I was fortunate enough to steal an hour of Marvin Ellison’s time last week to be able to drill down a little further into his strategic thinking, now that almost a year has passed under his role as CEO of JC Penney. Having credited him with getting the business “on the runway, ready for takeoff, “I wanted to understand how his mind works. Is he just a store operator, given his tenure as EVP of stores at Home Depot? If he lacks experience as a merchant, does it really matter? Is he an “in the weeds guy,” more tactically oriented than strategic? Is he a “short-termer,” pushing for quarterly results, sacrificing longer- term strategies for strengthening the brand and sustaining profitable growth?
During our conversation, a major shift in my thinking occurred. Hearing the many strategies and initiatives he and his team were embarking on, the logic behind them, how they are to be executed and how they would elevate the consumer experience and add value to the total JC Penney offering, my brain did a 360-degree spin. It went from my forever-held notion that career-experienced merchants are best qualified to be retail CEO’s, to a new assessment that “store guys,” like Ellison, who have significant experience running stores, are actually better qualified. And even though his Home Depot experience as EVP running 2000 US stores was in a different retail sector than JC Penney, successful strategies can be applied across all retail sectors.
Think of it this way: The store is the final, most important consumer touch point in the value chain. The store is where human engagement happens. Where one can hear and respond to consumers’ likes, dislikes and desires for product and service. Where the whole shopping experience happens. How the physical layout and presentation affects shoppers. Where the underserved categories and/or “white spaces” are. And on and on. The store is where it all happens.
In fact, by definition of the title and ensuing responsibilities, the executive in charge of stores does represent that final direct link with the consumer. Merchants, on the other hand, are one physical link further away in the chain. It’s true that really superior merchants will research and analyze all of the same information the store heads have direct access to, and typically, good merchants are successful in creating desirable products. Furthermore, without great merchants, retailers would not survive.
However, a head of stores, equipped with the experience of the final, direct physical engagement with the consumer, and understanding all of the foregoing points, would have a more holistic view of the entire enterprise and how to develop strategies that add and sustain long term value. Of course, the need for superior merchants is a given. And In my opinion, JC Penney has superior merchants.
An Amazon View on Distribution
Through Ellison’s presentation of some of the new growth initiatives, it was apparent that he viewed JC Penney stores and its integrated online site as distribution platforms. And not just for their private and national wholesale brands, for which JC Penney owns all of the inventory, but for third party brands and/or retailers as well, who would use the platform simply as a “showroom” and point of sale. For example, a big part of their strategy to resurrect the shattered home category, in addition to eliminating some categories such as mattresses and reviving some of the brands and products that were previously more aligned with JCP’s core consumer base, they are expanding into flooring, appliances and furniture.
However, JCP will only own the inventory displayed in their stores. As many as 100 to 215 kitchen and laundry appliances from GE, Hotpoint, LG and Samsung will be displayed in 2000 to 4800 square feet of space in about 500 stores. Online, JCP will offer 1200 models across the four brands. When a customer places an order, the transaction goes to the brand’s distribution center that’s located nearest to the customer’s zip code, which then makes the initial delivery to a distribution hub where a third-party logistics partner assumes the final delivery to the home and completes installation. For JC Penney, this is a low-cost, low-risk proposition that expands their share of market in a category aligned with their customers, and at a time during which Sears continues its precipitous decline.
Penney is also moving toward a similar partnership with Ashley furniture, the largest furniture retailer in the country, and Empire Today, the national carpeting and flooring company. Empire will actually staff its display area due to the flooring expertise required of its associates.
Just as Penney’s pre-Ellison partnership with Sephora has been an enormous success, Ellison understands the synergies of these partnerships and, therefore, their growth potential. These collaborations leverage the expertise of third party brands and retailers by allowing each to do what they do best, adding value for the customer while reducing costs, risk, and increasing sales. Ultimately, Sephora will be rolled out to 600 stores.
Speaking of leveraging expertise, Ellison also understands that Penney has one of the best vertically- integrated private apparel brand processes in the industry, accounting for almost half of their total revenues. Badly damaged under the short tenure of Ron Johnson, Ellison plans to resurrect the private label business and greatly expand it by finding white spaces and underserved categories that can be addressed by to existing brands or by creating new ones. He also envisions giving the strong national wholesale brands greater control, leveraging the synergy created by combining the niche expertise of Penney and the brands. This idea of ceding control to partners’ strengths hints to the future potential of branded shops within the stores and some form of leasing or revenue sharing partnerships.
A final point that strengthened my opinion of Ellison, as a strategist with a long-term perspective is his response to my question about how many stores should ultimately be closed given the continuing growth of the online business and decreasing in-store traffic. Rather than arbitrarily using some performance metric to making such a decision, he said they are going to select marginally performing stores and test their use as distribution centers for the “last mile” with more efficient and timely delivery. Instead of arbitrarily closing stores according to “the numbers,” he sees the potential of their dual use. Hellooo! How often have I predicted Amazon’s eventual store openings for that very same reason?
Ellison does not have the mentality of a typical product-focused merchant. He has the mind of a strategic thinker who has a holistic view of the entire dynamic of the JC Penney brand. He connects the entire operation: its consumers and what they desire; what the space offline and on can provide; how to configure the physical space; how to make a visceral connection with the consumer; and how to provide a transaction and the delivery through a complex system that appears seamless.
On top of all of this, he embraced the JC Penney culture and its people, and they embraced him.
CEO Marvin Ellison will continue to surprise.