2 Wrongs Don’t Fix JC Penney

JCPenney's board fired the company CEO 18 months ago.  Frustrated with weak performance, they replaced him with the most famous person in retail at the time. Ron Johnson was running Apple's stores, which had the highest profit per square foot of any retail chain in America.  Sure he would bring the Midas touch to JC Penney they gave him a $50M sign-on bonus and complete latitude to do as he wished.

Things didn't work out so well.  Sales fell some 25%.  The stock dropped 50%.  So about 2 weeks ago the Board fired Ron Johnson.

The first mistake:  Ron Johnson didn't try solving the real problem at JC Penney.  He spent lavishly trying to remake the brand.  He modernized the logo, upped the TV ad spend, spruced up stores and implemented a more consistent pricing strategy.  But that all was designed to help JC Penney compete in traditional brick-and-mortar retail. Against traditional companies like Wal-Mart, Kohl's, Sears, etc.  But that wasn't (and isn't) JC Penney's problem.

The problem in all of traditional retail is the growth of on-line.  In a small margin business with high fixed costs, like traditional retail, even a small revenue loss has a big impact on net profit.  For every 5% revenue decline 50-90% of that lost cash comes directly off the bottom line – because costs don't fall with revenues.  And these days every quarter – every month – more and more customers are buying more and more stuff from Amazon.com and its on-line brethren rather than brick and mortar stores.  It is these lost revenues that are destroying revenues and profits at Sears and JC Penney, and stagnating nearly everyone else including Wal-Mart. 

Coming from the tech world, you would have expected CEO Johnson to recognize this problem and radically change the strategy, rather than messing with tactics.  He should have looked to close stores to lower fixed costs, developed a powerful on-line presence and marketed hard to grab more customers showrooming or shopping from home.  He should have targeted to grow JCP on-line, stealing revenues from other traditional retailers, while making the company more of a hybrid retailer that profitably met customer needs in stores, or on-line, as suits them.  He should have used on-line retail to take customers from locked-in competitors unable to deal with "cannibalization."

No wonder the results tanked, and CEO Johnson was fired.  Doing more of the tired, old strategies in a shifting market never works.  In Apple parlance, he needed to be focused on an iPad strategy, when instead he kept trying to sell more Macs.

But now the Board has made its second mistake.  Bringing back the old CEO, Myron Ullman, has deepened JP Penney's lock-in to that old, traditional and uncompetitve brick-and-mortar strategy. He intends to return to JCP's legacy, buy more newspaper coupons, and keep doing more of the same.  While hoping for a better outcome.

What was that old description of insanity?  Something about repeating yourself…..

Expectedly, Penney's stock dropped another 10% after announcing the old CEO would return.  Investors are smart enough to recognize the retail market has shifted.  That newsapaper coupons, circulars and traditional advertising is not enough to compete with on-line merchants which have lower fixed costs, faster inventory turns and wider product selection. 

It certainly appears Mr. Johnson was not the right person to grow JC Penney.  All the more reason JCP needs to accelerate its strategy toward the on-line retail trend.  Going backward will only worsen an already terrible situation.

Interesting Apple Infographic

http://www.moneychoice.org/the-fall-of-apple/

 

United – this is NOT “any way to run an airline”

The good folks at Wichita State (a final four contender as U.S. basketball fans know) and Purdue released their 2013 Airline Quality Rating.  United Airlines came in dead last.  To which United responded that they simply did not care.  Oh my.

Interestingly, this study is based wholly on statistical performance, rather than customer input.  The academics utilize on-time flight performance, denied passenger boardings, mishandled bags and complaints filed with the Department of Transportation.  It does not even begin to explore surveying customers about their satisfaction.  Anyone who flies regularly can well imagine those results.  Oh my.

So how would you expect an innovative, adaptive growth-oriented company (think like Amazon, Apple, Samsung, Virgin, Neimann-Marcus, Lulu Lemon) to react to declining customer performance metrics?  They might actually change the product, to make it more desirable by customers.  They might hire more customer service representatives to identify customer issues and fix problems quicker.  They might adjust their processes to achieve higher customer satisfaction.  They might train their employees to be more customer-oriented. 

But, United decidedly is not an innovative, adaptive organization.  So it responded by denying the situation.  Claiming things are getting better.  And talking about how it is spending more money on its long-term strategy.

United doesn't care about customers – and really never has.  United is focused on "operational excellence" (using the word excellence very loosely) as Messrs. Treacy and Wiersema called this strategy in their mega-popular book "The Discipline of Market Leaders" from 1995. United's strategy, like many, many businesses, is to constantly strive for better execution of an old strategy (in their case, hub-and-spoke flight operations) by hammering away at cutting costs. 

Locked in to this strategy, United invests in more airplanes and gates (including making acquisitions like Continental) believing that being bigger will lead to more cost cutting opportunities (code named "synergies".)  They beat up on employees, fight with unions, remove anything unessential (like food) invent ways to create charges (like checked bags or change fees), fiddle with fuel costs, ignore customers and constantly try to engineer minute enhancements to operations in efforts to save pennies.

Like many companies, United is fixated on this strategy, even if it can't make any money.  Even if this strategy once drove it to bankruptcy.  Even if its employees are miserable. Even if quality metrics decline. Even if every year customers are less and less happy with the product.  All of that be darned!  United just keeps doing what it has always done, for over 3 decades, hoping that somehow – magically – results will improve.

Today people have choices.  More choices than ever.  That's true for transportation as well.  As customers have become less happy, they simply won't pay as much to fly.  The impact of all this operational focus, but let the customer be danged, management is price degradation to the point that United, like all the airlines, barely (or doesn't – like American) cover costs.  And because of all the competition each airline constantly chases the other to the bottom of customer satisfaction – each  lowering its price as it mimics the others with cost cuts.

In 1963 National Airlines ran ads asking "is this any way to run an airline?" Well, no. 

Success today – everywhere, not just airlines – requires more than operational focus.  Constantly cutting costs ruins the brand, customer satisfaction, eliminates investment in new products and inevitably kills profitability.  The litany of failed airlines demonstrates just how ineffective this strategy has become.  Because operational improvements are so easily matched by competitors, and ignores alternatives (like trains, buses and automobiles for airlines) it leads to price wars, lower profits and bankruptcy.

Nobody looks to airlines as a model of management.  But many companies still believe operational excellence will lead to success.  They need to look at the long-term implications of this strategy, and recognize that without innovation, new products and highly satisfied new customers no business will thrive – or even survive.

How Samsung Changed the Game on Apple

The iPad is now 3 years old.  Hard to believe we've only had tablets such a short time, given how common they have become.  It's easy to forget that when launched almost all analysts thought the iPad was a toy that would be lucky to sell a few million units.  Apple blew away that prediction in just a few months, as people demonstrated their lust for mobility.  To date the iPad has sold 121million units – with an ongoing sales rate of nearly 20million per quarter.

Following very successful launches of the iPod (which transformed music from CDs to MP3) and iPhone (which turned everyone into smartphone users,) the iPad's transformation of personal technology made Apple look like an impenetrable juggernaut – practically untouchable by any competitor!  The stock soared from $200/share to over $700/share, and Apple became the most valuable publicly traded company on any American exchange!

But things look very different now.  Despite huge ongoing sales (iPad sales exceed Windows sales,) and a phenomenal $30B cash hoard ($100B if you include receivables) Apple's value has declined by 40%! 

In the tech world, people tend to think competition is all about the product.  Feature and functionality comparisons abound.  And by that metric, no one has impacted Apple.  After 3 years in development, Microsoft's much anticipated Surface has been a bust – selling only about 1.5million units in the first 6 months.  Nobody has created a product capable of outright dethroning the i product series.  Quite simply, there have been no "game changer" products that dramatically outperform Apple's.

But, any professor of introductory marketing will tell you that there are 4 P's in marketing: Product, Price, Place and Promotion.  And understanding that simple lesson was the basis for the successful onslaught Samsung has waged upon Apple in 2012 and 2013. 

Samsung did not change the game with technology or product.  It has used the same Android starting point as most competitors for phones and tablets.  It's products are comparable to Apple's – but not dramatically superior.  And while they are cheaper, in most instances that has not been the reason people switched.  Instead, Samsung changed the game by focusing on distribution and advertising!

 

Chart courtesy Jay Yarrow, Business Insider 4/2/13 and Horace Dediu, Asymco

The remarkable insight from this chart is that Samsung is spending almost 4.5 times Apple – and $1B more than perennial consumer goods brand leader Coca-Cola on advertising! Simultaneously, Samsung has set up kiosks and stores in malls and retail locations all over America.

Can you imagine having the following conversation in your company in 2010?:

"As Vice President of Marketing I propose we take on the market leader not by having a superior product.  We will change the game from features and function comparisons to availability and awareness.  I intend to spend more than anyone in our industry on advertising – even more than Coke.  And I will open so many information and sales locations that our products will be as available as Coke.  We'll be everywhere.  Our products may not be better, but they will be everywhere and everyone will know about them."

Samsung found Apple's Achilles heel.  As Apple's revenues rose it did not keep its marketing growing.  SG&A (Selling, General and Administrative) expense declined from 14% of revenues in 2006 to 5% in 2012; of course aiding its skyrocketing profits.  And Apple continued to sell through its fairly limited distribution of Apple stores and network providers.  Apple started to "milk" its hard won brand position, rather than intensify it.

Samsung took advantage of Apple's oversight.  Samsung maintained its SG&A budget at 15% of revenues – even growing it to 24% for a brief time in 2009, before returning to 15%.  As its revenues grew, advertising and distribution grew.  Instead of looking back at its old ad budget in dollars, and maintaining that budget, Samsung allowed the budget to grow (to a huge number!) along with revenues. 

And that's how Samsung changed the game on Apple.  Once America's untouchable brand, the Apple brand has faltered.  People now question Apple's sustainability. Some now recognize Apple is vulnerable, and think its best times are behind it.  And it's all because Samsung ignored the industry lock-in to constantly focusing on product, and instead changed the game on Apple.

Something Microsoft should have thought about – but didn't.

Of course, Apple's profits are far, far higher than Samsung's.  And Apple is still a great company, and a well regarded brand, with tremendous sales.  There are ongoing rumors of a new iOS 7 operating system, an updated format for iPads, potentially a dramatically new iPhone and even an iTV.  And Apple is not without great engineers, and a HUGE war chest which it could use on advertising and distribution to go heads up with Samsung.

But, at least for now, Samsung has demonstrated how a competitor can change the game on a market leader.  Even a leader as successful and powerful as Apple.  And Samsung's leaders deserve a lot of credit for seeing the opportunity – and seizing it!