PROFESSOR: 'JC Penney Serves No Compelling Customer Purpose'

JC Penney is a company in free fall.

It recently had one of the worst retail quarters in history with a staggering 32 percent drop in same store sales, and may lose out on an essential agreement with Martha Stewart in a lawsuit with Macy's.

The few remaining believers, notably Pershing Square Capital Management CEO Bill Ackman, argue that there's still unlocked potential in the company and that CEO Ron Johnson just needs time to enact his turnaround plan.

But there could be a fundamental problem (if not many fundamental problems) with Johnson's plan.

As Rotman School of Management Dean Roger Martin writes at the Harvard Business Review, is that the company has no real strategy. He puts it bluntly: "The problem with J.C. Penney is that it serves no compelling customer purpose."

While Johnson has focused on improving elements of the store, he hasn't isolated the central reason for being that must be behind a successful brand. He hasn't provided anything that makes JC Penney the stand out from the pack.

Nothing makes that more clear than one of Johnson's core turnaround idea of high grossing shops within stores focused around specific brands. The success of these segments has served only to highlight how poorly the rest of the store is doing.

Martin writes:

For the approximately 90% of the store that isn't the new J.C. Penney, the floor of sales/square foot hasn't been a floor but rather quicksand ...

Customers are likely to walk through the 'old J.C. Penney' part of the store thinking "this is pretty bland" and then get to the 'new J.C. Penney' part and think "wow, the rest of the store is really a lot worse than I thought." That is how sales per square foot in the 'new J.C. Penney' can be double the rest of the store and total store sales are down 30%. The tiny 'new J.C. Penney' part of the store is cannibalizing massive volumes of sales from the 'old J.C. Penney' part of the store for each customer who walks through the door.

The optimistic view is that as the new JC Penney expands to become the whole store, sales will keep rising. That argument only makes sense, however, if sales at the new JC Penney not only overcome the cannibalization of the older style floor space, but are also so big that they challenge external competitors like Macy's and Target.

There's no evidence that this is happening.

Meanwhile Johnson's plan to stop having sales has been abandoned, a Martha Stewart-branded shop may not even happen, and a steady stream of layoffs won't draw any new customers.

A real strategy is built around answering a difficult question: What can this company do better than anyone else?

At this point, the company's not really trying to answer that, and it's not trying to beat anything but the old version of itself. That's not a plan that wins.