Knowledge Center: Publication
Reinventing a retail giant: An interview with J. C. Penney CEO Marvin Ellison12/16/2016 John S. Wood
As a century-old, venerated retailer, J. C. Penney encountered serious challenges in trying to evolve from a traditional brick-and-mortar company to one that could hold its own in an increasingly digital world. Five years ago, an attempt to pivot toward a more millennial customer effectively disconnected the company’s digital platform from its brick-and-mortar stores, alienating traditional customers and sending its stock price plunging. It seemed a foregone conclusion to many observers that J. C. Penney would be caught in the same death spiral as other retailers that had failed to keep pace with changing customer preferences and technologies.
Marvin Ellison would argue otherwise. The arrival in November 2014 of Ellison as president—and, eventually, CEO and chairman—gave investors, customers, and J. C. Penney employees alike cause for optimism. With more than two decades of retail experience, Ellison had built his reputation as a prescient leader with a keen understanding of the customer, first during a 15-year stint at Target and then at Home Depot, where he eventually served as executive vice president of US stores. Upon joining J. C. Penney, Ellison inherited an organization that had, in the views of some pundits, lost sight of its identity, mission, and customers. Although it is still early in Ellison’s tenure, the initial results have been promising. J. C. Penney has been reinvigorated, with improved financial and operating results driven by a renewed focus on its core customer base and strategic investments in omnichannel marketing.
To learn more about J. C. Penney’s turnaround effort, Heidrick & Struggles partners Tom Snyder and John Wood met recently with Ellison at J. C. Penney’s headquarters in Plano, Texas. The discussion ranged from fundamental truths about customers and how executives can encourage open and honest feedback from their employees to the value of a diverse team.
Marvin Ellison has 30 years of experience in retail. He has been the president and CEO of J. C. Penney Company, Inc., since August 2015 and the chairman since August 2016. Prior to that, he held various executive positions at The Home Depot, Inc., for 12 years and various operational roles at Target for 15 years. He serves on the board of directors for FedEx.
Heidrick & Struggles: As an incoming CEO, where did you start to ensure everyone was aligned on the strategy and direction?
Marvin Ellison: One of the first things I did when I took over was to give all my direct reports a pop quiz. I call it the “alignment quiz.” One of the questions was to describe J. C. Penney’s core customer. We had about six different definitions. This was from our leadership team—very intelligent, very capable people. But we had six different versions of “what the customer wants.” That tells you it’s a problem.
Heidrick & Struggles: How did you start to go about reconnecting with your customer base?
Marvin Ellison: When [chief customer and marketing officer] Mary Beth West first started, I asked her to do two things: define who the customer is and evaluate our return on ad spending. The findings were very instructive. For example, our female customers, broadly speaking, fall into two demographic groups. The core customer is a white female, over 60, no kids at home. She still reads the newspaper, and she spends a lot of time watching “live” TV. Meanwhile, the emerging customer is also female, multicultural, in her early 30s, with an average of two kids. She uses the DVR, so she fast-forwards through all our commercials; she never reads the newspaper; and she communicates via social media and her mobile devices.
That’s important because those two customers respond to media totally differently. For example, we’ve got two brands of kids’ clothes: a great national brand called Carter’s and Okie Dokie, a private brand at an opening price point. And when we did the deep research, we found out the 60-year-old customer was buying Carter’s for her grandkids because she wanted to treat them with a more expensive gift. Meanwhile, the mom with two kids was buying Okie Dokie because it was more economical and she was concerned with keeping up with how fast her children were growing. But we were marketing these two brands exactly the same way.
So now we’re targeting this younger, millennial customer with the right media channel, and we’re making sure that we have products that she will respond to. And we are also making sure that we serve our more mature core customer appropriately, because she is also very valuable to us. But it started with identifying how we communicate with younger customers—that’s where the growth is coming from—and doing it without disenfranchising our core customers or making them feel unwelcome.
Heidrick & Struggles: J. C. Penney was out of the appliance business, but now you’ve reentered it. What was the thinking, and how’s it going?
Marvin Ellison: The fact that we’re selling major appliances for the first time in more than 30 years is not a one-off strategy to grab revenue. It is a longer-term play in an area we think is going to be important to the customer.
I know a few fundamental things about appliances: they are primarily female-dominated purchases; you have to have one if you own a home; and 100,000 appliances break every day in America. More than 70% of our customers are female, the vast majority of our customers own homes, and one-third of our customers were buying appliances from competitors in malls.
Some of the least productive gross profit dollar per square foot and sales per square foot categories were in the home area, so it just made perfect sense to give appliances a shot. We wanted to test it, learn it, understand what brands resonated, and see what promotional strategies worked.
Heidrick & Struggles: What have the results been so far?
Marvin Ellison: We had some pretty aggressive targets, and the pilot exceeded all of our expectations from a sales and profitability standpoint. The stores that sold appliances had over a 200 basis point comp lift, meaning that if a store without appliances was a plus 1, a store with them was a plus 3. So it was significant.
One-third of the customers who have purchased appliances are new to J. C. Penney and had never shopped with us before. More than 70% of the transactions were purchased on the J. C. Penney credit card, which was equally significant because we have the lowest credit penetration of any of our competitors by a long shot. And so finding ways to get customers to take and use credit from us is very important.
Heidrick & Struggles: How do appliances fit into your overall vision for J. C. Penney?
Marvin Ellison: We’re not trying to be a hardware store or an electronics store; we’re trying to be a modern retailer. If you’re a traditional brick-and-mortar retailer, you have to do three things well to win in the future. First, you have to have differentiation. Our private brands, Sephora and Salon, will create those points of distinction that physically drive customers into the store.
Second, you have to create experiences. One of the reasons why we’re doing this “center core” redesign of the front of our stores is that customers were coming in and buying Sephora and going straight out the door. We weren’t getting nearly the cross-shop from Sephora because the surrounding area didn’t look good. In response, in many of our stores we’re redesigning the entire area that holds sunglasses, fashion jewelry, scarves, hats, gloves, and other accessories so that when that customer leaves Sephora she sees something that looks like Sephora in the surrounding area.
Last, you have to offer products that customers have to physically come in to buy. The majority of our consumers own their homes and want to focus on home beautification, so we’re offering appliances; custom window treatments; furniture, which we’re doing differently now through our partner Ashley Furniture; and flooring, with our partner Empire. It gives us a unique appeal in addition to what we do really well, which is private-brand soft home goods. If we do those things well, we can create a unique environment that is value-based.
Heidrick & Struggles: As you try to get the company moving in the right direction, how do you bring your associates along?
Marvin Ellison: It is the most difficult part of the job because, man, these folks have been through a lot. They’ve heard the song and dance, and they’ve heard it from some good singers and good dancers. This is going to sound overly simplistic, but it’s really about being authentic. Every month, I do a live broadcast town hall where I’m taking live questions that I have not seen in advance. Associates can e-mail and ask me anything. That’s one piece of it.
The other piece of it is on a weekly basis, I do at least two town halls in a store where I’m sitting in a room with associates at a lunch or dinner. I’m seeking feedback, and I’m answering them candidly on some of the things that they’re concerned about. That’s my way of being in touch, but it’s also my way of sending a message that I’m trying to listen and communicate the strategy.
Heidrick & Struggles: How do you set those meetings up? How can you be sure to achieve the necessary level of candor?
Marvin Ellison: I try to be direct with people, and people tend to warm up when you give them time. That’s important because this culture is very polite, and in a culture like ours the risk is that politeness can be a disguise for passive-aggressiveness. So being able to get people to open up and not just tell you what you want to hear is the part that leaders have to really work at. Executives who believe that they are always getting direct candor from people—they’re just fooling themselves. It’s really difficult.
When I was first starting out, I vividly remember sitting in a room with a senior executive, and your natural instinct is just to kind of survive the meeting, to live another day. So getting people to open up is just not easy. Once people know that this guy really wants to listen, and actual changes are being made based on the feedback, then that starts to help.
Another part of it is that our people just want to win. Last year we gave our highest bonus payout in over seven years. That’s a heck of a lot more impactful than what I say. So people want to win. We want to set financial plans and targets that are challenging but that our leaders and associates have the tools and strategy to beat, so when people come to work and they work hard, they can see the fruits of their labor, and they can feel like they’re part of a winning organization.
Heidrick & Struggles: Given what the company has been through, there’s no shortage of issues to address. With everything you’re trying to accomplish, how do you measure success?
Marvin Ellison: We’ve been very focused on the results. This is a results-oriented business. I could have a long list of meetings and events, but if we’re missing the sales plan and not making our profit target, then it’s all for naught. So results matter.
But I also think that you’ve got to inspect what you expect. And part of the issue we had here is that so much was going on that there was no closed-loop process to determine if anything was actually being completed. I mean, everybody was working hard, but they were not working in a very collaborative, collegial fashion. It was like, “Go to your silo and get it fixed.”
Heidrick & Struggles: What’s your online strategy to support your brick-and-mortar locations?
Marvin Ellison: Brick-and-mortar retail and online have to be a seamless connection with no friction. Back when the company was experiencing a major sales decline, the philosophy was to separate brick-and-mortar and online assortment, meaning that they were totally autonomous and they did not overlap. The thinking was that online will cannibalize a store, so let’s make them two totally separate channels.
That doesn’t work.
So we fixed that, and my point was, “If the customer trusts your brand, they’ll trust your brand even for items you don’t sell in the store.” Our e-commerce team has done miracle work. We’ve expanded and sold about 50% more online this year. We’re selling camping equipment, we’re selling fitness equipment, and some of our new category expansions have created the fastest growth categories online. We’ll never sell these items in the store, but the customers trust the brand, so they’re buying.
We’re rolling out a new mobile app, and we’re installing mobile devices in the store that can connect our digital and brick-and-mortar operations in a more seamless way. And we’ll soon have a buy-online, pick-up-in-store, same-day guarantee rolled out company-wide, which is significant. In the first quarter, we had this service in 250 stores. When the customers came in to pick up the item they had already purchased online, 40% of them bought something in addition to what they picked up, which is significantly higher than what I’d seen prior to that in my retail career.
Heidrick & Struggles: In what other ways are you making the experience seamless?
Marvin Ellison: We have roughly 200 stores that are set up to what I call “save the sale.” For example, if you order a shirt online in Dallas, it’s going to go to the dot-com distribution center for fulfillment. If that distribution center is out of stock, we’ve built an algorithm that will send the order to a nearby store and fulfill the order from the sales floor, and that saves a sale. Now, that’s not as efficient as we’d like it to be, but at least it satisfies the customer. And the customer is oblivious to the fact that it didn’t come from the original intended distribution center; it just shows up.
That is how you take a 114-year-old retailer with a really good asset pool and leverage it in a way that we haven’t before. And then all of that goes to eliminating friction, creating convenience, and making sure that we help the customers find what they’re looking for.
Heidrick & Struggles: How do you attract the talent you need to drive an excellent omnichannel customer experience?
Marvin Ellison: We’re behind a bit in technology. But, oftentimes, being behind will give you second-mover advantage because technology is changing so fast. A lot of companies invested in the server farm and a lot of hardware, and now we’re going to the cloud, which gives us enormous flexibility.
It also allows us to recruit, because coders and online engineers don’t want to work on servers or dated technology initiatives. It’s almost like hiring a modern mechanic to work on a carburetor when they have an interest in fuel injection. We’re recruiting great talent because we’re doing things that are exciting and challenging. But again, it’s a work in progress.
Heidrick & Struggles: You are one of a handful of African-American CEOs. How do you enhance the diversity in your team, and what sort of expectations do you have for the rest of the industry?
Marvin Ellison: I think it really comes down to people understanding that it is OK to take a chance on someone who doesn’t look like you. That’s the overly simplistic statement, but I can definitely recall plenty of opportunities where people have held me back because they didn’t want to see me fail. It was almost like they believed they were doing me a favor by not promoting me or by not offering me a challenging assignment. Over the years I’ve heard decision makers say, “We’ve got to be careful because if we put him or her in this role, we really need to make sure they are successful.” And I think that’s just the wrong way to think about it.
Talent transcends gender, ethnicity, or anything else that we tend to cloud ourselves with. For my team, it’s real simple: we can’t make great decisions if everybody around the table looks the same, because our customers don’t look the same.
I tell everyone, don’t go out and hire people who look like you or think like you. Go out and push yourself, and let’s try to find individuals who can come in and challenge the way we think, challenge the way we see things, so that we can embark on new initiatives and not continue to make the same mistakes over and over again. As an example, we don’t yet have enough millennial leaders throughout every part of our corporate team. However, I am pleased with the work we have done in merchandising. We have a lot of young, hungry buyers and design leaders, and that’s important because we have to get that part of the business right. But we have to do that across the entire organization to ensure that we better understand the future of retailing.
About the authors
Tom Snyder (firstname.lastname@example.org) is the global managing partner of Heidrick & Struggles’ Consumer Markets Practice; he is based in the Chicago office.
John S. Wood (email@example.com) is a vice chairman in the New York office and a member of the CEO & Board Practice.