Counterparties: How the Penney dropped
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Ron Johnsonâ€™s disastrous tenure at JC Penney ended on Monday with the companyâ€™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.
AsÂ James Surowiecki wrote in March, the store had quickly become corporate â€śAmericaâ€™s favorite cautionary taleâ€ť. Longtime former CEO Mike Ullman is back at the helm, and heâ€™ll have to have to win back a customer base that, as one analystÂ told Reuters, â€śfeels it has been betrayedâ€ť by Johnsonâ€™s grand plan to reinvent the store.
Johnsonâ€™s approach was built on ending JC Penneyâ€™s long tradition of discounts, but it turned into a lesson in behavioral economics. Johnson tried to do away with what he calledÂ â€śfake pricesâ€ť (aka quasi-continuous markdowns) in favor of three kinds of pricing (every day, monthly specials, and clearance). ToÂ Virginia Postrel, Johnsonâ€™s pricing strategy broke the first rule of retail: get customers into the store. Without discounts to be found, â€śthe treasure hunt was goneâ€ť, she writes. Instead of sales Johnson favored mini-brand boutiques. This was an Apple-like approach, based on the idea that â€ścustomers donâ€™t always know what they want,â€ť in the words of one exec.
There was another lesson to be learned. Surowiecki diagnoses a classic â€śattribution errorâ€ť by Penneyâ€™s board: Johnsonâ€™s work at Apple and Target, though impressive, didnâ€™t really suggest heâ€™d be good at running a century-old retailer.
Finally, JC Penneyâ€™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 someÂ $500 million on JC Penney investments. Johnson himself put $50 million of his own money to buy stock in JC Penney,Â Phil Wahba reports. Heâ€™s now down some $37.6 million on that bet. One exec toldÂ Stephanie Clifford that Johnsonâ€™s â€śhubris finally did him in.â€ť
Josh Brown wonders if Johnsonâ€™s radicalness was even necessary: there was no reason for JC Penney to swing for the fences, when a single would have sufficed. â€śThe 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?â€ť — Ryan McCarthy
On to todayâ€™s links:
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
And, of course, there are many more links at Counterparties.