiences. They understood that do it yourselfers represent a wide range of project knowledge. While a few of these customers are extremely knowledgeable, most are not. In fact many are pretty much unaware of all that is needed to complete many simple projects.
Thus from its inception Home Depot management stressed the hiring of knowledgeable personnel to man the floor. The company was able to attract a number of associates with backgrounds in essential areas such as plumbing, carpentry and electrical installation. The company also implemented a continuing educational system which applied to all customer-based departmental associates.
The object here was to offer all customers the type of insightful feedback which would see them leave the location feeling that they had acquired the knowledge to complete even the most daunting of projects. At least as important, the expectation was that customers would leave the premises having purchased all that was needed to complete their respective projects. Home Depot management was well aware that, as many do it yourselfers have very limited knowledge as to the full necessities of a project, they often leave the store only to eventually discover the products they are lacking. This often results in a quick trip to the local hardware store where the customer service is generally excellent and the expense of time and gas is minimal.
Home Depot’s educational system included tests required to pass the class and a completion notice which generally led to an increase in pay and/or a promotion. The training served to incentivize personnel and better serve customers. It also served to increase sales and profits and make the daunting big box format a go to place for the do it yourself crowd.
In Nardelli’s desire to grow The Home Depot in all possible directions, management went on a shopping spree, buying a number of very well managed local and regional pro dealers. This would likely have been off the radar of the company’s D-I-Y centric founders. The Nardelli administration also began to expand ancillary retail operations to compliment the iconic Home Depot stores. Retail concepts such as the EXPO Design Center were greatly expanded. Stores were opened to determine the viability of specialty outlets such as flooring stores and landscaping centers.
Perhaps the most far reaching of these ancillary retail projects was when the company tested a group of convenience stores called Home Depot Fuel. In addition to offering gas and diesel, these units featured a variety of snacks, hot foods and beverages including beer. What was to distinguish this concept from typical convenience stores was their locations. To begin any rollout of the concept, Home Depot was going to situate locations essentially in Home Depot parking lots. It was thought this would first serve a captive audience, Home Depot customers. The most notable enticement here were the contractors, who often sought to stock up on food and refreshments for their hard working crews.
To pay for all this expansion, Home Depot management cut back on what had been considered the company’s fundamental strengths. To meet quarterly earnings targets, jobs were cut. Educational programs were deemphasized. Recently completed call centers were virtually abandoned as jobs and services were shipped overseas. Many customers noticed the difference in the quality of customer services and virtually abandoned Home Depot.
As the subprime mess was becoming a subprime crisis, Home Depot found itself increasingly sinking into financial and customer difficulties. Pressures began to mount on Nardelli, especially from the stockholders. Finally, on January 2, 2007, Nardelli resigned. As is often the case with wildly failed administrations, controversy accompanied this departure under fire. Stockholders loudly protested as Nardelli claimed an over $120 million golden parachute.
To the surprise of some, Nardelli was replaced by a former understudy at both GE and Home Depot, Francis Blake. To right the ship, Blake immediately vowed to return to the founders core values. Hiring personnel was restored as a virtue. As luck would have it the onset of the recession found many very qualified plumbers, carpenters and electricians in need of work. Training was restored to its former corporate place of importance and once again properly rewarded.
To redirect the company’s focus, the substantial pro dealer segment of the company was rapidly sold, at a loss. The EXPO Design Center was quickly abandoned along with all other ancillary retail operations. These bold moves quickly returned the company to financial bliss despite a recession that refused to quit and continued to punish the pro dealer side of the industry most heavily.
A Lesson Lost on J.C. Penney?
Had J.C. Penney’s Ron Johnson chosen a course of change through evolution to begin with, he could have prudently clarified the company’s merchandising positions, without alienating a significant part of his loyal customer base. He could have reinvented the look of his stores and implemented a new pricing strategy with a fresh product mix through proper consumer tests in select markets, over time. Evolution might have allowed him to maintain and reeducate his customer base while attracting new categories of consumers.
Certainly a proper evolutionary approach to change, including maintaining respect for traditional customers and their sensibilities, could have avoided some pratfalls and allowed for a graceful change in Penney’s company culture. Now Mr. Johnson’s personal fame is rivaling that of the JCP brand and that is simply not good. Currently there seem to be headlines breaking at least weekly about JCP’s fortunes or lack thereof. This rush of events is perhaps too reminiscent of the final months of Robert Nardelli’s reign.
