Coming back from online "devastation" - the JC Penney challenge

We're repairing a broken online business.

It’s a sentiment to which Marvin Ellison has alluded before now, but coming up to six months into his role as JC Penney CEO, it’s one which he returns to again and again to explain the mess the retailer got itself into.

We've really never focused on truly omni-channels the way modern retail is focused on it.

We had a lot of devastation that took place during that really difficult leadership period that we had in the company. So we're building a lot of capabilities back.

This is starting to kick-in now, he insists:

In the second half of 2015, we developed true omni-channel capabilities. The development of these capabilities will allow us to share inventory between bricks-and-mortar and store locations with our dot-com area and have seamless connections with our customers, how and when and where she wants to shop.

Ellison points to the “record” performance of the online business over the 2015 holiday season, which:

saw more customers take advantage of our in-store pickup option. This is great because it drives traffic in the stores and it allows our excellent store associates the opportunity to engage customers and attach an additional sale.

And in the fourth quarter, we began to test online pickup in-store same day in a little more than 10% of our stores. The attach rate of these sales was very strong at nearly 35%, and we're very pleased with the early results. We're also excited with our plans to roll out BOPUS [Buy Online Pick-up in Store] chain-wide prior to the back-to-school selling season.

Breaking down the online numbers, mobile traffic now accounts for a quarter of all transactions, with conversion rates of nearly 60%. This is an area in which the company will be making further investment to improve those numbers and play broader online catch-up:

We know mobile is going to be a really significant part of our growth.

There's a lot of emphasis and investments that we're going to have to place on mobile, but the good news for us is, most retailers are very well-positioned with BOPUS technology, with ship-from-store functionality, with enterprise inventory and we're in the early stages.

So I look at it very simplistically. If we can deliver a 4.1% comp in a very difficult fourth quarter and we're catching up in an area like mobile, e-commerce and  omni-channel, I'm very pleased with what the future looks like when we are fully engaged in that technology and in that process. So more to come, but mobile is going to be a big growth area for JCPenney.

Tech spend efficiencies

Elsewhere there has already been a ramp-up of technology spend in back-office capabilities at JC Penney, including modern merchandising systems. Ellison rattles off a list of progress to date:

We have installed merchandising organizational hierarchy, enterprise item system, retail price management, purchase order system for e-commerce, a central sales audit system, a system for merchandise financial planning, assortment and item planning and enterprise replenishment on DCM.

The good news is, is that we are now starting to reap the benefits of those systems.  In the fourth quarter, a very challenging month of November with the weather, we were able for really the first time to not execute a markdown strategy based on a calendar, but really based on the flow of the business, based on customer traffic, customer demand and weather patterns, so that we could not erode profitability in an aggressive way.

These benefits are a marked contrast to some earlier technology forays by JC Penney, he adds:

We have not done a great job historically of implementing technology and allowing the technology to reduce task. So as we talk about these merchandising systems, you have to realize that these systems are replacing a significant amount of task that's being done manually by associates.

And any time you have a significant amount of keying of information going into spreadsheets in systems, we all know that you have a high degree of concern with errors that may take place. So as you implement these systems, you become more efficient, and you reduce the unnecessary task and expense because of the system implementation.

There will be more efficiencies to come, adds Ellison:

In my past life, having worked for a large retailer with a significant amount of cost in the store environment, we were able to do some pretty miraculous things when it related to implementing technology to reduce unnecessary labor costs that did not serve customers.

We've already identified a handful of very significant things in the stores that we're currently doing that we can implement some relatively basic technology to generate hours reduction, that we can either take to the bottom line or reinvest from a service level.

The commitment we have is that we're going to be relentlessly focused on expense reduction, but we're not going to do it at the expense of hurting top line, because we'd defeat the entire purpose of running an effective business. So we're very diligent, very focused on this. We have plenty of opportunity because we have so much task-driven activity that systems and technology can replace in a much more efficient way.

Equally strategic is the focus on what Ellison refers to as “the science of our retail strategy” and how that can be enhanced. He explains:

We're great at the art of retailing - areas of design, styles, store aesthetics and merchandise presentation. And we're improving in what I call the science of retailing - data analytics, inventory replenishment, assortment and item planning and process execution.

This ‘science’ focus will also see more use of data to underpin strategy. This is a major shift for JC Penney, says Ellison:

I would argue that no modern retailer was as far behind with using data as JC Penney between 2011 and 2014. In the first half of 2015, our store assortments and pricing were not localized, our credit penetration was at an industry low and our marketing strategy was outdated, which resulted in a low return on ad spend. Therefore, we recruited talented leaders in 2015 and began taking steps in the fall season to modernize our approach to customer and pricing data.

In the fourth quarter, this allowed us to improve our return on ad spend, better manage our seasonal markdowns and improve our credit penetration. We also began the process to assort our stores based on local needs and better understanding the pricing elasticity to remain competitive, while protecting our bottom line.

Although localization and data analytics are not groundbreaking retail initiatives, they are new to JCPenney and will be significantly accretive to our business. Because of these reasons and many more, we're confident that we have the ability to grow top line and improve our gross margin over the next three years.

My take

Baby steps, but confident ones. But still a very long way to go.