Retail Innovation: A Thin Line Between Failure and Success

Retail Innovation: A Thin Line Between Failure and Success
March 23, 2022 Omnibus

Some (business) tales teach us how to succeed.

The tale of JC Penney could be one of those. It has everything. A venerable retailer with over a hundred years of tradition. A big trouble. And someone daring to tackle it. A hero – an Apple guru even. A vision. A promise. A strategy built around A big hairy Audacious goal: “JC Penney will become US Favourite Store.” Also, a dramatic turn.

Still, this tale is a cautionary one. Warning business innovators of the dangers. Especially, the ones who change business models under time pressure (and show me someone who doesn’t?).

The case has been well documented. Two insightful and well-researched articles are quoted in the footnotes. But there is a perspective, we’ll try to add to the debate:

  1. Basic understanding – WHY the turnaround retail strategy failed
  2. Suggesting HOW – an alternative way of introducing bold retail strategies

But first, let’s digest a little context.

— JC PENNEY GETS A NEW CEO

It starts as a classic story of a venerable company. A charismatic founder. Growth. Long tradition. More generations of customers. Glory years: back in the 1970s and 1980s.

Then enters the internet. Some disruptions. Some dubious decisions. Some mishaps. As always. And a heavy blow of the financial crisis. The revenues dropped from 19,9 bn $ (2007) to 17,7 bn (2011).

A business model is struggling, stores are underperforming, the company is stagnating.

During fall 2011, a new CEO was appointed.

Not anyone. A star CEO. A former Apple guy, a disciple of Steve Jobs – Ron Johnson. With premium accolades: his pedigree was built around leading Apple retail stores in a period of high growth.

— A CHANGE

Stakeholders demanded what the new CEO soon provided: Change.

According to the impressively researched article by Jennifer Reingold, less than a month after the official inauguration, the new strategy was delivered.
Reingold: “Johnson laid out his vision of a more upscale, more youth-oriented Penney, weaned off its addiction to price promotions.”

It was very fast. Very audacious.

Johnson promised: “JC Penney will become US Favourite Store!”

The reaction of the company representatives? “No whisper of opposition,” describes Reingold. Sure. Who would oppose a retail guru, festooned by the supreme Apple Store accolades?

The presentation of the plan was unprecedented. The party was huge. Calvin Klein came.

The stock market reacted. The stock value jumped up.

— 16 MONTHS LATER

16 months later Johnson was fired. Brittain Ladd in Observer clinically lists the facts: “At the end of Johnson’s first year as CEO, same-store sales fell 25 percent resulting in a $4.3 billion decrease in revenue. The company recorded a $1 billion loss and the stock fell to $18.”

The headline of his article is more expressive and uses the vocabulary of a newspaper criminal account: “Ron Johnson Killed J.C.Penney …”

— WHAT HAPPENED IN-BETWEEN?

Accounts vary, but all emphasize the scope of the change.

CNN Wire stated: »Penney changed its advertisements, its logo, its store designs and its pricing model, all attempts to make the retailer more palatable to wealthier shoppers.«

Certainly not humble improvements. It’s the action trying to challenge the fundamentals of the old business model. Pressing all the key variables of retail (assortment, merchandising, pricing, coupon promotions, positioning, …). Pressing them at once. A radical turnaround strategy.

The clear goal was to magnetize the flow of new customers. It seems reasonable to assume the new CEO was willingly sacrificing part of the existing core customers. Trading lower-income wallets for more affluent ones. Following the Apple trail.

Makes sense. On paper.

— THE REALITY CHECK

But the final judgment in retail comes from customers – in the real environment. Customers in stores. They are the reality check.

And what happened? A huge amount of the core customers went away. New customers didn’t show up. In one year, the same-store revenues dropped 25%. The plan failed.

Which is not really the news. It happens in business daily. 95% of new ideas fail. The rest is the golden opportunity. Something an entrepreneurial spirit will always strive for.

Why JC Penney’s case is the news is the scale of the failure.

— THE SCALE OF FAILURE

What drew my attention is the way the new CEO and his team rolled-out the large-scale turnaround strategy.

In short: It was very fast & full scale. All once. All in. No testing. Skipping any feedback on a smaller scale. Investing in store redesigns and huge opening ceremonies. Grandness in every possible way.

And to get the scope of the leap taken – or call it sheer recklessness – we should highlight two additional things:

a) We are not talking about yet another startup experiment here. This is a traditional retailer, with rich history, developed company culture (see: Reingold), many employees, and deteriorating but still valuable brand that attracted generations of customers.

b) The transformation is not a small improvement. It’s an overhaul, changing the fundamentals of a brand and its business. A grand turnaround.

All-or-nothing approach suitable for aspiring startups with few customers, and therefore nothing to lose (except fund money). But a grand experiment in the traditional organization? Attacking all the embedded values at once? With no graduality?

Grand experiment taken with all-or-nothing approach in a traditional organization?

That’s a perfect mismatch.

I should dare to introduce a psychological interpretation here.

Because in psychology, we find a common term for describing someone who has a) an inflated sense of their importance, b) a deep need for excessive attention and admiration, c) troubled relationships and d) a lack of empathy for others.

The diagnosis is called narcissism. A disorder in which people have an inflated opinion of themselves.

And in our case, all the conditions for such business narcissism are met.
(of course, the context matters – within the Apple ecosystem the same may be called “daring vision” – transplant it to JC Penney and we have “first-class narcissism”)

No magic wand and no business guru could assure general success without practical validations. Which come from customers. Not in focus groups but in retail stores. Period.

— TESTING A FULL SET OF VARIABLES AT ONCE

And in physical retail, the ultimate check of a new store design with a full set of changed key retail variables – like pricing model, different assortment, new promotional policies, … – is a PILOT STORE.

A 25% drop in a pilot store is bad news. It tells you something is wrong with the plan. Something doesn’t work. You should diagnose the reason, then change it.

A 25% drop in a chain of 1000 stores on top of huge investment is a catastrophe. There’s no backup button like in virtual reality. It’s irreversible. It tells you there is only one way – out. At least, for those who can get out.

— BUT: INNOVATION NEEDS SPEED. AND, WE DON’T HAVE TIME!

And, then I hear my clients’ voices and maybe yours as well: It will take us, what, 3 months to implement a new store design in a pilot store? And than another 3 months to check it? What if we don’t have time for that?

It’s not an easy one. Believe me, I’ve been pondering these questions a lot. They are creeping around always when I consult or make innovation-inducing workshops leading to new store designs.

How fast should we innovate? Are we thorough enough? And again: are we fast enough?

The stakes are high, the pressure could be enormous.

The digital times further escalate the expectations as the disruptors increased the need for innovation speed. We couldn’t escape the fact: These are the times when Elon Musk is the leading hero. And His Paypal peer Peter Thiel puts exponential growth as a supreme condition of success. And online propelled Jeff Bezos right to the top of the Retailia empire.

Still: as much respect the Musks, the Jobs’, the Thiels, the Bezos’ deserve for their success, their examples could easily deceive our minds. In striving to do innovation, at once and full-scale, we nurture our narcissism instead of honestly looking our projects in the mirror – getting feedback, accepting it, and then making improvements. And, exactly in this early reality check lies the power of a pilot store. (A little footnote here: Yes, we can learn from those guys, as well. See how quietly Amazon expands its Fresh grocery format, in select cities, step by step, wave by wave …)

— FASTER ROLL – OUT

On the other side: yes, it’s possible to do the roll-out quicker. On the condition, we do it selectively.

How? As you prepare a test, you always discover some flaws in the current system that could be improved. Sure brainers. Small, viable improvements. Say, cleaner shopping carts, easier navigation, improvments in store layouts. After each pilot project stage, a list of viable changes can be made, and transferred to the whole network. The trouble is: the clients barely want to hear about such improvements. They need a turnaround, not cleaner shopping carts. But it is these small details against which customers measure retailers credibility. Also, solving these necessary but unfancy pain points prepares a springboard for bigger changes. You’ve got to learn how to walk, before you run fast.

Anyway, the pressure to roll-out faster is always present. In the retail environment it might be enormous. But just never, never make a full roll-out on a innovation that changes all the fundamentals of a previous business model. You might be on the right track, you probably are, but some necessary adjustments will draw the thin line between failure and success. The rule is: Testing > Checking > Improving > Expanding. (One exemption: Steve Jobs. Oh, yes, another one who succeeded with the full roll-out: Lenin. Not an exemption: the rest of us, including Jobs’ disciples like Ron Johnson)

Remember, a step in the wrong direction might be made super fast – but it is still a wrong one.

When a mistake is done in a pilot environment, it is reversible. It is irreversible after you trample the business fundamentals already, and your customers have left for good.

It’s also easier to accept failure in experiment format than later when hundreds of thousands, sometimes millions of € are invested into a project.

— KEY TAKEAWAY FOR A BOLD INNOVATOR

Time pressure and overblown egos inflated by public hype might push innovations over the cliff. Then downfall is inevitable. But we can learn from this and try to play better.

Innovations are always a walk on a thin rope. We need to be bold, but not narcissistic.

Change in a startup environment is different than a change in a traditional organization. Business fundamentals couldn’t be overthrown overnight.

Anyway, our plans need a reality check before getting full-scale. Innovations, bold changes of a fundamental model, should be done in stages, step by step.
The steps should be fast & decisive, but there is a difference between:
– fast and hurried
– decisive and arrogant
And especially, there is a difference between being bold and narcissistic.

The line is thin, the risk must be taken. But facing the feedback in the early stages is a necessary step for success. Otherwise, the inflated egos could turn innovation into wishful thinking. And the results for denying the reality can easily resemble catastrophe. They shouldn’t.

 

— THE END

Footnotes

Two articles that provide great insights into the case:

– Jennifer Reingold, “How to Fail in Business, While Really, Really Trying.” Fortune International, March 20, 2014.

– Brittain Ladd, “Ron Johnson Killed J.C. Penney—But He Has Become One of the Brightest Minds in Retail.” Observer. June 10, 2019.

A little request for You Reader

If:

  • You Reader have any additional material I should check on or personal experience with JC Penney or maybe your local experience with the similar case please contribute a commentary or paste a link below! I’d be glad to refresh the article with new facts.
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  • You Reader agree or don’t agree with parts or the whole of the article, share your thoughts – react in the commentary!

Thank You Reader!

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