Counterparties: How the Penney dropped

April 10, 2013

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Ron Johnson’s disastrous tenure at JC Penney ended on Monday with the company’s stock down roughly 50% during his tenure. The former Apple and Target exec, an acknowledged retail star, is out after just 17 months — a 25% drop in sales will do that to you.

As James Surowiecki wrote in March, the store had quickly become corporate “America’s favorite cautionary tale”. Longtime former CEO Mike Ullman is back at the helm, and he’ll have to have to win back a customer base that, as one analyst told Reuters, “feels it has been betrayed” by Johnson’s grand plan to reinvent the store.

Johnson’s approach was built on ending JC Penney’s long tradition of discounts, but it turned into a lesson in behavioral economics. Johnson tried to do away with what he called “fake prices” (aka quasi-continuous markdowns) in favor of three kinds of pricing (every day, monthly specials, and clearance). To Virginia Postrel, Johnson’s pricing strategy broke the first rule of retail: get customers into the store. Without discounts to be found, “the treasure hunt was gone”, she writes. Instead of sales Johnson favored mini-brand boutiques. This was an Apple-like approach, based on the idea that “customers don’t always know what they want,” in the words of one exec.

There was another lesson to be learned. Surowiecki diagnoses a classic “attribution error” by Penney’s board: Johnson’s work at Apple and Target, though impressive, didn’t really suggest he’d be good at running a century-old retailer.

Finally, JC Penney’s failed revolution is example of how very smart people can be very wrong, especially when they overreach. Johnson was championed by activist hedge fund manager Bill Ackman, whose fund is now staring down a paper loss of some $500 million on JC Penney investments. Johnson himself put $50 million of his own money to buy stock in JC Penney, Phil Wahba reports. He’s now down some $37.6 million on that bet. One exec told Stephanie Clifford that Johnson’s “hubris finally did him in.”

Josh Brown wonders if Johnson’s radicalness was even necessary: there was no reason for JC Penney to swing for the fences, when a single would have sufficed. “The country doesn’t need another Macys or Bloomingdales or Nordstroms. What it could have used was a sexier JC Penney. Why wasn’t that a good enough aspiration?” — Ryan McCarthy

On to today’s links:

Must Read
The one issue that Bernanke still hasn’t addressed: Has financialization gone too far? – Robert Solow

How Goldman Sachs made a fortune on dollar stores – Lauren LaCapra and Carrick Mollenkamp

The “biggest lie in global finance”? Your pension fund’s expected rate of return – WSJ

Most homeowners will get $1,000 or less from the foreclosure settlement – WSJ
Bank errors or now-illegal practices caused about 30% of home foreclosures – Shahien Nasiripour

The Fed
Whoops: The Fed accidentally releases its March meeting minutes early – Reuters
The FOMC March minutes  – Federal Reserve

Obama’s budget includes a “greatest hits list” of ideas to raise revenue, including a Buffett tax – Reuters
A chart showing that Presidents almost never get the budget they want – Dylan Matthews

Ron Paul-quoting Reddit user randomly gives away $13,000 in Bitcoins – Business Insider
Today in inevitable events: Bitcoin is experiencing manic volatility – Business Insider

Tumblr’s editorial team will be “moving on” – Tumblr
The collected messages of David Karp – New Yorker

Crisis Retro
Community banks used government money intended to boost small business lending to repay TARP – WSJ

Revolving Door
One of the key architects of deregulation is now runs a powerful “shadow regulator” – Bloomberg

And, of course, there are many more links at Counterparties.

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