We’ve come a long way in e-commerce in two years, says JC Penney boss

SUMMARY:

Two years ago JC Penney was an omni-channel non-starter, but all that’s changing, says CEO Marvin Ellison.

Marvin Ellison

There was no retailer our size as behind the curve on e-commerce and omni-channel as JC Penney.

A brutally frank assessment from Marvin Ellison as he looks back over the past two years as CEO of the US retail institution. We’ve been closely tracking his progress in turning around that situation as he seeks to re-invent the store chain for its traditional Middle America audience.

It has been a case of a journey of a million miles beginning with a single step, as he recalls how far the company has come in two years:

We were woefully behind in every respect. We rolled out buy online pick up in store same day for back to school last year. We just launched a new and improved mobile app with a mobile wallet where you can download coupons and you’re loyalty points.

We’re in the process of allowing you to download your JC Penney credit card, so you can have your mobile app can truly act as a mobile wallet, which is something that most customers are expecting in this day and age, and so great improvement and great feedback on that. And we’re really excited that we launched just as fast the ability to fulfill online orders from all stores in the company.

That last point is a particularly important milestone, says Ellison:

Why is this important is because we now have the ability to ship online orders from existing inventory in all of our stores. The moment we were able to activate this last week, we immediately made $1 billion in additional inventory available for online customers without adding one SKU. So, that’s a tremendous benefit. And as we are able to do that, we’re going to reduce the distance between customer and delivery because of the stores being utilized for fulfillment. In addition, we reduced the timeframe and the cost, because of the shorter distance.

The new store

In common with other retaiers with a substantial real estate footprint, JC Penney has been closing downs stores across the US, but Ellison is conscious of the new role of the offline shop in the omni-channel mix:

Part of what we’re working on is the classic initiative of how you leverage your store fleet to be part of your fulfilment strategy for your e-commerce customers. For the first time, we’re now able to do that. In 2016, 77% of all online orders touched the physical store, and that’s only going to increase as the year progresses.

The fulfilment cost reduction is driven primarily by efficiency and supply chain. Efficiencies and how we pick and how we shift, as well as continuing to leverage buy online pick up in store same day as one of the key ways that customers come in to pick a product. And you will see us increase the ability to buy online ship to store, so that customers can have the ability to come to the store to pick it up versus having it shipped to their home.

This bolsters Ellison’s confidence that JC Penney has access to a competitive differentiator that will enable it to compete with pureplay e-commerce vendors:

The biggest challenge that e-commerce companies will face will be the ability to get products fulfilled within the same timeframe in the future as we do today for the same cost. Fulfillment costs are increasing, dramatically, because you have UPS, FedEx and the US Postal Service, that’s the three main entities to ship and fulfill orders. And they are not increasing capacity to deliver at the same rate that e-commerce is growing.

So, you’re going to have a supply and demand issue that’s going to be apparent here pretty soon. Remember, the number one entity in the US to deliver online product is the US Postal Service. I don’t know about you, but I don’t think there is a ton of capital being infused into the US Postal Service to improve their ability to fulfil online orders, but that is the number one deliverer of e-commerce products in the US today.

So, we believe that retailers from a bricks-and-mortar perspective have to leverage their physical stores to offset the constraints that the industry will face with fulfilling orders as frequently and as inexpensively as we do today. We don’t know that that’s sustainable over the next few years.

Another strategy for competing with the likes of Amazon is play to strengths in-store that can only be experienced in the physical realm, he adds:

We’re trying to minimize the impact of pure-play e-commerce competition by implementing and introducing businesses and categories that are difficult to replicate online. We’re trying to take advantage of market share opportunities that are existing from retailers who are either leaving or who are donating market share.

As it pertains to what are we doing as a traditional bricks-and-mortar retailer to compete with pure play e-commerce companies and to minimize the risk, we are focused on driving our private brand penetration…These are exclusive brands and/or relationships only with JC Penney. So, we’re not worrying about pricing algorithms or comparative shopping. These can only be purchased with us. So, we think that’s important as bricks-and-mortar tries to compete online.

In addition to that, we’re looking at what is difficult to replicate online. What we’ve learned exclusively is that if you are a plus-size female customer or big-and-tall man, it’s hard to buy apparel online exclusively. So, our ability to lean into plus-size and lean into big-and-tall is because we think it’s an under-served market, but also these customers have said it’s really difficult to be the exclusive online customer because it’s hard to find your fit and it’s hard for me to find something that fits and flat as a contour on my body.

This theory can also be seen in JC Penney’s push into categories such as appliances, furniture, mattresses, home and in-store services:

These are very difficult services and/or products to sell exclusively online. These are high ticket, require consultation and in some cases customers want to touch and feel it. Then, as you think about in-store environment, [you] can’t get your hair done online…our salon services business and our partnership with InStyle is tremendously beneficial to u,s because when you are salon customer for JC Penney, you shop twice as often as an online customer and you spend twice as much.

So, as you think about all of these areas, it is protecting us from e-commerce, it has taken advantage of declining competitive positioning, it is weatherproofing the business and it is ability to grow to business in ways that our competitors are not growing.

My take

Interesting perspectives and competitive tactics from a retailer who’s absolutely coming from the back of the omni-channel pack.

Image credit - JC Penney

Disclosure - Ellison was speaking at the 37th Annual Piper Jaffray Consumer Conference.