Asymmetrical Information - Megan McArdle


The Real Lesson of JC Penney: Sometimes, You're Stuck

It's fun to blame Ron Johnson, but it's doubtful that anyone else could have saved the ailing retailer.

This week, JC Penney's board fired the firm's CEO: Ron Johnson, the former retail genius who bought you the Apple Store.  The post-mortems have been pretty brutal.  Johnson seemed to think that what worked for Apple would work for JC Penney: he canceled sales and tried to lure buyers instead with specialized in-store boutiques and similar buzzy fare.  

This was pretty much entirely disastrous.  "Always low prices" works for Wal-Mart because it is, far and away, the low cost supplier of pretty much everything it sells, and for Apple because it sells a product that can't be bought at a discount anywhere.  It didn't work for JC Penney, which sells middling quality goods to a cost-conscious demographic which has been especially squeezed over the last five years.  As Virginia Postrel points out, this got rid of the old reason that people used to stop into Penneys, but didn't give them enough of a new one to get them through the doors.  

This certainly demonstrates that you should never put too much stock in genius (your own, or anyone else's).  Some of what looks like superlative performance may just be the luck of the draw.  Ron Johnson did a very good job launching Apple's retail stores.  But it doesn't follow that he can therefore make anything work, even an ailing department store brand whose consumers are cutting back sharply on their spending.  

But by the same token, we shouldn't give in to the temptation to think that Ron Johnson is some sort of idiot who would have been able to save Penneys if he wasn't so stupid.  Johnson's bold moves didn't work, to be sure . . . but it's not clear what would have.  Large retail stores in malls are not a very good business to be in.  And if you have to be in that business, because you happened to get into the business 80 years ago when it was a license to print money, JC Penneys market segment is about the last one you'd pick.  It's vulnerable on about every front.  

Its coupon-clipping consumer base is aging.  Discounters are undercutting them everywhere: clothes, housewares, linens.  Worse, younger consumers would vastly prefer to buy their housewares at Target and their clothes at H&M.  If those consumers get their hands on some money, they'll move upmarket to Crate and Barrel and Banana Republic.  The current aesthetic is high-low: either so expensive you'll keep it forever, or so cheap that you won't mind throwing it away.  That leaves nowhere for JC Penney to sell.  

Besides, people don't want to hang out at the mall, and they don't feel any particular need to buy all their stuff in one place.  The pricey mall real estate that used to be JC Penney's biggest asset is rapidly turning into an expensive liability.  There's a reason that department stores have spent the last two decades going out of business; it now seems to be Penney's turn.  

It's hard to see how anyone could have saved the firm (and yes, I think the incoming CEO will also fail).  There's very little there to build on: if you were going to try to build a new Nordstroms, or a new Target, you'd start from scratch, not try to lash a new brand identity onto the tattered Penney's logo.  Ron Johnson was probably doomed to fail from the start.  But given what he had to work with, at worst, he slightly hastened the inevitable.