Ron Johnson's office seat has barely cooled off following his departure as business observers everywhere dissect what went so dreadfully wrong at J.C. Penney. The former Apple executive was too Silicon Valley for the Plano, Texas, retailer. He was arrogant. He didn't test his ideas, maintaining the Apple mantra that customers don't know what they want until you show it to them. He approved marketing campaigns that told loyal Penney's shoppers that "you deserve to look better," basically telling them that they looked less than glamorous wearing the brand they had trusted and been comfortable with for years. He hoarded information so that individual store merchandisers didn't know how various lines were performing. He mocked J.C. Penney's ways of doing things. He abandoned the discounting customers had come to expect from retailers. And he, and most of the team he recruited, were commuter leaders, jetting back to California after cramming in marathon work sessions at headquarters.
These factors certainly couldn't have helped. I think, however, there's one major reason behind J.C. Penney's sudden swoon that not enough commentators are picking up on. There's one big reason JCP would never be "Bloomingdale's for the mass market," as Johnson wanted it to be, and that's because the mass market is gone. Because the middle class is gone, or at least rapidly going.
This reflects a troubling development in our economy, what some have termed the "hourglass economy." This means that companies can reach both high-end and low-end consumers, but there's no longer a broad middle to appeal to.
For years, a fundamental problem that Penney's has grappled with is that their historical base of middle-income households is shrinking. If you compare charts showing how various slices of our economy are doing, you'd see growth at the bottom and growth at the top of the income spectrum, and shrinkage in the middle. Penney's is not going to be able to overcome a demographic reality that is causing its historical customer base to go away. Indeed, economic forces are leading many employers of what would at one point have been middle-class jobs to push the economic risks to their employees, further limiting their disposable spending capacity.
That doesn't mean JCP is doomed. In 2004, former CEO Alan Questrom was applauded for turning around the store which had hit on hard times. He was replaced by the soon-to-once-again-take-the-reins Myron Ullman, who managed to continue the store's evolution, introducing more hip brands and giving shoppers a reason to turn up. Among his more interesting initiatives was to leverage capabilities that Penney's had long developed as a catalog company into the emerging world of Internet retail. Indeed, in 2009, reporters at Businessweek admiringly observed that J.C. Penney "gets" the net, holding its own even against competitors such as Kohl's and Target. He was widely regarded to have led a successful strategy by the time Penney's board, seeking something new, turned to Johnson.
But Kohl's and Target, like Walmart, appeal to the growing segment of consumers at the lower end of America's economic spectrum. If JCP continues to focus on the shrinking middle class, it's only reasonable to assume their sales will also continue to shrink. I think Penney's management needs to once again get back into the heads of its core consumers. They need to understand those consumers' entire sets of experiences and make doing business with Penney's better again. But they also need to decide where they are going to find growth again. In an hourglass economy, it's unlikely to be their traditional middle-income consumer. Who could they appeal to and how? I'd consider things like making life easier for super-stressed moms. Perhaps considering the whole household in their approach (the company is big in household goods) — maybe even offering services that would help newly formed households get set up. Skinny jeans and Euro-fashions don't strike me as the route to the future.