Shortly after taking the top job at J.C. Penney Co. last fall, Chief Executive Ron Johnson signed up for the company's email alerts. He was shocked by what landed in his inbox.
The former Apple Inc. retail executive was deluged by sales announcements, sometimes two a day. He and his team counted 590 separate sales last year. They didn't bring in shoppersâ€”Mr. Johnson's team found the average customer purchased only four times a yearâ€”but they did crush prices. Alarmingly, he learned nearly three-quarters of Penney's products sold at discounts of 50% or more.
Three months into the job, J.C. Penney Chief Executive Ron Johnson is planning a far-reaching but risky overhaul of the ...view middle of the document...
The center of the storeâ€”where department stores typically concentrate cosmetics, accessories and other high-margin impulse buysâ€”will be turned into a "Town Square," where shoppers can hang out amid seasonal events and other attractions.
Floor space will be carved into as many as 100 "stores within a store"â€”including branded spaces like "Martha Stewart's Kitchen," space for the company's Liz Claiborne line, and thematic stores geared toward seasons and trends.
"Some may call it crazy, but I don't think there is an alternative," Mr. Johnson said in an interview. "In an Internet age where you can have exactly what you want with one keyword, people won't tolerate big stores. You have to break it down for them."
But overhauling the chain's fleet of 1,100 stores will pose costly challenges, and consumers have been reluctant to spend without the incentive of big markdowns.
Penney has been battered in recent years by competition from rivals like Macy's Inc. and Kohl's Corp. Under former Chief Executive Myron Ullman, Penney shed its catalog business and invested in exclusive brands and partnerships with hot sellers like fast-fashion line Mango and Sephora cosmetics. But it continued to struggle with lackluster sales and the need to discount heavily to clear merchandise.
At an interview at the Plano, Texas, headquarters last week, Mr. Johnson said he determined that the store's initial prices needed to be realigned with what customers feel comfortable paying. Beginning in February, Penney will lower the initial price for items by about 40% from where they start now.
He also plans to sharply reduce the number of promotions. Penney will pick a number of in-season items that will be on sale for an entire month. It will have two clearance sales, on the first and third Fridays of the month, called "Best Price Fridays," an idea he picked up while working at Mervyn's, a now-defunct regional department store. Prices will be expressed in flat dollar amounts without cents.
Penney plans to spend $80 million a month on the program.
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The move is risky, as shoppers have become rabid bargain hunters. But the old strategy wasn't working. Sales at stores open at least a year, a key measure of a retailer's ability to draw customers, rose a thin 0.7% in the 11 months through December, down from a 2.7% increase the year before and well behind Macy's 5.4% gain.
A poor holiday showing led Penney to sharply cut its profit outlook for the fourth quarter. Its shares are up about 6.7% in the past year, but that's compared with Macy's gain of nearly 47%. On Wednesday, Penney's shares fell 1%. Macy's fell 3.1%.
Department stores increasingly are setting up "stores in a store" and carving out areas for specific brands....