Sunday Group I

Mary Foster, Sharon Lahey, Maegen Lane, Roman Yakhin

MGMT 6359, Seminar in Strategic Management Spring Semester 2017, Dr. P. Cloninger

JC Penney: Team Case Analysis

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TABLE OF CONTENTS

1.0 Executive Summary ...................................................................................................... 3

2.0 External Analysis

2.1 General Environmental Analysis

2.1.1 Demographic Segment ................................................................................. 5

2.1.2 Economic Segment ...................................................................................... 6

2.1.3 Political/Legal Segment ............................................................................... 7

2.1.4 Socio Cultural Segment ............................................................................... 7

2.1.5 Technological Segment ................................................................................ 8

2.1.6 Global Segment ............................................................................................ 8

2.1.7 Summary of General Environment Analysis ............................................... 9

2.1.8 Driving Forces .............................................................................................10

2.2 Industry Analysis

2.2.1 Description of the Industry ..........................................................................10

2.2.2 Industry Dominant Economic Features .......................................................13

2.2.3 Market Size ..................................................................................................14

2.2.4 Market Growth Rate ....................................................................................15

2.2.5 Industry Trends ............................................................................................17

2.2.6 Five Forces Analysis ....................................................................................17

2.2.6.1 Threat of New Entrants ..................................................................17

2.2.6.2 Power of Suppliers .........................................................................18

2.2.6.3 Power of Buyers .............................................................................18

2.2.6.4 Threat of Substitutes .......................................................................18

2.2.6.5 Intensity of Rivalry .........................................................................19

2.2.6.5.1 Industry Competitors .....................................................19

2.2.6.5.2 Rivals’ Anticipated Strategic Moves .............................20

2.2.6.6 Summary of Five Forces Analysis .................................................21

2.2.7 Industry Key Success Factors (KSFs)..........................................................21

3.0 Internal Analysis

3.1 Organizational Analysis

3.1.1 Corporate Mission ........................................................................................22

3.1.2 Products and Services ..................................................................................22

3.1.3 Leadership & Organizational Culture ..........................................................23

3.1.4 Structure & Strategy ....................................................................................24

3.1.4.1 Current Structure and Strategy .......................................................24

3.1.4.2 Components of Strategy .................................................................24

3.1.4.3 Competitive Strength ......................................................................25

3.1.5 Summary of Organizational Analysis ..........................................................26

3.2 Analysis of Firm Resources & Capabilities

3.2.1 Tangible and Intangible Resources ..............................................................26

3.2.2 Value Chain Analysis ..................................................................................27

3.2.3 Core Competencies and Sustainable Advantages ........................................29

3.2.4 Summary of Firm Resources & Capabilities ...............................................29

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3.3 Financial Analysis

3.3.1 Valuation Analysis .......................................................................................30

3.3.2 Growth Analysis ..........................................................................................30

3.3.3 Profitability Analysis ...................................................................................31

3.3.4 Financial Strength Analysis .........................................................................32

3.3.5 Management Efficiency Analysis ................................................................32

3.3.6 Summary of Financial Analysis ...................................................................33

4.0 Strategic Issues Analysis

4.1 Critical Challenges .................................................................................................34

4.2 Resources and Capabilities .....................................................................................34

4.3 Strengths or Weaknesses Analysis .........................................................................35

4.4 Opportunities or Threats Analysis ..........................................................................36

5.0 Recommendations

5.1 Recommendation One

5.1.1 Goal and Project Objectives.........................................................................37

5.1.2 Action Plans .................................................................................................38

5.1.3 Deliverable ...................................................................................................38

5.1.4 Milestones ....................................................................................................40

5.1.5 Resources Required .....................................................................................42

5.1.6 Technical Requirements...............................................................................42

5.1.7 Budgeting ....................................................................................................43

5.1.8 Feedback Mechanism ...................................................................................45

5.2 Recommendation Two

5.2.1 Goal and Project Objectives.........................................................................46

5.2.2 Action Plans .................................................................................................47

5.2.3 Deliverable ...................................................................................................48

5.2.4 Milestones ....................................................................................................48

5.2.5 Resources Required .....................................................................................51

5.2.6 Technical Requirements...............................................................................51

5.2.7 Budgeting ....................................................................................................51

5.2.8 Feedback Mechanism ...................................................................................53

5.3 Risk Assessments and Contingency Plans .................................................................53

5.4 Limits and Exclusions ..................................................................................................55

5.5 Long-Term Effects .......................................................................................................56

6.0 References .....................................................................................................................57

7.0 Appendix .......................................................................................................................64

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1.0 EXECUTIVE SUMMARY

JC Penney is a large department store chain with 1,021 stores and revenue of $12.5

billion. The company has developed partnerships with upscale cosmetics and clothing retailers,

and has also attracted a strong customer following on their website. JC Penney has also shifted

its product selection by selling appliances again, to compete against its struggling rivals, such as

Sears. The company also launched several different yet successful private labels. However, the

department store industry has experienced significant difficulties due to the rise in competition

from online retailers, such as Amazon.com, as well as from brick-and-mortar Supercenters and

Warehouse Clubs. This paper analyzes the external environment of the department store

industry, the forces that are driving change, and how these factors impact JC Penney.

Recommendations for future action are also included.

We examine the profitability of department stores by using the five forces analysis:

bargaining power of suppliers, threat of new entrants, industry rivalry in the industry, bargaining

power of buyers, and threat of substitutes. JC Penney’s primary consumer groups currently

include lower- to middle-class households, which include the elderly, and mothers or housewives

who provide for their household. JC Penney was among the companies most negatively affected

during the past decade by the redistribution of wealth from the middle-class (which is the core

customer base for department stores) to the wealthiest 10% of Americans. More than 100

underperforming JC Penney stores are scheduled to be closed soon, and thousands of employees

will be displaced because of the economic difficulties that the company is experiencing.

A strategic analysis of JC Penney and its value chain, distinctive competitive advantages

and its competitive position industry is included. We will examine the financial ratios,

advantages and disadvantages of JC Penney’s structure compared to its competitors in the

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department store industry to determine its profitability and potential for growth. This paper will

also identify JC Penney’s strengths, weaknesses, opportunities, and threats (SWOT analysis).

Proposed are two solutions to improve the current situation for JC Penney and which

hold promise to benefit the company in the long-term. The first recommendation involves

placing independent capsule Trader Joe’s stores (or other grocery stores) inside existing JC

Penney stores to increase foot traffic and potentially increase revenues. Trader Joe’s was selected

due to their convenience foods—prepared family meals and innovative products that should

attract Millennial Moms, one of JC Penney’s target demographic groups. Grocery stores are

commonly situated in shopping malls in Canada and the UK and the concept should work well in

the U.S due to cultural similarities. This strategy supports JC Penney’s goals to provide the

experience of total convenience for its customers, from hair salons to online order pickup to

home repair appointments, and it will now become a destination to pick up groceries for dinner

on the way home after shopping.

The second recommendation is to create pop-up shops within select JC Penney stores that

act as testing grounds for new products. The inventory is delivered, merchandised, and removed

by the designer, which results in reduced financial risk to JC Penney. These pop-up shops will

feature new items each month, such as handbags from the factory lines of famous midrange

designers, or for example, HGTV decorator/Food Channel celebrity chef home goods, depending

on agreements. The purpose of this project is to attract fashionable Millennials, as well as more

upscale customers. These two strategies will help revive JC Penney as a stronger contender in

the industry by increasing foot traffic, attracting younger-generation customers, and subsequently

increasing profit margins, while reducing risk by negotiating contracts where other companies

assume the major responsibilities for inventory product lines, transportation and stocking.

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2.0 EXTERNAL ANALYSIS

The external environmental analysis will focus on a general industry environmental

analysis, a competitive analysis of the industry, five forces analysis, and key success factors.

2.1 General Environment Analysis

This section of the report analyzes the general environment of the department store

industry. Trends in the six major macro-environment industry components are examined,

including demographic, economic, political/legal, socio-cultural, technological, and global

segments.

2.1.1 Demographic Segment

Management analysis firm McKinsey & Company predicts several major trends that will

have a significant impact, with one of these being demographic changes, specifically the

increasing impact of baby boomers, Hispanics and Millennials. Each segment is predicted by

McKinsey to affect the retail market differently:

Baby boomers will impact services and experiences more than products. They head

households that account for 92% of food purchases, 73% of housewares, and 56% of

apparel.

Hispanic households spend 1.5 times more on children’s apparel, fresh food, and

footwear than non-Hispanics, and their retail spending will double over the next 10 years,

eventually accounting for one-fifth of total retail spending.

Millennials will account for one-third of total spending by 2020 and their shopping

preferences are not easily predictable (MacKenzie, 2013).

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2.1.2 Economic Segment

The Department Stores industry is an important contributor to the U.S. economy, with

2016 revenues of $157.4 billion, and wages expense of $21.4 billion. Management analysis firm

McKinsey & Company views the retail industry as experiencing ongoing significant changes at

present and for the foreseeable future; however, the firm believes that changes happen slowly in

this industry and their impact will take time to be felt (MacKenzie, October 2013). Industry

analysts state that the department stores industry will continue to contract but at a slower rate due

to increases in per capita disposable income as the economy improves.

Annual growth from 2012 to 2017 was -3.8% while predicted annual growth from 2017

to 2022 is expected to be -2.5% (IbisWorld, Industry at a Glance, Department Store Industry,

2017). Online shopping with smartphones has changed the way consumers interact with both

online and physical stores, as consumers peruse items for sale in-store and check reviews online

as they shop. The research firm points out that despite the growth of online shopping, brick-and-

mortar stores “should still account for approximately 85 percent of US retail sales in 2025”

(McKinsey, October 2013).

The current US GDP growth rate for fourth quarter 2016 is 1.9 %, down from 3.5% in 3Q

2016. With the industry growth rate lower than GDP, declining numbers of employees, low

revenue volatility, stores closing, declining revenue and strong, growing competitors, the

Department Store industry fits the definition of a declining industry (GDP Press Release,

February 28, 2017, Bureau of Economic Analysis).

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2.1.3 Political/Legal Segment

The Department Store industry is considered lightly regulated with regulations mostly

enacted by state governments. Federal laws include the Federal Consumer Credit Protection Act

(Truth in Lending); The Federal Fair Credit Reporting Act; The Fair Debt Collection Practices

Act, for consumers. State laws include: Fair Labor Standards Act, minimum wage regulations,

and laws regarding working conditions. As an industry that relies heavily on minimum wage

regulation, due to most workers requiring minimal skills and training, any rise in state-regulated

minimum wages strongly negatively affects profits. Congress has also enacted laws against the

formation of monopolies, price discrimination and has instituted environmental regulations to

protect consumers. Tariffs are also levied again imported merchandise. While consumers often

prefer lower-priced goods, cheap imports from China and Mexico demand lower profit margins

and therefore produce less revenue for the industry. (IBISWorld, Operating Conditions, 2017).

2.1.4 Socio-Cultural Segment

Child-labor abuses are a global concern for the fashion and retail industries. A high

proportion of imported goods are manufactured in countries where child labor regulations and

safety regulations are poorly enforced, such as Bangladesh, Pakistan, Cambodia, and China

(Moylan, 2013). Sustainability in terms of harvesting natural fibers or producing synthetic

materials that may harm the environment is another high-profile social concern that affects the

purchasing decisions of many consumers. Authenticity and corporate responsibility are ideals

tied to both labor laws and environmental concerns, along with other issues such as diversity,

body image, and perceived value for price that especially affect purchasing decisions of

Millennials, the most crucial buying segment for the future of retail, due to this group’s size and

income (Figure 1). Not only will Millennials demand that companies act responsibly and

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authentically, they will punish companies that do not meet expectations by refusing to purchase

their goods (Barakat, 2014). Therefore, it is important that companies clearly state their beliefs,

set goals, and publicly state their record on how they have met those social goals (Mak, 2016).

2.1.5 Technological Segment

The evolution of department store cash registers, from ornate brass appliances to

handheld tablets, is a compelling visual representation of the evolution of technological design in

retail. The use of RFID chips in supply chain management, loss-prevention, electronic tracking

of packages to fulfill customer expectations, point-of-sale information gathering, and

exploitation of customer use of mobile phones, are all examples of technology that affects how

department stores do business. Effective use of these technologies can increase profit margins.

Failure to implement can mean almost certain economic loss (IbisWorld, Technology &

Systems, 2017). Department stores adopt technology both to improve the customer experience

overall and to increase the speed of transactions, effectively competing with online businesses,

with the additional benefit of the customer seeing and trying the merchandise before it is

purchased. Farla Efros, president of retail strategy firm HRC Advisory states, “I think the reality

is brick-and-mortar will never go away because of tactile experiences, or the need to look at and

feel products…that’s why a lot of retailers are investing in buy online, pickup in-store” (Mak,

2016).

2.1.6 Global Segment

Department stores form a large part of a country’s cultural identity, but many chains have

crossed borders to establish a loyal following from customers who have travelled internationally

and wish to replicate the experience and obtain goods at home. These international chains are

increasingly competitive with American national chains. As well, imports from Mexico and

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China form a large segment of lower-priced goods that are offered in department stores, which

directly affects revenue (IbisWorld, International Trade, 2017).

2.1.7 Summary of General Environmental Analysis

The above analysis shows that department stores have lost their importance as a means of

acquiring goods in the national economy. The convenience of online shopping, and ability to

compare prices and read reviews, has resonated with consumers, and department stores must

respond to that challenge by integrating technology into the shopping experience—something

many of their customers are already doing. Department stores have the advantage of providing

instant gratification because the items desired are in front of the customer, ready to be touched,

tried on and purchased on impulse. By providing extended choices in offsite warehouses that can

be instantly ordered and shipped for free in two days, the customer is also reassured that their

purchase is exactly what they wanted.

Shopping in department stores is an integral part of American culture, and a favorite past

time in other countries. Experiences in many of the country’s iconic stores are shared and

treasured. Their imminent demise is more a confirmation of other losses—centralized

communities with mixed use buildings that people are now eager to reembrace after the move to

suburban sprawl left so many people feeling isolated and disconnected from community life. By

reinvigorating urban centers, embracing consumer-friendly technology, and reminding

consumers that department store shopping is a pleasurable, social experience, industry analysts

believe the department store industry could see a resurgence of profitability in the not-too-distant

future (Jinks, 2017).

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2.1.8 Driving Forces

The external environmental analysis of the department store industry reveals that there is

cause for concern if the industry does not respond to the driving forces of technology, namely

online shopping and fast, free shipping that amounts to almost-instant gratification. Additionally,

the department store industry must consider the growth of a new industry, one-stop Supercenters

and Warehouse Clubs that carry everything a consumer could desire, including groceries, in

bulk, at very cheap prices, but lacking personalized customer service. By creating pleasurable

environments that people wish to explore and experience, department stores can compete by

providing an element of social experience that online shopping cannot. They can also provide

goods conducive to impulse purchase, especially the department stores that cater to lower

budgets.

With society on the edge of impending change, as Baby Boomers age and decide to

acquire less goods, department stores must satisfy the demands of Millennials and Generation X,

before these demographic groups willingly part with their money. Both groups are very different

from the Baby Boomers who grew up with department stores as destination experiences. By

getting to know their target demographics for the upcoming decades, department stores can

provide the consumer goods that will bring in these groups, who demand social awareness and

environmental responsibility from the businesses they patronize, and who value new experiences

more than acquisition of goods.

2.2 Industry Analysis

2.2.1 Description of the Industry

The Department Stores industry is analyzed in industry reports under NAICS 452111,

“Department Stores, except discount department stores (primary industry).” Many of the

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businesses in this industry are also included in NAICS 454113, Mail Order Houses or 45411a (E-

Commerce & Online Auctions in the US. The Department Stores industry is in the decline life-

cycle stage, with high competition, low revenue volatility and high concentration level

(IbisWorld, Department Stores, 2017). This combination of factors, which would deter new

startups and further contribute to the decline stage, supports the prevailing view that the industry

has been in decline for several years with revenues continuing to fall for the near future at a rate

of -3.8% (IbisWorld, Department Stores, 2017).

The Department Store industry (excluding discount stores) consists of a range of retailers

that extends from high-recognition brand-name stores selling luxury goods to national and global

chains targeting middle and lower-income families. Many stores sell house brands to compete

with national brands and have expanded from brick-and-mortar businesses to include ecommerce

sites of their own to effectively compete with purely online shopping giants such as

Amazon.com, and (for used goods) eBay.com, as well as other online businesses that direct

marketing at niche markets, such as etsy.com (handmade, personalized, low volume goods), and

retail aggregators, such as Google Shopping.

The dwindling fortunes of the department store industry are a widespread phenomenon.

In 1950, there were 600,000 stores in the United Kingdom; in 2012, 290,000 (Jinks, 2017). Store

closings in the United States are common as retailers struggle to regain pre-recession per-square-

foot profitability. Industry-wide, 800 department stores from major chains would have to close to

regain productivity (Wahba, 2016a.) David Jinks, in his article, “2030: the demise of the high

street,” believes all is not lost yet. He proposes that department stores satisfy social needs and

could be central to reinvigorating town centers, which were abandoned as families moved to the

suburbs. Jinks sees town centers as mixed-use, with homes built in commercial areas to bring

people back to urban centers, and “reimagined department stores…that return to a Victorian

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model, with shopping becoming a social experience again” (Jinks 2017). While department

stores may be less of a social hub now, online businesses such as Google and Amazon are

beginning to see the value of hands-on experience and are considering opening brick-and-mortar

stores (Poggi, 2012).

While one of the reasons for the contraction in the industry is the change in consumer

shopping habits from department stores to online shopping, department stores are also facing

increasing competition from their own bargain versions, and from department stores that have

morphed into Supercenters by offering groceries, which moves revenues to other industries.

(IbisWorld, Industry Performance, Department Store Industry, 2017). Consumers appear to be

chasing convenience by preferring one-stop shopping in person, so are purchasing groceries,

household goods and apparel at one location, or switching to online shopping. As a comparison

to the Department Store industry’s negative growth, expansion was positive in the highly

competitive, mature Warehouse Clubs & Supercenters industry, with annual growth from 2011-

2016 at 2.1% and predicted to be 3.3% for the five-year period from 2016-2021. (IbisWorld,

Industry at a Glance, Warehouse Clubs & Supercenters, 2016).

This decline means that department stores no longer dominate the retail industry. In 1990,

six of the retailers on the National Retail Federations’ top ten list were department stores. Wal-

Mart, a discount store, was at the top of the retail industry list in terms of revenue, with $32.6

billion in 1990, compared to 2016 revenues of $353.1 billion. On the 2016 list, Wal-Mart still

ranks at number 1, far outpacing grocery chain Kroger, which rose from number 5 in 1990 to

number 2, in 2016, with revenue increases from $32.1 billion to $103.8 billion. The next three

spots on the 1990 list of top retailers are no longer on the top 10 list—Kmart, Sears, and

American Stores have fallen off, as have J. C. Penney and May Department Stores. Only one

department store remains, Target (formerly Dayton-Hudson on the 1990 list), at number 6, with

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revenues of $73.2 billion (McKenzie, 2013; National Retail Federation, 2016). Significantly,

several grocery store chains have expanded their reach, from selling primarily groceries to

offering clothing, shoes, housewares and home décor, a reverse strategy of the Wal-Mart

Superstores expansion into perishable goods, which may prove yet another threat to department

stores. (Business Insider, September 14, 2015).

Department stores are responding to the changing landscape by expanding their online

retail sites to accommodate the change in consumer preferences. A study by eMarketer ranked

the top 15 US retail websites by visit share in December 2015. Amazon ranked first, with 34.5%;

Supercenter & Discount industry leader, Wal-Mart, ranked second, at a distant 6.03%, while

traditional national department stores who have expanded into online sales had rankings of third

(Target, 3.18%); sixth (Kohl’s, 1.68%); seventh (Macy’s, 1.59%); eleventh (Sears, .98%); and

twelfth (J C Penney, .96%) (eMarketer, October 24, 2016).

2.2.2 Industry Dominant Economic Features

The industry is characterized by high levels of competition, low revenue volatility, and

high concentration, as defines an industry in decline. The reasons for the decline include loss of

revenue to online retailers and Supercenters who compete by selling groceries, thus moving

revenue to a different industry; however, many of the existing Supercenters are former

department store chains who expanded to remain competitive (IbisWorld, Industry at a Glance,

2017).

The Department Store industry experiences greater operational costs than does the online

retail sector, due to energy costs throughout its supply chain and distribution channels, owing to

the need to supply goods to stores and stock distribution centers. like online retailers, if they also

offer that service. Department stores have construction and maintenance costs for their many

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locations (or lease costs), and wages, due to its greater need for sales assistants. While discount

department stores can operate with fewer sales assistants due to lower customer expectations,

higher-end stores must provide more personalized service, meaning employing sufficient staff to

meet the service level that management promises and consumers expect from the department

store experience.

These higher operational costs for the Department Store sector reduce the ability to

compete with online retailers. The average wage per employee has remained almost unchanged

since 2008 ($21,277), is currently $21,539, and is predicted to remain stable until 2022 (est.

$21,294), while the per capita disposable income rose from $36,082 in 2008 to $44,023,

predicted by 2022. This means that the average yearly income in retail is less than the average

per capita disposable income, making the retail trade an unattractive industry for a career for

many workers. During this same period, employment in the industry decreased from 1,292,007

(2008) to 998,012 (2016) and is predicted to decrease to 867,831 in 2022, while revenue per

employee dropped from $175,000 in 2008, to a predicted $159,800 in 2022. The number of

establishments is expected to decrease from 8,813 in 2008, to 7,107 in 2022, and enterprises

have decreased from 30 to 25 and are expected to fall to 22 in 2022 (IbisWorld, Key Statistics,

2016).

2.2.3 Market Size

Department store industry revenue increased until 2012, when it dropped from $879

billion in 2011 to $700 billion in 2012 (IbisWorld, 2017). The sharp decrease correlated with the

decrease in the number of companies in the industry during this same period. This was the lowest

point for overall revenue since 2006, and the decline continued. In 2013, revenues decreased to

$385 billion (Gale Business Insights). The number of businesses in the department store industry

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grew slowly, but steadily, until the economic recession in the mid-to-late 2000s, then started a

swift decline from 271 companies in 2009 worldwide to 91 companies in 2013, which was more

of a free fall. Since 2013, there has been a slight recovery—in 2015 there were 126 companies in

this industry (Gale Business Insights). Revenues have also rebounded to $587 billion, which is

not a full recovery back to the healthier numbers of 2011, but does show a significant and

promising increase. Figure 2, Appendix, shows revenue in the industry, and Figure 3 breaks

down the change in the number of companies over time.

Major product and service segments for this industry include: Women’s clothing and

footwear (26.4%, $41.55); Drugs and cosmetics (20.70%, $32.58); Home goods and appliances

(18.7%, $29.43B); Men’s clothing and footwear (13.6%, $21.41B); Children’s clothing and

footwear (11.4%, $17.94B); Non-grocery food items (4.3%, $6.77B); Toys and hobbies (3.0%,

$4.72B) and Other (1.9%, $2.99B) for a total industry value of $157.4 billion (IbisWorld, 2017)

(Figure 4, Appendix).

2.2.4 Market Growth Rate

Annual growth from 2012-2017 is predicted to decline -3.8%, but the decline could slow

to -2.5% from 2017-2022. Although in decline, the industry generates revenues of $157.4 billion

with profits of $10.7 billion and pays wages of $21.4 billion (IbisWorld, Products and Markets,

2017). Each of the segments affects the growth rate in different ways (IbisWorld, Products and

Markets, 2017):

The Apparel and Footwear segment is a group that includes Women’s, Men’s, and

Children’s and remains popular in the department store industry because people like to try on

these articles. This combined segment is expected to remain strong for the department store

industry because of this advantage over online retailers. This segment supports a slower rate of

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decline as industry revenues increased $10 billion or 5.6% from 2015-2016 (IbisWorld, Products

and Markets, 2017). However, it should be noted that once a consumer is familiar with a product,

that apparel brand and size can be reliably ordered online, which means a potential movement to

online sales.

Drugs and Cosmetics are increasingly available through specialized stores, such as

Sephora, which adds to competition for department stores. Sephora offers a full-service

cosmetics experience, with in-store makeovers and consumer-friendly apps, which Millennials

prefer to traditional department store shopping. This competition positively affects total

department store industry revenue and slows decline. Revenues in this segment increased $9.5

billion or 6.6% from 2015 – 2016 (IbisWorld, Products and Markets, 2017; Reay, 2017).

The Home Goods and Appliances segment demand is closely related to new housing

starts; however, the number of industry operators has limited expected growth, which also

positively affects total department store industry revenue. From 2015-2016, revenues increased

$2.6 billion or 2.3% (IbisWorld, Products and Markets, 2017).

The Toys and Hobbies segment demand has decreased in department stores as

consumers switch to purchasing online, which negatively affects overall industry revenue and

contributes to decline. From 2015 to 2016, revenues in this segment declined $5.4 billion or

3.2% (IbisWorld, Products and Markets, 2017).

The Other products segment includes “non-grocery food items, such as confectioneries

and sodas; household supplies, such as gift wrapping and cleaning supplies” (IbisWorld,

Products and Markets, 2017). These products contribute to the decline of department store

industry revenue, because consumers are now purchasing at department stores that have

transitioned to warehouse clubs or they shop for the products at grocery stores. From 2015-2015,

revenues declined $23.7 billion dollars or 14.4%. (IbisWorld, Products and Markets, 2017)

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2.2.5 Industry Trends

The Department Store industry will continue to decline as sales are lost to online

commerce, and department store chains convert to Supercenters to compete with established

Warehouse Club brands. If disposable income increases, as is predicted, decline should stabilize.

Opportunities for growth exist, as marketers shift focus from acquisition-eager Baby Boomers to

include new demographic groups with different values and expectations, which could fuel a

resurgence for department stores who know how to cater to these unpredictable Millennials,

Millennial Moms, and the booming, brand-loyal Hispanic market (MacKenzie, 2013).

2.2.6 Five Forces Analysis

This section of the report will focus on the five competitive forces in the department store

(except discount stores) industry: (1) Threat of New Entrants, (2) Power of Suppliers, (3) Power

of Buyers, (4) Intensity of Rivalry

2.2.6.1 Threat of New Entrants

The threat of new entrants is low. The industry is declining, so starting a new

department store chain in an area where foot traffic would bring in sufficient revenue to compete

against online shopping means that the new location would have to be in an urban area with

associated high rent or high construction costs. Since the market is already considered to be

highly concentrated with high competition, it is not an easy market to enter, due to high costs of

entry, i.e. acquiring inventory. Technology Change is medium, because technology costs are

limited to loss prevention and point of sale electronics and software. The threat of entry can be

moderate if existing brands create alternative Supercenter sub-brands that cannibalize their own

stores but also offer a segue into the more profitable Supercenter and Warehouse Club Industry,

such as Wal-Mart with Sam’s Club.

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2.2.6.2 Power of Suppliers

The power of suppliers is high for brand-name goods that buyers prefer over all

substitutes, but these are very few products by comparison to the number of items offered for

sale in the industry, and demand may only be high periodically at certain times of the year (e.g. a

certain toy during Christmas or roses on Valentine’s Day or Mother’s Day). Otherwise, power of

suppliers is low for most goods. Department stores in the luxury range have high profit margins

and work with high-in-demand suppliers who can raise prices on their luxury goods and demand

exclusive rights to prime store locations and displays. Moderately-priced department stores often

operate on thin margins. Supplier price increases can have a negative impact on the store’s

profitability. The high competition level in the industry may give suppliers an edge if they offer a

product that captures the attention of the desirable young adult market and have negotiating

power with competing retailers. An example is when a toy becomes the star of the Christmas

season and there is a run on the product wherever it appears.

2.2.6.3 Power of Buyers

The power of buyers is high. Buyers for consumer goods sold in department stores could

be looking for the best price, or merely looking at an item that they want to buy online, or could

be impulse buyers who have no idea what they want and need to be wooed. Switching costs are

low to non-existent. There are many brands of clothing, for example, brands of jeans that are

available everywhere at different prices, and many other types of pants can substitute for them,

which holds true for almost any other article of clothing, type of home décor, or appliance.

2.2.6.4 Threat of Substitutes

The threat of substitutes is high. Substitutes for department stores include online stores,

craft boutiques, designer stores, hardware stores to make items yourself, craft and sewing stores,

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discount department stores, charity shops and the corner store. Any place or event that sells

goods or services can substitute for anything that a department store can offer. Its appeal lies in

its collection of goods under one roof with a certain “look” that a consumer can rely on, identify

with, and become a loyal customer. That loyalty could disappear in an instant with a bad

experience at the store, or with a product.

2.2.6.5 Intensity of Rivalry

The intensity of rivalry is high. Department Store industry is highly concentrated, in the

declining life cycle stage, with low revenue volatility, medium barriers to entry, and low capital

intensity. Existing rivalry is high due to saturation and near identical goods sold within

competitors’ stores. Stores compete within the industry, as well as with potential substitutes,

especially online stores. With six stores forming 92% of the market share, rivalry is high.

Department stores must find a way to differentiate themselves from their rivals, either through

auxiliary services, delivery features, loss leader sales, exclusive celebrity agreements, and house

brands (IbisWorld, Department Stores, 2017).

2.2.6.5.1 Industry Competitors

JC Penney’s consumer base is low-to-moderate income, and much older than the

desirable youthful group that spends money on clothes and disposable goods. According to a

2013 survey by Prosper Business Group (Stock, 2013) almost half of JC Penney’s customers are

over 55 years old, while close competitors Kohl’s and Macy’s over-55s comprise just 36% of

their customer base. Only 20% of JC Penney’s customers are under 35, while market leader

Target’s 35-and-under group comprise 36% of their customer base. JC Penney’s customers are

not wealthy, either. 29% of their customer households earn under $35,000 with only 13% over

$100,000 (Stock, 2013).

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Revenue from each of the three closest competitors has remained stagnant. JC Penney

had revenues of approximately $12 billion every year from 2012 up to and including forecasts

for 2017. Macy’s revenues for the same period hover around $25 billion each year, and Target,

steady at $60 billion over the same period. Operating income varies considerably, but strong

competition between the rivals is reflected in their unvarying revenues over an identical period.

(IbisWorld, Department Stores, Major Companies, 2017).

2.2.6.5.2 Rivals Anticipated Strategic Moves

Rivals Macy’s, Target, and Kohl’s must increase revenues, so may decide to join the

Supercenter and Warehouse industry. Target has already made moves in that direction, which

may account for its position as industry leader. While Target has a youthful, energetic persona,

good food, Starbucks kiosks, and interesting home goods brands, Kohl’s, Macy’s and JC Penney

are far behind in terms of style, and perceived energy and innovation. Macy’s is still the epitome

of a traditional department store, with its traditional layout and classic brand names. Kohl’s is

nearly indistinguishable from JC Penney in its clothing brands, jewelry offerings, and price

points. If they decide not to move into the Supercenter industry, they must increase customer

experience (expensive and difficult) or offer online shopping sites that compete with leaders in

that sector. Figure 5, Appendix, provides the strategic group analysis of the main competitors in

the US department store industry. Figure 6, Appendix, provides the market share for each

competitor.

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2.2.6.6. Table 1 - Summary of Five Forces Analysis

Summary of Five Forces Analysis

Brick-and-Mortar Store eCommerce Expansion Expansion into Perishable Goods

Now Future Now Future Now Future

Buyer Leverage High High High High High High

Supplier Leverage Low/High Low/High Low Low Low Low

Threat of New Entrants Low Low High High Moderate Moderate

Threat of Substitutes High High High High High High

Intensity of Rivalry High High High High High High

Profit Potential Low/Moderate Low/Moderate High High Moderate Moderate

2.2.7 Industry Key Success Factors

Determining Key Success Factors for the Department Store industry involves considering

whether department stores need to transform and therefore enter another industry (Supercenters)

or if they need to revitalize the industry. Since there is a move towards reviving town centers,

which offers hope for the department store as a central part of that reimagining, extreme

transformation may be premature. IbisWorld.com offers several Key Success Factors, of which

the most pertinent for the future health of the industry are:

1. Ability to control stock on hand – to provide an excellent customer experience and

immediate satisfaction to compete with online experience.

2. Attractive product presentation – to stimulate customer interest and differentiate the

industry in a positive way from online shopping.

3. Having a wide and expanding product range – to provoke impulse buyers to visit and

desire the goods at hand rather than searching online for cheaper alternatives

4. Ability to expand and curtail operations rapidly in line with market demand – to optimize

variable costs and stay profitable while keeping their reputation as excellent shopping

destinations.

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3.0 INTERNAL ANALYSIS

3.1. Organizational Analysis

3.1.1. Corporate Mission

J. C. Penney Company, Inc. (JC Penney) is one of the nation's largest home furnishings

and apparel retailers in the United States with 1,021 department stores in 49 states and Puerto

Rico, with a broad assortment of products from a prominent portfolio of private, exclusive and

national brands. The company was founded in 1902 and is headquartered in Plano, TX. JC

Penney sells family apparel, jewelry, shoes, home décor, furnishings (some custom), electronics

and appliances at both brick-and-mortar stores and online (in its earlier history, mail-order sales

preceded online sales). JC Penney is on a mission to make certain every customer's shopping

experience is worth their effort, money and time, whether it is shopping at one of more than

1,000 store locations or visiting jcp.com. JC Penney’s three strategic priorities are: strengthening

private brands, becoming a world-class omnichannel retailer, and increasing revenue per

customer.

3.1.2. Products and Services

JC Penney offers a wide range of family, business and leisure apparel, shoes, home décor,

appliances and furnishings in-store and online at competitive prices, directed at middle-market shoppers.

Many of its products have earned consumer-valued awards such as the Good Housekeeping Seal of

Approval, attesting to customer satisfaction in terms of value (Durham, 2015). JC Penney is a full-service

department store. In attempt to revamp its product lines, JC Penney is adding beauty products, toys,

appliances and home goods to appeal to its customer base.

In addition to departments as listed above, in-store boutiques provide services such as

hair styling salons, optical, portrait photography and custom decorating services. The company’s

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website is fully integrated with its physical stores and customers can find the same items online,

often with extended selections available to order and have them delivered to their homes. JC

Penney’s mobile application of its website is available but does not have a strong preference to

consumers. Orders can be placed through the website or JC Penney app using mobile

smartphones, instore kiosks, and at home. JC Penney’s current focus in on shifting the store

products and services to be better in line with what the modern customer wants.

3.1.3. Leadership & Organizational Culture

In 2011, JC Penney hired Ron Johnson as CEO to revitalize the company, which had

declining revenues, due to the company’s image as frumpy and consumers favoring online

shopping over brick-and-mortar. Seventeen months later, Johnson was fired and JC Penney is

still recovering from his changes, which led to a decrease in revenues of 51%, a workforce

reduction of 40,000 employees, a huge $5.35 billion debt load from store renovations, and a

plummeting share price. Johnson made changes too quickly, retail industry experts decided.

(Tuttle, 2013; Wahba,2016b).

Johnson eliminated many of JC Penney’s private brands (and created others), which were

dear to JC Penney’s customer base. He did so without testing concepts or surveying customer

preferences and ignoring JC Penney’s traditions and history (Tuttle, 2013). JC Penney is selling

assets, including land and buildings at its home office site. JC Penney’s goal is to reduce its debt-

to-EBITDA ratio from its current 5.4 to less than 3 (Figure 7, Appendix). Under new CEO

Marvin Ellison, the share price has increased 50%, but has yet to regain pre-Ron Johnson levels.

(Wahba, 2016d). At the end of 2010, just before Johnson’s hiring, JC Penney was selling at $35

per share and now trades at approximately $6 (JCPenney.com, 2017). JC Penney has recently

added new management titles in recognition of the new roles needed to take JC Penney back into

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profitability and revamp its image to keep the current Baby Boomer customer and attract the

Millennial Moms and their children (Figure 8, Appendix).

3.1.4 Structure and Strategy

3.1.4.1 Current Structure & Strategy

JC Penney operates as a Best-Cost Provider, which gives customers more value for their

money by satisfying buyers expectations on quality, features, performance and service attributes

while beating their price expectations. JC Penney originally provided customers with value

products at a lower cost through coupons and discounts and shifted to an everyday low price

tactic. JC Penney offers a mid-range selection of goods, superior in quality to those typically

offered in dollar store and discount warehouse clubs, but lower quality than luxury brands. JC

Penney’s selection is comprised of special sized apparel such as big and tall, plus size and petite,

and a significant proportion of in-house brands exclusive to JC Penney. JC Penney has been

offering private brands for more than 100 years, generating approximately half of its revenue

from private labels (Wahba, 2014).

3.1.4.2 Components of Strategy

JC Penney is now focusing on regaining its market share by reinstating sales and coupons

to win back former customers, increasing in-house boutiques and services, creating online

storefronts to attract online customers, and adding additional private brands to their portfolio. JC

Penney’s main advertising strategy is through television, online advertising, magazines, catalogs

and emails. JC Penney has attempted to compete with online retailers by improving its

omnichannel retailing, offering same-day in-store free delivery (purchases over $25) and free

shipping anywhere (purchases over $99). JC Penney continues to expand its private brand

portfolio to attract Millennial Moms and add Sephora boutiques to additional stores. JC Penney

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eliminated its dependency on third parties and reduced their costs by operating through a

distribution network which allows them to achieve higher margins by operating in a cost-

effective manner and provide customers with lower prices at the same time.

3.1.4.3 Competitive Strength

In JC Penney’s core merchandise, 50% is private label and the rest is exclusive brands

that customers know and trust such as Nike, Levi and Dockers. J.C. Penney’s private brands J.C.

Penney, JC Penney, J.C. Penney Home Collection, Arizona Jeans, Liz Claiborne, Okie Dokie, St

John’s Bay and Stafford to name a few have all generated gross profit margins that are 3-5

percent higher than national brands. JC Penney has developed partnerships with upscale

cosmetics and clothing retailers, and has also attracted a strong customer following on their

website. JC Penney also sells through online and mobile channels which allows them to reach a

market that may not enjoy or have the time to visit a store location. They also allow customers to

sign up for an email subscription which will send coupons, promo code to their email or notify

them of upcoming sales or promotions. They have similarly initiated a rewards program in order

to give customers an incentive to return, make larger purchases, or shop more frequently at the

store by offering them the benefits of additional discounts.

Table 2. Competitive Strength Scores

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3.1.5 Summary of Organizational Analysis

The department store industry is considered an industry in decline. The market is not

attractive to newcomers, and competition is high for the current survivors. JC Penney is one of

the top ten in terms of market share, despite its calamitous redesign during CEO Johnson’s

tenure. The company seems to be recovering under CEO Ellison’s direction and recently

reported positive net income for the first time in many quarters. Because of the company’s

current market share, established position, and recent turnaround, this is still a desirable industry

for this company.

3.2. Analysis of Firm Resources & Capabilities

3.2.1. Tangible and Intangible Resources

The company operates 1,021 department stores in 49 states and Puerto Rico, 417 of

which are owned, the remainder leased. Total retail space is 103.3 million sq. ft. The company

owns 13 distribution centers dedicated to various activities (distribution of store merchandise,

online fulfillment, furniture, etc.) for a total of 15,760,000 sq. ft. (JC Penney, Form 10-K, 2017).

JC Penney purchases merchandise from 2,600 domestic and foreign suppliers and maintains

buying and quality assurance offices in 10 foreign countries (JC Penney, Form 10-K, 2017). The

company employs 106,000 full- and part-time employees (JC Penney, Form 10-K, 2017). JC

Penney announced that 138 underperforming stores will start liquidation proceedings in April

2017 (JC Penney Press Release, Feb 24, 2016). Infrastructure and technology spending are

greatly hindered by the amount of debt maturing in relation to free cash flow. In 2019, JC

Penney estimates that it will have $450 million free cash flow compared to $400 million in

unsecure debt maturities (JC Penney, Form 10-K, 2017).

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3.2.2. Value Chain Analysis

A company’s value chain consists of the primary and secondary activities that a company

performs internally to bring value to a customer (Figure 9, Appendix) (Thompson, 2016; Arline,

2015). JC Penney uses its well-established supply chain, distribution channels, a strong sales and

marketing scheme and customer service as its primary activities in its value chain. The secondary

activities are human resources, general administration, and information technology because the

workers providing all those primary activities need support from corporate. JC Penney has

vertically integrated its supply chain with private labels. This also means that JC Penney can

offer a lower price and sales on the private brands as they are cheaper for JC Penney to create.

This adds significant cost savings to the customer, but also increases the profit margin and

therefore revenues for JC Penney.

JC Penney’s primary activities consist of:

Inbound Logistics – the receiving, storing and distribution of goods from manufacturers

to JC Penney’s distribution warehouse. JC Penney operates deconsolidation centers, which

breakdown the manufacturers’ shipments, then ship to distribution centers and online fulfillment

centers throughout the US (Figure 10, Appendix). The company procures merchandise from

2,400 foreign and domestic suppliers, providing flexibility in suppliers (JC Penney, 10-K, 2016).

With such a wide network of suppliers, it can shop around for the best deal on an item to supply

to its customers. With distribution centers dedicated to specific segments of the stores’

operations, JC Penney can optimize each location for efficiency (JC Penney, Analysts Day

Presentation, 2016).

Outbound Logistics – the goods are shipped to stores, customers or to online fulfillment

centers. If an item is not available in its online fulfillment center, it can find the item in a store

and ship to the customer, or another store. Data analysis will help locate items and enable

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decision making for the best location from which to ship, supporting JC Penney’s goal of

meeting customer needs and competing with online retail shipping speeds.

Marketing and Sales – advertising, sales, sales associates, pricing and customer

relationship management are all part of the omnichannel experience that forms an integral part of

JC Penney’s strategy (JC Penney, Analysts Day Presentation, 2016).

Services – activities in support of the products sold, plus specialized boutique services,

such as salons and home repair services. JC Penney is offering services, such as its InStyle Salon

partnerships, appliance installation, and home services online storefront to differentiate its

business from online retailers, to bring potential shoppers into the store after service is complete

and to improve customer retention (JC Penney Analyst Day Transcript, 2016).

Support activities include: Procurement – activities involved in contracting and

delivering the manufactured goods to distribution warehouses. JCP owns an international

purchasing subsidiary that maintains buying and quality assurance offices in 11 foreign

countries. Its network of 2,400 domestic and foreign suppliers gives JCP flexibility to source

from the most advantageous supplier.

Technology Development – supports all activities from Procurement to Inbound

Logistics to Firm Infrastructure to Service and enhances the customer experience through the

JCP strategic pillar of omnichannel support. JCP has fully integrated Oracle software into its

operations and customer experience (Hildebrand, 2015). It has also transitioned from

automatically shipping the same number of each item to every store and now relies on data-

driven inventory information for shipment ordering information (Wahba, February 24, 2016).

Human Resource Management – hiring the right employees to lead and support JCP’s

vision of warrior spirit customer associates, whose goal is to bring satisfaction and value to all

customers. JCP celebrates its long-term employees with a bronze medallion award and even new

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appliances for long-term employees. The company refers to its associates as having a “warrior

spirit” bringing them into the equation for success, while also increasing transparency by

admitting that they have a battle on their hands.

Firm Infrastructure – all administrative personnel and management, the structure of the

firm, including reporting lines, finance, organization, and quality control. JCP has recently added

new management titles in recognition of the new roles needed to take JCP back into profitability

and revamp its image to keep the current Baby Boomer customer and attract the Millennial

Moms and their children (Figure 7). At every point in the value chain, JCP has built in flexibility

to allow making data-based decision to optimize value for its customer.

3.2.3. Core Competencies and Sustainable Advantages

JC Penney’s main core competency is its private brand selection in the categories of

apparel, shoes, home goods and jewelry. JC Penney can tweak almost any aspect of the brands to

increase margins, or to keep prices below the limit that its target customer will accept. Because

of JC Penney’s large network of suppliers, its revenue, market share, reputation, number of

stores, and associated bargaining power, private brands are JC Penney’s core competency and a

sustainable advantage that a competitor would find difficult to overcome, due to the exclusivity

of the lines to JC Penney. Along with private brands, JC Penney also offers convenience through

its instore salons and boutiques. It concentrates on offering an omnichannel experience, or the

ability for a customer to find exactly what she needs either online or instore and having the item

shipped quickly for same day pickup.

3.2.4. Summary of Firm Resources & Capabilities

JC Penney’s resources include a wide distribution network that includes foreign and

domestic resources, large market share, and a historic reputation as an icon of the American

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retail industry and a fixture of American culture. It is an honorable brand that seems a little

dusty, but that deficit is being addressed. There is a strong affection for the brand and a solid

customer base that returns to the store because it is reliable and provides value and convenience.

The company has had difficult financial times for about 10 years; the worst being experienced in

the last 5 years. Its recovery strategy consists of three pillars: private brands, omnichannel

experience, and additional revenue per customer. Of these, private brands and the online

experience are resources that could be assessed for competitive power and are supported by all

JC Penney’s resources and capabilities. JC Penney must rely on the customer’s perceived value

of those brands to maintain a sustainable competitive advantage, by ensuring the quality received

for the price paid exceeds the customer’s expectations on a regular basis. With all JC Penney’s

resources and capabilities focused on doing exactly that, JC Penney may be able to sustain a

competitive advantage through its private brands.

3.3. Financial Analysis

3.3.1. Valuation Analysis

JC Penney has not paid a dividend to shareholders in over five years and the book value

per share is $4.39 based on the 2017 balance sheet. There is no dividend payout expected for the

2018 fiscal year either. This is not currently a strong stock and has steadily declined from a

recent high on January 4, 2017 of $8.47 to around $5.85 lately, just over half as much as it was

worth a year ago, about $10 per share (Figure 11, Appendix) (MarketWatch, 2017).

3.3.2. Growth Analysis

JC Penney’s gross profit margin has hovered around 3.5% for the past three years with

2016 being the strongest fiscal year in terms of sales revenue verses cost of goods sold.

According to IBISWorld, there was 2.9% drop in revenue from the 2016 to 2017 fiscal years, but

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an increase in operating income of 3.7% over this same period. JC Penney also has the largest

chain of salons in the US with currently 850 locations. With JC Penney bringing back appliances

to gain foot traffic in the stores and the partnerships with Sephora, Nike and Adidas to have

small in-store boutiques, the shift back to sales and coupons may go even further to bring back

the previous customer base. If JC Penney finds ways to bring in Millennials with things that

people want to buy rather than trying to sell whatever they happen to have, they may be able to

bring in another generation of price-conscious shoppers.

3.3.3. Profitability Analysis

The operating profit margin has improved tremendously over the past three years with the

biggest increase being in the 2017 fiscal year with the first positive margin in a few years. JC

Penney’s operating margin is 3.15% which has improved from the negative numbers in the past,

but is worse than department stores industry average operating profit margin of 4.79%. The net

profit margin has seen the same sort of increase and while it is now .00008 cents per dollar of

sales in profit it is up from negative cents per dollar of sales in the prior two fiscal years. The net

return on assets is also much improved at .0001 cents per dollar of assets used and while this is

still very low, it is positive which is more than can be said for prior years. The department store

industry has an average net return on assets of 5.7 for April 2015 to March 2016 which is many

times more than JC Penney alone (IBISWorld, 2016). This means that while the industry is

reported to be struggling JC Penney is struggling much more than others in terms of profit after

taxes divided by total assets. JC Penney’s return on stockholders’ equity is the strongest of the

profitability ratios other than gross profit margin because it is currently at .0007 cents per dollar

of stockholders’ equity used.

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3.3.4. Financial Strength Analysis

JC Penney has maintained a strong current ratio in that they keep current assets and

current liabilities in line with each other. However, in the past two years this ratio has slid from 2

to 1.69 which is up a little from 2016. This means that the company could turn assets into cash

when it needs to cover liabilities which it is currently doing by trying to sell their corporate

headquarters. JC Penney lines up closely with the industry median of 1.6 for April 2015-March

2016 (IBIS World 2016). The final ratio that helps to provide a clear picture for JC Penney’s

current creditworthiness is the times-interest-earned ratio or coverage ratio which most lenders

require to be at least 2.0 and JC Penney’s is positive in 2017 for the first time in three years and

is only barely over 1.0. They are just now able to cover the interest of some of their long-term

debt and this along with all the previous ratios in this section speaks their lack of

creditworthiness. They are too risky to lend to and has caused them to close stores and sell off

their headquarters to raise funds.

JCP’s credit rating was severely affected by the debt incurred under CEO Johnson.

Moody’s downgraded JCP from Baa1 in April 2009, to B2 in May 2013. It has upgraded since

then to Ba1 in September 2016. Moody’s states that the upgrade reflects the company’s

“continued improvement in operating performance in the face of challenging market conditions

for the department store sector (Figure 12, Appendix) (Moody’s Investors Service, 2016).

3.3.5. Management Efficiency Analysis

Ratios of management efficiency shows how efficient company’s management run the

company. It indicates if company mange inventory efficiently, if company has too many or too

few assets. inventory turnover ratio measures how fast a company sells its inventory. JC

Penney’s 2017 inventory turnover is 2.59 which is worse than department stores industry average

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inventory turnover ratio of 6.14. CEO Ellison is a supply chain manager and inventory specialist

by training and experience, which means that he can help improve the out of stock inventory

problems that have plagued JC Penney in recent years. One major issue that is being corrected is

“demand-based logic” or shipping replacements for what is being sold using real sales data and

not a set number monthly regardless of demand (Wahba, 2016d). Asset turnover ratio measures

the efficiency of company’s assets to generate revenues. JC Penney’s asset turnover ratio is

1.34. It is worse than department stores industry average asset turnover ratio of 2.12. Goods are

now more readily available whether it is online or in-stores for customers to purchase. In-store

pick up was also added recently so that customers can shop online and then pick up their items in

store. Ellison is working to make JC Penney less intuition driven and more data driven with real

time numbers and in store visits by management to make sure that their ideas and innovations

work in real spaces (Wahba, 2016d).

3.3.6. Summary of Financial Analysis

Overall JC Penney is still recovering from the recession of recent years and poor

management decisions. It has a negative growth rate of 0.62% and a below industry standard

operational margin of 3.15%. The net profit margin is almost zero. JC Penney has serious issue

with its long-term debt obligations. JC Penney’s long-term debt/equity ratio is about 5 times

greater than the industry standard, and the debt to equity ratio is dangerously high at 3.57. Both,

inventory and asset turnover are low compared to competition however. While the recovery is

slow and lumbering, it is picking up speed as the net profit margins and return on stockholders’

equity improve as well as cash flows. The 2017 fiscal year which ended in January was the first

to be profitable in nearly 5 years, but still a long way from providing dividends to shareholders

or increasing JC Penney’s creditworthiness. The net income last year of nearly $1 million is a

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substantial increase from the -$513 million net income for 2016, or at its worst, the net income of

-$1.39 billion in 2014 (JC Penney income statement, 2017). The road to recovery is long, but

with many of the new initiatives and data driven plans, JC Penney has the chance to come out of

this slump.

4.0. STRATEGIC ISSUES ANALYSIS

4.1. Critical Challenges

JC Penney has a few major challenges. The department store industry is shrinking in size

partially because conventional department stores keep losing ground to internet retailers. The

consumer switch from physical stores to internet outlets is one of the main driving forces in the

industry. The traditional customer base of JC Penney is gradually changing. Per Kyle Stock

writing for Bloomberg, almost half of the customers shopping at JC Penney are over 55 years old

and 29% of them make less than $35,000 per year. This does not compare well to Macy’s or

Kohl’s where only 36% are over 55 years old and only 20 or 19% respectively have an annual

income below $35,000. This means that in comparison JC Penney customers tend to be older and

poorer, which helps to explain the success of coupons and sales. The sales numbers reflect two

things “They are relatively price sensitive; 2) they are probably more set in their shopping ways

than customers at discount stores or competing department stores” (Stock, 2013). Because JC

Penney and many department stores have traditionally skewed a little older, there is a need for

stores to increase their online presence and bring them back onto people’s radar.

4.2. Resources and Capabilities

JC Penney has a strategic fit for selling appliances and providing remodeling services.

It’s perfectly fit in its value chain. It perfectly fits JC Penney’s customer base that consists

mostly of middleclass women homeowners. There are 850 hair salons in JC Penney stores

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making it the largest hair salon chain in the US and bringing in almost 5% of total sales, which is

something than cannot be easily duplicated by other department stores (Wahba, 2016d). Along

with the partnership with Sephora, the salons could be an even bigger draw for special events

because they could be one stop shop for Prom or a wedding as a guest. The online features to

look at current inventory is already up and running so people can look online to see if their size

is in stock at their local store.

4.3. Strengths or Weaknesses Analysis

JC Penney strengths are comprised of the following: the company has old history. By

being around for more than 100 years means that J.C. Penney or JC Penney are names that most

people have heard and nearly everyone has shopped at so using their strengths is vital to staying

in business. JC Penney has a good reputation among American consumers. JC Penney has a

multiple channeling strategy, a strong liquidity position, a diverse product and service line and an

efficient supply chain which are all vital strengths. The company has an excellent understanding

of their customer base, and a good degree of vertical integration. It also has several store brands:

such as Arizona Jeans and St. John’s Bay. The huge niche market of having salons in many of

their stores is something else that is not available in other department stores that could easily be

capitalized on.

JC Penney’s weaknesses: the company received majority of its revenue from selling

apparels in physical stores. This industry is rapidly reducing in size. JC Penney also has very low

productivity per employee, $110,061 vs $214, 958 industry’s average, and its inventory turnover

is much worse than industry’s average, 2.59 vs 6.14 which are all serious weaknesses that must

be addressed by JC Penney leadership (IbisWorld, 2017). JC Penney also has extensive

weaknesses in terms of outdated technology and the recent shifts in marketing strategy that drove

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many longtime customers away. While many other department stores have tried to keep up with

the changing technology with strong apps for mobile devices and online shopping being

integrated into in-store inventory, JC Penney is playing catch-up on all fronts right now in terms

of technology.

4.4. Opportunities or Threats Analysis

The largest opportunity for JC Penney is expanding in the appliance segment of the

industry. It presents a chance to increase revenue without being dependent on apparel sales.

Another great opportunity for JC Penney is the possible demise of its most direct competitor,

Sears. It presents a chance to get a significant part of Sear’s customer base, because 85% of

Sears and JC Penney customers are the same. Also, returning to their older methods is another

way for JC Penney to entice new customers to stores. Expanding and advertising the salons with

tie in deals for Prom season or during the summer for wedding guests is another opportunity that

JC Penney should be taking advantage of. A major threat for JC Penney is the continuous trend

away from department stores to internet retailers. Another threat is the reduction of the

traditional middleclass customer base of the company. The internet and sites like Amazon are an

ongoing threat that is true for everyone in retail not just department stores. JC Penney must make

sure that their online presence and availability is up to the challenge because online only stores

have much less overhead, and can charge much lower prices. Clinging to what has worked in the

past is no longer a feasible strategy in the age on online retailers. Also, more stores are rising to

compete with different aspects of JC Penney, Kroger and HEB have added clothing and some

housewares to some of their stores (Kaplan, 2014).

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5.0 RECOMMENDATIONS

5.1 Recommendation One

We recommend investigating a partnership with a grocery store chain. For the purposes

of illustrating the potential of such a partnership, we use Trader Joe’s as the preferred partner.

Placing a small grocery store inside JC Penney will dramatically increase traffic in stores, and

help better compete with other department stores that have begun offering grocery store

products. JC Penney stores with low sales per sq./ft. are ideal candidates for the added items and

offer potential for increased foot traffic.

5.1.1 Goal and Project Objectives

Adding Trader Joe’s will increase foot traffic inside of JC Penney stores. Consumers

shop for groceries regularly, but tend to shop in malls or standalone traditional department stores

less often. Having a grocery store within the mall makes it much more convenient for customers

to shop at one place as opposed to having to visit separate locations for groceries, and yet another

for clothing and shoes. Selling clothing, décor, housewares and food will allow JC Penney to be

a one-stop shop for customers and introduce JC Penney customers to the Trader Joe’s brand,

providing the company with a new customer base. JC Penney’s revenues should increase several

times due to the greatly increased customer traffic. The idea of placing supermarkets inside

shopping malls is very popular overseas and we believe it can be successful in the US as well.

Whole Foods, which is Trader Joe’s most direct competitor, is already opening grocery stores

around the country in malls around the US (Parmley, 2017). These Whole Foods or ShopRites

are replacing anchor stores in malls. However, Trader Joe’s stores are much smaller compared to

these stores, and traditionally much more frugal.

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This strategy will benefit Trader Joe’s by allowing them to actively compete against its

other competitors, Wal-Mart, Target, Whole Foods and now Kroger, who all offer clothing,

gourmet food and housewares. Within two years Kroger is expected to surpass Whole foods,

Trader Joe’s biggest competitor, and become the nation’s top seller of organic and natural food.

The latest Kroger store locations include upscale services, such as a deli and prepared food

section, a craft beer and wine bar for customers to wine test and socialize and an extensive

offering of clothing and footwear, with an emphasis on children’s clothing to appear as an

attractive option for families who would normally shop at Target or Walmart, which are also

competitors of JC Penney. Placing a Trader Joe’s within JC Penney would be a reverse of

Kroger’s latest strategy by selling food within the department store as opposed to selling clothing

in the grocery store. This strategy would also work well in stores outside of malls as well. Of the

more than 25 stores in the greater Houston area, 10 are in shopping centers or strip centers rather

than malls (JC Penney store finder). This holds true around Dallas-Fort Worth as well. If malls

are not ready or willing to allow such a change in their stores, then there are many options that

involve stores separate from malls.

5.1.2 Action Plans

JC Penney should identify a pilot location to test the project. An ideal location is a stand-

alone JC Penney suburban store with a large parking lot, near large population area, but not too

close to grocery stores. The revenue per sq./ft. in the targeted store must be below the company’s

average. This would be a capsule store like Sephora, but larger in size. Trader Joe’s will pay for

the construction and JC Penney will provide the space. There are only 461 Trader Joe’s around

the US and there are over 1000 JC Penney stores. Few places would have a Trader Joe’s too

close to a JC Penney store with a Trader Joe’s that would cannibalize the business. There are

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many communities that would welcome an additional grocery option, so would benefit from

upgrading a standalone JC Penney to a new version with a grocery store.

5.1.3 Deliverable

Remodeling JC Penney by installing a Trader Joe’s capsule store has the potential to

greatly increase revenues. As of now, an average JC Penney customer shops in its stores maybe

once a month. However, with the addition of a grocery store inside, customers are likely to shop

in JC Penney more often as groceries are shopped for more frequently. This could also add new

customers that have not shopped at JC Penney but that are interested in Trader Joe’s. Grocery

shopping has been resistant to fully online shopping and delivery, however there are some places

that it is coming back (Wohlsen 2014). JC Penney has started allowing customers to shop online

and pick up in stores. This is not something that Trader Joe’s does yet, but other grocery stores

have started so it could be something that JC Penney brings to the table. According to Richard

Kestenbaum at Forbes, the grocery industry brings in about $675 billion in the US and over 90%

of American households shop for groceries weekly. For online and delivery grocery sales to

work, there should be high population density as well as high incomes in areas where people do

not have time to shop, this makes population and wealth dense places like London, New York

and San Francisco where online groceries are starting. Much of the US however does not fall

into this very specific category so being able to pick up groceries ordered online is more the

direction that grocery stores and retailers are headed (Kestenbaum 2017). Typically visiting the

mall is optional while making a trip to the supermarket is a necessity. This will allow JC Penney

to incur sales from a different customer base who would not normally shop in their stores. The

Sephora capsule stores have increased traffic and the construction cost would be similar.

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Training for new staff to work in the Trader Joe’s as well as hiring those with grocery

experience is another important deliverable. Working with Trader Joe’s to make sure that the

store is up to standards and the staff is fully trained is vital to this partnership working.

5.1.4 Milestones

Month 1 & 2 - Locate and select the appropriate location for the pilot project. The location must

consist of the following characteristics: standalone store, near a subdivision, far from other

grocery stores, and has very low revenue per sq./ft. JC Penney. Hire Training manager as well as

food service managers to begin planning, training for future staff.

Month 3 - Plan the remodeling process. Initiate clearance sell in the targeted store. Free up

10,000sq. ft. of space for expense of not profitable and low margin merchandises. Or in a smaller

format store free up about 7,000 sq. ft. Begin working on website additions of Trader Joe’s to JC

Penney website at pilot location.

Month 4-9- Proceed with construction of the Trader Joe’s capsule store. Begin hiring and

training grocery store staff for pilot location.

Month 10 – Open JC Penney/Trader Joe’s pilot store and begin working out kinks that will

invariably crop up. Work with Trader Joe’s consultant to make sure that everything is delivered

in a timely fashion and that the store is working as efficiently as possible.

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Figure 13. JC Penney with a center Trader Joe’s capsule store

End of Year 1 – This is 12 months from the start of the project. Have year-end numbers to be

able to compare year over year foot traffic and revenues. Make necessary small adjustments such

as placement of goods in store or personnel at this point. Begin scouting stores for possible

additional Trader Joe’s locations.

End of Year 2 – Make 2 year comparisons of income statement and balance sheet to show

where things are working and where things are not. Make sure the numbers still justify the

partnership. If the numbers are good, then begin adding Trader Joe’s to the next round of stores

that meet the requirements laid out and that are ready for this sort of change.

End of Year 3 – Compare all years and locations with a Trader Joe’s to continue making sure

that the revenue and customer traffic at each store lines up or exceeds expectations based on the

original pilot store. Continue making small changes to allow for product or display differences

and customer preferences.

End of Year 4 – Monitor numbers and begin remodeling or new construction on more Trader

Joe’s inside JC Penney. Tweak product placement and tastes based on customer feedback and

begin renegotiating contract with Trader Joe’s. Run the numbers to make sure that this strategy is

still working.

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End of Year 5 – Finish renegotiations with Trader Joe’s to continue partnership if still profitable

for all. Make sure that the terms allow JC Penney to continue expanding if that is what the

returns suggest. Now do long term comparison of before the stores had Trader Joe’s and now

based on four or five years’ worth of income statements and customer traffic and customer

reviews.

5.1.5 Resources

For a project with a very aggressive 10-month deadline, multiple resources are needed.

Some of these resources are internal and will be provided by JC Penney while the external

resources will be provided by Trader Joe’s and third party contractors.

Internal resources include the real estate for the project, JC Penney store. It also includes

time spent by members of JC Penney team working on this project. The team should consist of

members of multiple departments. Advertising the remodel and the addition of Trader Joe’s is

something else that would be required of JC Penney and Trader Joe’s. Both would need to

advertise for this partnership to work.

The external resources also include financial input by Trader Joe’s. It will be expensive,

but it could be on the lower end because constructing a capsule store inside a building with

existing foundation, roof and parking lot is more affordable than building a store from scratch

also a much smaller footprint store.

5.1.6 Technical Requirements

The technical requirements required data analysis of all the JC Penney stores by sales,

size and location to select the perfect location. An engineering assessment of a building

designated for a project.

A whole new methodology of training would be required because grocery stores have

completely different internal requirements than clothes and home goods. However, the

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employees of the Trader Joe’s would be hired and trained by Trader Joe’s so this should not be a

new skill set that JC Penney must acquire.

The website at the JC Penney/Trader Joe’s location will need to be remodeled as well.

This will require IT support and expertise to update and change the JC Penney website to reflect

the Trader Joe’s goods.

5.1.7 Budgeting

Construction

JC Penney will provide space and Trader Joe will provide financing for the project.

Table 7. Construction Costs for Grocery Store – Trader Joe’s

The construction cost is estimated from $313,000 to $447,200 depending on the store

size. The cost of training employees that will work in the Trader Joe’s/JC Penney stores or hiring

those with grocery store experience will fall to JC Penney. The cost incurred by Trader Joe’s is

expected to be recuperated by Trader Joe’s within one year of opening the doors and profitable

within two years.

Training

The first employees needed would be Training and Development Managers specifically

with grocery store experience which has an annual mean wage of $117,590 and Food Service

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Managers for the pilot store then one or two each per each additional location later in the process

with annual mean salaries for $51,980 (Labor Statistics 2017). These would need to be in place

before hiring and training new employees. Possibly hiring a Trader Joe’s Training Manager or

bringing on in as a consultant could ensure that both get the best possible version of their stores

and the cost of the manager could be shared between the companies. Unlike Sephora inside JC

Penney employees, the Trader Joe’s would be staffed by Trader Joe’s employees (JC Penney

jobs website). This would be a departure from how things have been done in the past for JC

Penney partnerships, but it would be a little like pharmacies in grocery stores, separate

businesses inside one building. It would be cheaper and easier for JC Penney, because Trader

Joe’s already has the expertise to handle food safety and other grocery store concerns. Trader

Joe’s has been exclusively in the grocery store business since they opened after World War II, so

they can bring expertise on layout of store and how to run the stores.

Advertising

Use Google search to put JC Penney with Trader Joe’s high on the list of sites when

using the search engine. Push Facebook ads and banner ads to people with organic or clean

eating statements on their pages or in the search history and those with searches for either JC

Penney or Trader Joe’s in their history. Push emails to anyone that has an account online with

either JC Penney or Trader Joe’s and lives near the pilot store and subsequent stores as the

project expands. Advertise in newspapers as well online papers and community pages for the

surrounding area that is being targeted as potential customers for this new store. Adding new

marketing or advertising staff with experience in online marketing may help to push further into

new ways to advertise electronically.

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Website

The JC Penney website for this pilot location and all later locations will need to be redone

to allow customers to shop online and pick up in store Trader Joe’s items as well as JC Penney

items. This project should start at the same time as the store remodeling phase begins.

5.1.8 Feedback Mechanism

To determine if the pilot project was successful or not we recommend monitoring two

important parameters: revenue and customer traffic. We must know the base, prior to project

implementation, an average number of customers over a given time period and revenue in the

store over the same period. By monitoring and comparing with these base parameters every week

the new number of customers and revenue it would be possible to assess if the project was

successful and to what degree.

5.2 Recommendation Two

Recommendation Two is intended to address J.C. Penney’s aging demographic and associated

impending reduced revenues (Stock, 2013). The ideal target demographic would be younger than JC

Penney’s current Baby Boomer consumer profile and would have a greater inclination to follow fashion

fads and more inclined to spend disposable income rather than save. To attract higher income consumers

with greater disposable income, JC Penney must introduce mid-range goods that allow a greater profit

margin. To avoid repeating the mistakes of the past, when CEO Ron Johnson cancelled value-priced

house brands and brought in expensive replacements without testing the products (Tuttle, 2013), we

propose that JC Penney install limited-time (one month) “pop-up” factory outlet shops within JC Penney

department stores to attract fashion-savvy shoppers on a budget. Every month, the pop-up shop would

feature a new designer.

Target began using designer collaborations back in 2003 but they shifted toward the month-long

format in 2009. Target is a competitor for JC Penney with aims at a similar demographic, younger, middle

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income customers. Target has increased buzz monthly as their pop ups start and have had more than 150

designers collaborate over the past 15 years. These do not create huge additional revenue on their own,

but have moved Target up in reputation and esteem in people’s minds (Peterson, 2015). This allows

people to shop for designer goods a price they can afford. These are fashionable young people overall and

this is a demographic that JC Penney can also tap with the addition of pop-up factory outlets for

handbags. Sephora has paved the way for these shoppers to come into JC Penney and this could move

even more to shop JC Penney. It could also bring up the reputation of JC Penney like it has done for

Target.

CEO Marvin Ellison stated in an interview that JC Penney’s handbag selection was “ugly” and he

felt that they had missed an opportunity with a recent upsurge in handbag demand (Wahba, 2016d). The

demand for designer-brand handbags, shoes and small luxury leather and fabric goods is still strong and

JC Penney can profit from offering these goods. IbisWorld’s analysis of the handbag retail industry

predicts that growth will remain strong due to “aspirational luxury shoppers [who]…do not have the

strong purchasing power of older generations with better-established careers” and that “growth [will be]

driven by strong sales of high-end leather handbags and men’s accessories” (February 2017). This

younger, aspirational demographic is a potentially profitable target market for JC Penney.

5.2.1 Goal and Project Objectives

Placing a pop-up shop inside JC Penney would increase foot traffic into the stores due to

the limited-time nature of pop-up shops and the desire of shoppers to take advantage of

availability and low prices for designer goods within a specific time frame. Pop-up retail is a new

phenomenon that has proven profitable for various reasons and in many scenarios (Nicasio,

2014). The narrow window of opportunity would allow JC Penney to create and maintain an

associated mailing list to alert loyal customers of upcoming pop-ups and contact them with other

marketing promotions. Targeted designers would include Coach Factory, Michael Kors Factory,

Kate Spade New York, Burberry Outlet, Tory Burch Outlet, Armani, and Prada, among others.

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These are not designers that have collaborated with Target but are in the same vein as what has

worked in Target stores (Peterson, 2015). The Coach Factory outlet in Cypress, TX, often

benefits from long line-ups on Mother’s Day, the holiday season, and special events. The

presence of a line-up during these times are an indication that the goods inside are popular with

consumers, and can potentially lead to promoting JC Penney as a retailer of choice with a

younger demographic. In addition, JC Penney can also market-test rising new designers with less

risk through the pop-up store, effectively positioning itself as a source for informing consumers

of rising fashion trends.

5.2.2 Action Plans

JC Penney should dedicate a location for recurring pop-up shops within the store interior

and heavily promote upcoming events in media, social media and through email lists. The pop-

up shops should have their own branding that attracts younger demographics and is instantly

recognizable. Contracted events with designer outlet stores would require the designer’s

branding within the pop-up that would be supplied by the designer brand and removed at the end

of the event. The designer would be required to promote the pop-up event on its main website as

well. JC Penney would dedicate space that was previously allocated to low-performing goods

and either reduce the space for those goods or eliminate them completely. Currently, services

provide the lowest revenues, but JC Penney management views services as successful

enticements to enter the store and purchase additional goods. In the future, JC Penney should

also try to offer pop-up opportunities from brands such as European manufacturers that would be

attractive to professionals who have travelled and are familiar with those brands names, for

example Smythson, Bottega Veneta, and Victoria Beckham. These shops would be stores that

have a Sephora as well, they would not be in locations with a Trader Joe’s.

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5.2.3 Deliverables

JC Penney should have a pop-up area that is closed between events to build anticipation.

The dedicated area should look modern, high-end, and offer only highly-desirable brand names

that are offered in current factory stores, or are last-season’s unsold full-price merchandise, or

lower-end interpretations of higher priced handbags sold in designer full-price boutiques (for

example, made of fabric instead of leather). These would be very similar to the collaborations

used in Target, H&M and others. The construction costs would be similar to the Sephora capsule

stores and the pop-up should be located near Sephora capsules to promote additional sales at

both in-store shops. JC Penney should also promote a “V.I.P Club” whose members receive

advance notification of the events as well as a coupon for additional discounts, and JC Penney

can include ads for regular in-store merchandise. By requiring collaborating designers to

advertise the events on their own websites, JC Penney also becomes associated with higher-end

fashion that will attract more Millennials and professionals.

5.2.4 Milestones

Months 1 & 2 – Identify appropriate JC Penney stores, which should have Sephora capsules,

have relevant demographic groups within a one-hour drive and be of a sufficient size to avoid

displacing higher revenue-producing merchandise. Locate and select the appropriate physical

location for the pop-up store within selected JC Penney stores. The boutique should be modern,

stylish, and generic enough to satisfy the designers’ needs, allow for flexible shelving and layout,

and be located near other JC Penney women’s fashions and Sephora. Begin negotiations with

designers who have outlets or would agree to provide goods at drastic markdowns or lower price

exclusives.

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Months 3 & 4 – Secure first quarter designers and promote events through mass media. Begin

construction on the stores. Build email marketing for the “V.I.P. Club” and send out emails.

Promote through social media similar to how they currently do for their “Penny Days” program.

Secure additional designers for future events. Research trends for designer popularity and contact

the top 5 to 10 handbag/leather goods/shoe designers in the industry.

Months 5 & 6 – Complete construction and hold first monthly events.

Months 7 – 12 – Hold additional monthly events, evaluate foot traffic, revenue increase or

decrease, growth in pop-up email list requests, website visits and if consumer demand is

indicated by line-ups on opening day of each event.

Figure 14. JC Penney with the new Factory Pop-up

End of Year 1 – This is only twelve months after the idea was decided on. Have year-end

numbers to be able to compare year over year foot traffic and revenues. Make necessary small

adjustments such as placement of goods in store or personnel at this point. Begin scouting stores

for possible additional factory pop-ups. Make sure that the following year’s design

collaborations are lined up.

End of Year 2 – Make 2 year comparisons of income statement and balance sheet to show

which designers are working and which are not. Make sure the numbers still justify the

collaborations. If the numbers are good, then begin adding factory pop-ups to the next round of

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stores that meet the requirements and would benefit from this capsule store. Continue

collaborations that are working and discontinue those that are not. Begin searching for up and

coming designers or looking to the shows like “Project Runway” for new design collaborations.

End of Year 3 – Compare all years and locations with a pop-up to continue making sure that the

revenue and customer traffic at each store lines up or exceeds expectations based on the original

pilot store. Continue making small changes to allow for product or display differences and

customer preferences. Keep collaborations that are being successful and continue hunting for

new designers to feature. Begin allowing for more than handbags if people seem interested in

added accessories from the same designers. There is now an established email list of loyal VIP

Club members that could be surveyed to find out if expanding offerings from the most popular

designers is something they are interested in.

End of Year 4 – Monitor numbers and begin remodeling or new construction on more factory

pop-ups inside JC Penney. Tweak product placement and tastes based on customer feedback and

search for new options. Run the numbers to make sure that this strategy is still working. Always

be looking for new hot designers or ones that are looking to expand into handbags and

accessories.

End of Year 5 – Now do long term comparison of before the stores had factory pop-ups and

now based on four or five years’ worth of income statements and customer traffic and customer

reviews. Discontinue collaborations that are not working and keep looking for what is working

and what might work next. The need for continued searching and negotiating for new designers

will not change, but now some should be coming to JC Penney instead of JC Penney going to

them.

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5.2.5 Resources

JC Penney would provide internal resources, such as the sales staff to support the pop-up,

in collaboration with the designer brand staff for each event. This could be provided from

existing staff as the event requires only hourly employees for the duration of the event. Design

and construction of the pop-up capsule structure would be completed by JC Penney contractors

or staff and paid from JC Penney budgets due to required specialization for each store. Store

fixtures would be provided by JC Penney. The pop-up shop would be stocked by the designer

brand staff, and signage and required merchandising and styling to be performed in collaboration

with JC Penney to ensure it meets company standards. All leftover stock would be removed by

the designer brand staff at the close of the event, or purchased at discounted wholesale prices, if

desired, by JC Penney. Training and hiring of additional staff will also take up time and money

for these pop-up shops.

5.2.6 Technical Requirements

JC Penney would provide cash registers and payment hardware and software, as well as

theft prevention hardware and software. JC Penney would provide data analysis of the event and

forward the negotiated proportion of sales. This arrangement provides minimal expenses to JC

Penney and helps to avoid transportation and inventory costs. The website will need to be

updated to reflect the designer being featured and tease the next designer. Also, the merchandise

will need to be updated to reflect the current options and inventory.

5.2.7 Budgeting

JC Penney will provide space of approximately 2,000 sq. ft for each pop-up shop, as well

as electricity, costs of sales staff, and labor assistance for unloading inventory from the designer

brand delivery. The estimated cost of remodeling JC Penney stores for Sephora capsules was

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about $200,000 for construction per location according to Tiffany Holland at The Roanoke

Times in January 2015. The Sephora stores range from 1,500 to 2,500 sq. ft and required fixtures

and new lighting and branding much like the pop-ups would. The pricing per store with the pop-

up would be similar. The return on this investment is expected to begin within one year of

opening the pop-up.

Training and Hiring

The employees would work for JC Penney but would only work in the Factory Pop-up

just like the employees that work only in the Sephora capsules inside JC Penney (JC Penney jobs

website). This would be a cost to JC Penney to either find the right employees for this space or to

train existing employees. These would need to people with a background in mid-range sales or

experience in sales. Working closely with the collaborating designers would also be very

important to make the space unique for each new collaboration.

Advertising

Push Facebook ads and banner ads to people with fashion or mid-range designers on their

pages or in the search history and those with searches for either JC Penney or collaborating

designers in their history. Push emails to anyone that an account online with either JC Penney or

current designers and lives near the pilot store and subsequent stores as the project expands.

Advertise in newspapers as well online papers and community pages for the surrounding area

that is being targeted as potential customers for this new store. Adding new marketing or

advertising staff with experience in online marketing may help to push further into new ways to

advertise electronically.

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Website

The JC Penney website for this pilot location and all later locations will need to be redone

to allow customers to shop online and pick up in store unique items as well as JC Penney items.

This project should start at the same time as the store remodeling phase begins.

5.2.8 Feedback Mechanism

Revenues from the pop-up events would be monitored, as well as incidental sales in the

rest of the store, along with foot-traffic, email clickthroughs, website search term data, increased

numbers of website visits and social media comments. The variations in profit and interest from

one pop-up to the next will also be monitored to see which designers are working and which are

not. Also, gives JC Penney an idea of which stores will work for this project in the future and

which designers to reach out to. By using their internal search engine as they did when adding

appliances, JC Penney and Ellison can see which designers have not been featured but have been

searched for. This is another internal way to assess results.

5.3 Risk Assessments and Contingency Plans

There are a few inherent risks in looking for so many new partnerships: no mid-range

designers want to collaborate; Trader Joe’s passes on partnering; everyone comes on board and

there is no change in JC Penney’s profits.

The chance that none of the targeted designers want to collaborate is slim because this is

a model that is working well in Target stores and H&Ms and other department stores, but must

be considered. JC Penney has the advantage over both Target and other department stores in that

they are not competing with in-store options. In JC Penney stores with the pop-up, there would

be no in-house purse lines to compete, thereby assuring the partners of an added advantage to

partnering. The jewelry counter would be much smaller to allow for more collaboration

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opportunities. There is also the opportunity for newer designers to have pop-ups as well, which

could give JC Penney the boost of being on the leading edge of handbags and accessories. By

allowing for last season or lower price exclusives, partnering with JC Penney could give

designers the chance to sell out of stale merchandise that no longer fits in their current line, as

well as reach new customers. By targeting the middle class younger person that is still up and

coming, these mid-range brands could find lifelong customers that in the future could afford full

price pieces. Also, these designers would not need to staff, rent and furnish space for their own

outlet locations. It would expose a whole new group of shoppers to these brands.

Trader Joe’s and Aldi are going through some internal struggles right now between the

two parts of the family that own them. There is some back and forth between the ideas of the

sister-in-law and family that runs Trader Joe’s and her ideas for expansion and the brother that

runs Aldi’s frugal ideals. These are mostly personal spending concerns and not how Trader Joe’s

is managed, but still could pose a threat to a partnership. One way that Trader Joe’s can continue

to expand and reach more customers in the US is by partnering with someone else. “(T)he

disagreements within the board could hold up changes that the company needs to make”

(Northrup 2016). The board issues could hold up a partnership arrangement but could also prove

to be a way for the two grocery stores to further distinguish themselves. The US is the only place

where both Aldi and Trader Joe’s compete.

The last risk is if both Trader Joe’s and the mid-range designers are on board and the

remodels happen, but there is no uptick in sales and profit for all the companies, but especially

JC Penney. There is a chance just like with ex-CEO Ron Johnson’s plans that this does not work.

In which case, additional grocery store chains could be approached to provide capsule

interpretations of their ready-made and essentials sections (milk, bread). Old partnerships should

be strengthened like the one with Sephora and the expansion of the appliances that seems to be

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working so far. Also, more marketing to find the customers and entice them into the store would

be in order.

The contingency plan would be to strength their current partnerships and to push forward

with some of the pilot programs already in the works such as Ashley Furniture and Flooring

shops with Empire. These are viable steps forward that could make JC Penney even more of a

destination for Millennials. “’You can self-define yourself,’ Ellison said. ‘We can create internal

limits about what we are. Or we can find out what you would buy from us if we sold it’”

(Halkias 2016). JC Penney is already in the process of reinventing itself and finding new ways to

reach people. Trader Joe’s and factory pop-up handbag or accessory boutiques are two more

ways to do this.

5.4. Limits and Exclusions

JC Penney should limit the amount of new supply chains by working with Trader Joe’s to

provide all their own goods and with the collaborating designers to use known suppliers

wherever possible. This will keep the new supply chains to a minimum. Also, it is important for

JC Penney to not over extend itself or move too far from their customer base. While the long-

term goals are younger customers with higher incomes, the long-standing customers cannot be

left behind as that is a known failing strategy. The shift toward more environmentally and

fashion conscious Millennials should be measured and in stores that will support these changes.

JC Penney would be contributing a lot of money for hiring and training in both projects, but the

pop-up shops have the potential to be less costly overall. This is not straying too far from what is

expected in a JC Penney and could be a more conservative option. The issue is finding designers

that want to collaborate with JC Penney, though because of the number already working down

market with Target, which is an obstacle that can be overcome.

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5.5. Long-Term Effects

There are long term benefits of either or both recommendations. The Trader Joe’s

clientele is younger and more affluent than JC Penney so it could lower the age and increase the

annual income of JC Penney shoppers. The factory pop-ups would allow for more fashion

options and women in the US are spending $11.5 billion on handbags annually (Daily Mail

2016). This is not a new trend, so having mid-range designer handbags within reach of more

women could boost sales in JC Penney overall. Women like to shop for handbags, so working

with known designers and exciting newcomers would allow women to comparison shop. Email

blasts from both the designer and JC Penney could help get women thinking about their next

handbag purchase. The long-term possibilities of repeat customers due to frequent handbag

selection changes on a regular schedule would allow for more purchases in other departments, as

well. Customer traffic would increase in both settings, though there may not be a JC Penney with

both a Trader Joe’s and a factory pop-up, unless future analysis indicates that JC Penney’s

customers want both features in their local store.

57

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7.0 APPENDIX

Figure 1. Population Demographic Group Percentiles

Figure 2. Economic Segment: Department Store Industry Revenue, 1998-2016

0-17 years23%

Millennials24%Gen X

20%

Baby Boomers23%

Silent/Greatest10%

Demographic Group %

65

Figure 3. Market Size: Number of Companies Over Time by Industry, 1998-2016

Figure 4. Product Segmentation, Department Store Industry, 2017

Source: IbisWorld, Department Store Industry, Industry Analysis, 2017

66

Figure 5. Industry Competitors: Strategic Group Map of US Market, 2017

Figure 6. Market Share for Major Competitors, US Department Store Industry

Created from data, IbisWorld, Department Store Industry, 2017.

JCPenney

Regional National Global

Geographic Coverage

Nordstrom Sear's Macy's Walmart Target

US Department Store Industry

High

LowPri

ce a

nd

Per

ceiv

ed Q

ual

ity

Medium

0

67

Figure 7. JC Penney, Net Debt to EBITDA

JCP Analyst Presentation, 2016.

Figure 8. New Millennial Marketing Executive Titles

JCP Analyst Presentation, 2016.

68

Figure 9. JC Penney Value Chain Activities

Figure 11. JC Penney Historical Share Price

69

Figure 12. JC Penney Credit Rating Performance – Moody’s

Figure 13. Nine-Cell Industry Attractiveness – Competitive Strength Matrix

70

Table 3. JC Penney Financial Ratios

Morningstar, JCP

Table 4. JC Penney Key Ratios

Morningstar, JCP

71

Table 5. Department Store Industry Averages

72

Table 6. SWOT Analysis, JC Penney