Who Killed JC Penney?

CEO Ron Johnson might be the captain of a sinking ship. But he was handed the Titanic when the dining room was already under water.

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"The Worst Quarter In Retail History."

That's how Henry Blodget described JC Penney's last three months of 2012, as same-store sales took an epic 32 percent nosedive. To be clear about exactly what a disaster that is, it means that for every $100 dollars JC Penney sold in a store around Christmas 2011, it sold only $68 in that store in Christmas 2012. That doesn't look like the beginning of the end for JC Penney. That just looks like the end.

To appreciate how we arrived at this moment, let's rewind the tape about six years. It's early 2007, Steve Jobs is about to introduce the world to "iPhone", and JC Penney's stock is on fire, having tripled since the turn of the century. With 99 percent of purchases being discounts, coupons are looking like an unbeatable business strategy.

Then the recession hits. The stock promptly falls by 75 percent. While competitors like Macy's and Target limp back to recovery, JC Penney clings to its decade low.

Bill Ackman, the activist hedge fund manager who owns a sixth of the company, decides he wants to shake things up. He hires Ron Johnson from Apple. Johnson is a legend, having designed the world's most famous sleek white showrooms and having made Target a discount fashion destination. Johnson is an Ideas Guy, and, naturally, he arrives at JC Penney with an Idea: No more coupon games, just low prices.

Why would JC Penney ever entertain the idea of blowing up their core coupon business? Brett Gordon, a professor at Columbia Business School, explained to me that for a company like JC Penney, there are two kinds of shoppers: the bargain-hunter and the clock-watcher. They need less of the first and more of the second to survive.

Bargain hunters don't just like bargains. They also like the hunt. They're cheap, they're poor, and they're not getting richer in the near future. This is JC Penney's demographic, and it's not a growth demographic. Winning the war for their slim pocketbook means competing against stores like Walmart that will beat you on price every time. It's a losing game.

Johnson wants to journey upmarket. The clock-watcher likes a good bargain, but she really just wants to buy her kids' clothes and get on with life. Her time is more valuable, because she is more valuable. She's not so cheap and not so poor. This is the shopper Johnson decides he wants to attract by ditching coupons and moving to permanent low prices with occasional sales.

I've tried to present this argument as fairly as possible, but whatever you think of Johnson's fundamental insight, it is not working. Sales are in a free fall, because the bargain-hunters are hunting elsewhere and nobody is taking their place. Ron Johnson might be a genius, but he's a genius at building shopping experiences for young, hip, upwardly mobile professionals. JC Penney's target audience is older, less hip, lower middle class moms and kids.

It's very likely the JC Penney could not have been saved by anything short of a presidential executive order that all mom jeans shall henceforth be purchased from JC Penney. As I've written, department stores are in secular decline for economic reasons (the non-recovery recovery), demographic reasons (younger people are moving away from older suburbs), and technological reasons (Amazon.com is a department store in every room and Walmart wins every price war).

Ron Johnson might be the captain of a sinking ship. But he was handed the Titanic when the dining room was already under water.