- Excerpt
CELEBRATION OF FOOLS:
An Inside Look at the Rise and Fall of JCPenney
by Bill Hare
INTRODUCTION
This case history was developed from the new book, CELEBRATION
OF FOOLS, for use by business schools.
The case history analyzes the unique
characteristics that propelled Penney's from a Mom & Pop store in Wyoming
into a global merchandising monolith. It then explores the causes for
Penney's dramatic decline (the stock price went from $78/share in 1998
to $8.70/share in 2000). This is a textbook example of what happens
to companies that abandon their principles.
CELEBRATION OF FOOLS does not cover JCPenney's current attempts
at rebuilding the brand, including the proposed sale of Eckerd Drugs. While
JCPenney stock has rebounded somewhat, the success of these restructuring
efforts is by no means certain. Penney's attempts at recovery don't diminish
this case study, which examines the reasons for the decline.
CELEBRATION OF FOOLS is written by Bill Hare, an executive
speechwriter who wrote for Penney senior management for eight years.
He had an inside line on the thoughts, statements, and actions of JCPenney
executives. Hare also had access to JCPenney archives, news clippings,
and an oral history dating back to 1905.
This case history will be welcomed by instructors and students in business
schools, anyone interested in the history of business, and people involved
in retailing, merchandising, sales, and business management.
More information about the book, CELEBRATION OF FOOLS, and
author Bill Hare, follows the case history.
Case History:
The Rise and Fall of JCPenney
by Bill Hare
1. The Golden Rule
In 1902, Guy Johnson and Tom Callahan
opened a small store called the "Golden
Rule" in Kemmerer, Wyoming. The manager of that store was James Cash
Penney, who had proven himself as assistant manager of the original Golden
Rule store in Evanston, Wyoming.
The Kemmerer store was only 25 by
45 feet. The Penneys lived in the attic with packing crates as furniture.
The store was loaded with merchandise, "rough
corduroys and sheepskin-lined coats piled high on the center tables,
with men's furnishings to one side, ladies' and babies' things to the
other,"(1) and yard goods and shoes in back. The walls, shelves,
and counters were also filled, and items such as notions and toys were
tucked into corners (there were no cabinets or other fixtures because
of the expense). Merchandise even hung from the ceiling.
Guy Johnson, on his semiannual buying trip to the East, had bought well
-- a Golden Rule specialty. Other differences between the Golden Rule
and other stores were:
- The absence of haggling (a single, written price for all customers)
- Outstanding values (Johnson and a small group of buyers negotiated
wholesale prices for all 20 Golden Rule stores)
- Exemplary service (stores opened early and stayed open late; Golden
Rule managers typically worked 100 hours a week)
- No credit (every transaction was cash-and-carry); this helped the
stores gain an excellent credit rating, further increasing their buying
power with manufacturers.
In 1907, James Cash Penney bought out Callahan and Johnson, and changed
the name of the business to the J.C. Penney Company, later shortened
to JCPenney.
2. The Penney Formula
From the beginning, three things were the most important in the Callahan-Johnson-Penney
way of business:
- Ethical Behavior ("Golden Rule" was more
than a clever slogan)
- Buying Power (a syndicate of stores buying in force)
- Partnership
It was the idea of partnership (and
Penney's execution) that drove the organization's geometric growth.
Ownership of a new store was typically split into thirds, one each
for James Penney, the old manager, and the new manager. In turn, the
new manager selected a candidate for ownership of yet another new store
and began training him as his "first man."
Managers took little more than clerks' wages out of the cash flow, but
they shared in year-end profits in direct proportion to their percentage
of ownership. James Penney was the godfather of profit sharing. For a
store manager, profit sharing wasn't systemwide but related specifically
to his store. If you ran one of the giant stores well, you got a giant
check each year.
3. The Body of Doctrine
At the store managers convention
in 1913 at Salt Lake City's big Hotel Utah, James Penney introduced "The Body of Doctrine," a set of principles
to guide the business dealings of Penney personnel. It later became known
as "The Penney Idea":
- To serve the public, as nearly as we can, to its complete satisfaction.
- To expect from the service we render a fair remuneration and not
all the profits the traffic will bear.
- To do all in our power to pack the customer's dollar full of value,
quality and satisfaction.
- To continue to train ourselves and our associates so that the service
we give will be more and more intelligently performed.
- To improve constantly the human factor in our business.
- To reward the men and women of our organization through participation
in what the business produces.
- To test our every policy, method, and act in this wise: Does it square
with what is right and just?
The Body of Doctrine was written
by a colleague of James Penney and later called "The Penney Idea." Following
its principles, the J. C. Penney Company would grow into the only American
company whose business credo emphasized ethics.
4. Conflict Between Buyers and Sellers
In order to combat the rigidity and bureaucracy resulting from the growth
of JCPenney, CEO W.R. Howell, who ascended to the top position in 1983,
divided the company into six competitive divisions. The idea was that
vertically integrated divisions -- men's, women's, children's, home,
home improvement, and automotive -- would spawn faster, more focused
results.
One of the strengths of the company
had always been the power and expertise of its wholesale buyers. From
the beginning, Penney afforded unique autonomy for the store manager
-- including doing his own "buying." After district
and region input, buyers in New York selected the assortments from which
managers then chose. Store managers resented the New York buyers' leverage
over them while the buyers scorned the managers' lack of sophistication.
But what buyers hated most was a store manager's elevated status in the
organization.
As the company moved from Main Street to anchoring malls, the average
store size greatly increased, and the influence of the field overtook
New York's. Ex-field executives came to dominate the company's senior
management, and total merchandise control passed to the stores. This
weakened the company in two ways.
First, buyers' focus was narrow and deep -- they knew a lot about one
line. But store associates' knowledge of merchandise was more broad and
shallow -- a good associate knew something about a lot of different lines.
Also, buyers had to stay closely in touch with the likes of fiber producers,
textile mills, and manufacturers. Of necessity, buyers were aware of
(and often influential regarding) what was going to happen in the future.
Store executives, of necessity, were focused on what was happening right
now.
JCPenney became, therefore, a right-now organization with little focus
on the future and diminished depth of merchandise knowledge. This, in
turn, led to the corruption of executives getting into bed with vendors.
Elise Greenberg had been one of
the three senior buyers in the men's division before she resigned in
disgust in early 1999. "I couldn't deal
with the unethical business practices," she said -- having gone to her
boss again and again with ways to save the company a bundle, only to
be scolded because she was targeting a favorite supplier.(2)
Alienation of JCPenney's New York buyers was further advanced when Howell
moved the corporate headquarters from Manhattan to Dallas in 1988. Many
of the company's experienced buyers refused to make the move and left
the company. The reorganization of the company into competing divisions
and the move to Dallas sowed the seeds for Penney's decline:
- Eliminating internal cooperation in favor of competition between
divisions has to rank high on the Edsel list of bonehead moves in corporate
America.
- Competition among divisions muffled the corporate grapevine. In the
life of any corporation, getting at the truth internally is always
a major challenge for the leadership. The grapevine helps keep a company
alive and vital. One has to care to complain and gossip.
- Top executives became more isolated, especially after the move to
Dallas. Limited access to senior management contributed to the lockstep
bureaucracy that increasingly enveloped the company.
- Splitting up the merchandise department (buying) hastened the triumph
of the stores. The management of most new merchandising divisions came
from -- where else? -- the stores.
Howell's main weakness as CEO was a product of (or at least reinforced
by) the times. He began early in the era of CEO stock promoters. Responding
to stockholder and Wall Street clamoring for more market value growth,
boards began selecting -- and rewarding -- executives whose primary focus
and skill was in the present payout and resulting stock value.
For the 80 years of company history before Howell's ascendancy, however,
the emphasis had been exactly the opposite: on the customer and on the
future. If Wall Street didn't understand it or like it, tough.
5. The Penney Idea, Revisited
Let's examine three of the precepts
of "The Penney Idea" and see how
well they survived the test of time. The incidents related below occurred
during or just prior to Penney's 1994 banner year.
- "To do all in our power to pack the customer's dollar full of value,
quality, and satisfaction." 1994 was shaping up to be one of Penney's
best years ever. Looking to such results, Howell had given a speech
at the Waldorf-Astoria in which he predicted a bright future for his
company. After the speech, the CEO and his entourage took a limousine
to Teeterboro airport, where a company jet was waiting. En route, Howell
pontificated about the success he saw on the horizon. Then he chuckled
and added, "You know, guys, there's really no mystery to making it
happen. All you have to do is keep your costs under control." Possible
cost-cutting measures then dominated the conversation for the rest
of the trip back to Dallas. Not once was the Penney customer ever
mentioned.
- "To serve the public, as nearly as we can, to its complete satisfaction." The
name given to an internal promotion begun in the first quarter of 1994
was "4 Billion or More in '94." The goal was a fiscal year increase
in revenues by that amount. Profits, it was assumed, would rise
similarly. Posters went up at every Penney office around the world.
An expensive video was produced. Rallies were held. The whole system
was revved up to sell more merchandise or to support anything that
would do so. Inventories were expanded -- and hidden in some cases,
to be marked down and written off the following year. Where was
the customer in all this?
- "To expect for the service we render a fair remuneration and not
all the profit the traffic will bear." Joan Gosnell was manager
of the extensive JCPenney archives. One day she finished compiling
memorabilia and notes for an executive's speech, including a favorite
anecdote: Earl Sams, in charge of the company for four decades,
had always worshipped the founder's customer-first precepts. Once
Sams wrote store manager Al Hughes (later a Penney president) to
gently scold him because his store had shown too much profit!
Gosnell returned to her
office, where a small package awaited her. She opened it and found
a Plexiglas desk plaque that read: "IF IT DOESN'T HAVE
TO DO WITH PROFIT, I DON'T HAVE TIME FOR IT." Since this plaque landed
on hundreds of managers' desks throughout the company, she wondered if
anyone was supposed to have time for the customer anymore. Apparently the
administration thought not.
6. The Unraveling
In the 27 months between June, 1988, and October, 2000, shares of JCPenney
stock went from a high of $78.75 to a low of $8.69 -- lower than the
closing price of $13/share on Black Tuesday, October 29, 1929, when the
stock market crashed. And this unprecedented decline occurred during
one of the biggest bull markets in the history of the New York Stock
Exchange.
JCPenney was a company built upon the concept of thrift and hard work
first, rewards second. The Howell administration tore JCPenney from its
roots because they wanted to live in affordable McMansions on golf courses
in gated communities. They wanted easy commutes and commodious office
suites with custom-made views. While the old generation ate, slept, and
drank merchandise and stores put up with any abuse and inconvenience
in communion, the Howell crew was dedicated to getting the numbers and
driving the stock. They nearly drove it right into bankruptcy.
NOTES:
(1) Mary Elizabeth Curry, "Creating an American Institution: The
Merchandising Genius of J.C. Penney" (New York: Garland Publishing,
1993), p. 96.
(2) From "Penney Pinched," a November 25, 1999, "Dallas Observer" article
by Miriam Rozen.
Copyright ©2004
by Bill Hare. All rights reserved. Reprinted here with permission of
the publisher, Amacom Books, http://www.amacombooks.org. Please feel
free to duplicate or distribute this file, as long as the contents
are not changed and this copyright notice is intact.
