Describe the components of the J.C. Penney new business model. Then, evaluate the business model’s overall effectiveness

9 – 5 1 3 – 0 3 6

R E V : J A N U A R Y 4 , 2 0 1 3

________________________________________________________________________________________________________________

HBS Professor Elie Ofek and Professor Jill Avery (Simmons School of Management) prepared this case. This case was developed from published
sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary
data, or illustrations of effective or ineffective management.

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E L I E O F E K

J I L L A V E R Y

J.C. Penney’s “Fair and Square” Pricing Strategy

Retailing is hard, and that’s what Steve [Jobs] said to me when we started stores at Apple.

— Ron Johnson, CEO, J.C. Penney1

It was August 2012 and the release of second quarter earnings was looming for Ron Johnson, the
chief executive officer of J.C. Penney, one of America’s first department stores. Johnson, HBS ’84, had
intimated to Wall Street that the retailer’s second quarter results were likely to miss expectations
again, following dismal first quarter results that had sent the company’s stock price careening to less
than half of its February 2012 value of $43 a share. The Q1 news released in May was grim: a $163
million loss, same store revenue down 19%, and the number of customers shopping in J.C. Penney
stores down 10%. These results were particularly disheartening given the company’s radical
repositioning of its business model and its brand in February 2012.

The centerpiece of the repositioning initiative was a switch from J.C. Penney’s existing high-low
pricing strategy, in which the retailer ran frequent sales to offer customers deep discounts off of its higher
list prices, to a new strategy the company dubbed “Fair and Square” pricing. “Fair and Square” pricing
was meant to simplify J.C. Penney’s pricing structure and make it more straightforward for customers to
shop. It offered great prices every day, with less frequent price promotions. The company touted its new
pricing strategy as offering “no games, no gimmicks” and invited consumers to “do the math” to see
how it offered them cheaper prices on a regular basis with less hassle.

Moving away from high-low pricing was a massive shift for J.C. Penney. In 2011, the retailer spent
$1.2 billion to execute 590 different sales events and promotions2 and generated 72% of its $17.3
billion in annual revenue from products sold at steep discounts of more than 50% off of the initial list
price.3 Wall Street was initially supportive of the company’s plans for change. Investors, who sent J.C.
Penney’s stock soaring up 24% following the announcement of the new pricing plan, viewed it as a
way for J.C. Penney to escape the ruthless downward spiral of escalating price promotions that
gripped America’s retailers struggling to survive the economic recession.

But by mid-summer 2012, customers and shareholders appeared to be voting with their feet,
leaving the retailer in droves. Was Johnson’s new pricing strategy misguided or was it just a matter of
time before customers fully embraced it? Johnson was under enormous pressure to turn things
around quickly as the all-important back-to-school and holiday shopping seasons were imminent.
Many voices were calling on him to consider changing the pricing strategy again.

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Company Background

Johnson was at the helm of what at one time was considered America’s most venerated
department store. Once the largest department store chain in the country with over 2,000 stores, as of
2012, the 110 year old retailer operated 1,100 stores, claiming to serve more than half of America’s
households with 41 million square feet of retail space. Founded by James Cash Penney in 1902, the
company’s first outlet was opened in a Wyoming mining town under the name “The Golden Rule,”
that signified its philosophy of treating customers the way Penney himself wished to be treated.
Johnson believed that his “Fair and Square” pricing plan corresponded to the founder’s beliefs, “Now
if you go back to the founding of this company, James Cash Penney believed in everyday fair prices.
He said, ‘We don’t mark goods up just to mark them down. We don’t believe in sales.’”4

The company enjoyed years of rapid growth and expansion. By its 50th anniversary, annual sales
exceeded $1 billion. It initially offered consumers one stop shopping as a mass merchandiser, selling
soft goods, such as clothing, as well as hard goods, such as appliances, hardware, electronics, and
sporting goods. Its retail business was joined by a mail order catalog in 1963 and an ecommerce
website in 1998. However, following tough times in the 1980’s, the company reorganized, phasing out
its hard goods lines and refocusing on its soft goods to become a fashion oriented department store.

But by its 100th anniversary, the company appeared to be running out of steam. Price-oriented
mass merchandisers, such as Walmart and Target, had garnered the lower end of the market, while
higher end department stores, such as Macy’s and Nordstrom’s, were catering to the upwardly
mobile middle class. Although the economic recession of 2008 was difficult for all retailers due to
consumers’ increasing frugality, middle market retailers, like J.C. Penney and Sears, were hit the
hardest. By 2011, J.C. Penney’s stores were old, often disorganized, and faded, and the brand and its
merchandise were starting to feel dated. About 400 of its stores were located in small towns, such as
Alpena, Michigan with a population of a little over 10,000. In such towns, there were often only few,
if any, other department stores. The remaining 700 or so stores were located in major metropolitan
areas, often in suburban malls, such as the Northshore Mall in Peabody, Massachusetts (15 miles
north of Boston).

Following years of store closings, sales malaise, declining market share, slumping earnings, and
weak stock market performance, activist investor and hedge fund manager, William Ackman (HBS
’92) obtained an 18% majority shareholder position in the company in 2010–2011. He was determined
to turn J.C Penney around and extract its value, much of which was locked up in its vast real estate
holdings that were estimated to be worth $11 billion.5 J.C. Penney owned 400 of its retail stores and
paid low rents (an average of less than $5 per square foot) for the remainder. Specialty stores like Gap
paid much higher rents (around $40 per square foot) for their retail space.6 Looking to shake up the
company, Ackman was instrumental in luring Johnson to take the CEO position.

Johnson was a big catch. In the 1990s, he was vice president of merchandising at Target where he
helped transform the mass merchandiser into a hot retail brand selling stylish yet affordable
products. During his time there, Johnson negotiated a contract with designer Michael Graves,
beginning Target’s profitable partnerships with high end designers, which enhanced its brand image
as a chic, fashion-forward retailer. Starting in 2000, he worked with Steve Jobs to develop the wildly
successful Apple retail stores. Johnson was the brainchild behind the “Genius Bars” concept, a free
technical help and support area staffed by knowledgeable customer service representatives, widely
touted as one of the most innovative retail concepts of the last decade. Johnson was regarded by
many as creative and determined; according to a friend, “What people loved more about him than his
talent was his persistence. He was just relentless.”7 Johnson’s deep retail experience combined with

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his wholesome charisma and boyish enthusiasm made him the perfect change agent. The media
dubbed him the “Steve Jobs of the retail industry” and on the day his appointment was announced
J.C. Penney’s stock jumped 18%. (See Exhibit 1 for J.C. Penney’s stock market performance).

An Industry under Pressure

J.C. Penney’s 2011 sales were lower than they were in the 1990s and the retail landscape was
getting more competitive. Department stores, in particular, were under increased pressure. New
retail formats, such as big box retailers like Walmart that operated free standing supercenters selling
mass merchandise and small specialty stores like Gap and J. Crew that were located in shopping
malls and offered specialized merchandise, were squeezing department stores out of the market (see
Exhibit 2). An emerging challenge came from large international clothing retailers, such as H&M and
ZARA, that were aggressively entering the U.S. market. These retailers relied on shorter product life
cycles and partnerships with top designers to offer fast-fashion merchandise at relatively low prices.
Johnson explained the challenge as he stepped into his new role:

Over the past 30 years the department store has become a less relevant part of the retail
infrastructure, largely because of decisions the stores have made. As America exploded with
big box and specialty stores and new shopping formats, department stores abdicated their
unique role instead of engaging the competition. They retreated from categories and
assortments that made them distinctive.8

Department stores were once the most popular places for Americans to shop, offering distinctive
merchandise in elegant settings that provided special services, such as tearooms, salons, and on-site
tailoring, and served as social hubs. Johnson reminisced, “In the golden age of department stores,
America’s families came for more than just to shop. They were able to have fun experiences and were
offered a range of useful services. . . . If we want to transform the department store, we have to
understand what happened. These stores were a pillar of the community.”9

Johnson, unlike others, believed that department stores could be revived. “There’s no reason
department stores can’t flourish. They can be people’s favorite place to shop. They’ve got all these
strategic advantages—the lowest cost of real estate, exceptional access to merchandise, scale to create
enormous marketing power, colocation with specialty stores. And people like stores with huge
assortments and one-stop shopping.”10

J.C. Penney’s performance had been lackluster for quite some time, and the retailer was losing
market share even within the shrinking department store channel (see Exhibits 3 and 4). Competitors
Macy’s and Kohl’s were nipping at J.C. Penney’s business from both the high and low end. The
average J.C. Penney customer only visited a store four times per year and sales per square foot ($156)
were low compared to those of its competitors and the specialty stores Johnson hoped to emulate
(Gap $30011, Apple $5,626 in sales per square foot).12 Department stores and big box stores had
increased their promotional budgets since the outbreak of the Great Recession in 2007 and most used
blockbuster sales, coupons, and frequent price promotion to drive purchases. According to consulting
firm A.T. Kearney, more than 40% of the items Americans bought in 2011 were bought on sale, up
from 10% in 1990.13 Many retailers were eager to wean shoppers off of the big discounts that had
become commonplace.

Competition was also increasing from online retailing. Yet Johnson believed brick and mortar
stores were still relevant, “Physical stores are still the primary way people acquire merchandise and I
think that will be true 50 years from now. . . . A store has got to be much more than a place to acquire

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merchandise. It’s got to help people enrich their lives. If the store just fulfills a specific product need,
it’s not creating new types of value for the consumer. It’s transacting. Any website can do that.”14

Many of J.C. Penney’s largest competitors, such as Macy’s, seemed to have a different view and
were investing heavily in their e-commerce operations and in catering to what they called the “omni-
channel” consumer, who accessed the retailer through the web, on mobile devices or in physical
stores (often as part of the same purchase decision). Although it had been a pioneer in multi-channel
commerce, with 2001 combined catalog and web sales of nearly $3.4 billion, J.C. Penney’s e-
commerce sales had stagnated over the last three years while those of Macy’s and Kohl’s had grown
substantially during the same time frame.15 (See Exhibit 5 for E-commerce sales growth).

J.C. Penney’s Radical Makeover

Following his appointment in November 2011, Johnson determined that nothing short of a
complete overhaul would solve J.C. Penney’s problems. Just two months after taking the helm,
Johnson and his newly recruited leadership team, culled largely from Apple and Target, announced a
radical repositioning of the J.C. Penney business model and brand. Following the announcement,
Forbes magazine dubbed J.C. Penney the most interesting retail story of the year, proclaiming, “This
week, Johnson took a sledgehammer to the J.C. Penney way of doing business. It’s the most exciting
thing I’ve seen in retail since Apple opened stores, again with Johnson at the helm.”16

The turnaround plan evoked J.C. Penney’s founding spirit, and Johnson declared it a reclamation
of the company’s heritage. J.C. Penney’s website announced, “Over 100 years ago, James Cash
Penney founded his company on the principle of treating customers the way he wanted to be treated
himself: fair and square. Today, rooted in its rich heritage, J.C. Penney Company, Inc. is re-imagining
every aspect of its business in order to reclaim its birthright and become America’s favorite store. . . .
At every visit, customers will discover straightforward Fair and Square Pricing.”17

The four-year plan involved several distinct, yet integrated elements that touched every part of
the business and were designed to recreate a golden age department store that appealed to all
Americans, across age, income, and geographic demographics. As Johnson explained, “We are going
to rethink every aspect of our business, boldly pursue change, and create long-term shareholder
value, as we become America’s favorite store. Every initiative we pursue will be guided by our core
value to treat customers as we would like to be treated—fair and square.”18

New Logo

J.C. Penney had been tinkering with its brand logo, changing it three times in three years. In 2011,
the company asked the public for help in redesigning the logo in a crowd-sourcing experiment. The
winning design was submitted by a University of Cincinnati student and was unveiled with much
fanfare via social media. In 2012, Johnson scrapped this design and hired an agency to redesign the
logo once again. The new logo evoked the American flag with red, white, and blue colors and the
letters “jcp” in lower case font within a square that represented the new “Fair and Square” mantra.
J.C. Penney, which many affectionately called “Penney’s” would now be known as “jcp.” (See Exhibit
6 for the new logo.)

New Brand Spokesperson

One of the most exciting and controversial developments of the plan was the announcement of
comedian and talk show host Ellen DeGeneres as the new brand spokesperson. DeGeneres, who once
worked at a J.C. Penney store as a teenager in Louisiana, appeared in television advertising,

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developed J.C. Penney themed skits for her popular talk show, and tweeted about the company on
Twitter. Johnson proclaimed DeGeneres to be “one of the most fun and vibrant people in
entertainment today, with great warmth and a down-to-earth attitude. . . . Importantly, we share the
same fundamental values as Ellen.”19

Shortly after DeGeneres’ advertising debut, the conservative Christian group One Million Moms
took offense, citing DeGeneres’ homosexuality as problematic for the brand’s image and its
traditional family shopper demographic. The group asked its members to boycott J.C. Penney and to
call their local store manager to ask for DeGeneres’ removal as spokesperson. DeGeneres went on the
offensive to defend her personal values and to reassert her relationship with her fans and with J.C.
Penney, producing a witty, yet heartfelt response delivered on her talk show that quickly went viral
on the social web. A firestorm erupted and played out on J.C. Penney’s Facebook page, where both
pro- and anti-gay posters pledged their support for and/or rejection of the retailer.

J.C. Penney survived the controversy by standing firmly behind its choice of spokesperson. The
protest event generated significant positive press for the company and Facebook feedback was more
positive than negative. Riding the wave of publicity, J.C. Penney went on to feature two gay dads in a
widely touted Father’s Day advertising campaign.

New Store Design

While the new logo and spokesperson were short-term fixes that could be executed quickly,
Johnson knew from his experience at Apple that, to really make a difference, he had to make
significant changes to the product offering, a longer term proposition. He embarked on a multi-year
plan to re-energize and redesign J.C. Penney’s product offering and its merchandising at retail.

He began by forging new supplier relationships with top brands like Martha Stewart and hot
designers like Nanette Lepore to create J.C. Penney-specific merchandise lines, a strategy reminiscent
of Target. He then went to work to improve the quality of J.C. Penney’s sagging and dated private
label brands, Worthington, St. John’s Bay, The Original Arizona Jeans Co, and Stafford, to
reinvigorate them and restore their brand integrity. These efforts could also build on J.C. Penney’s
recent purchase of the Liz Claiborne brands (which, among others, included Liz Claiborne branded
apparel, Lucky Jeans, Kate Spade and Juicy Couture) and the ongoing opening of about 300 Sephora
locations inside J.C. Penney stores, which offered a select set of Sephora beauty care products.20

He envisioned the in-store retail environment as a series of interactive specialty “Shops,” along a
visually engaging and vibrant “Street,” with a central “Square” that would serve as the social hub of
the store. J.C. Penney’s vast array of merchandise, currently hung on crowded racks and shelves,
would be regrouped and merchandised in 80-100 “stores-within-a-store,” each meant to simulate the
buying experience of a specialty shop. The first shop to appear was devoted to jeans and featured a
denim bar, trained fit specialists, and Levi’s innovative Curve ID program that helped women find
the right jeans for their body type (see Exhibit 7). Plans for future shops included Joe Fresh and
Mango. The company planned to install two to three new shops each month, beginning in August
2012, over a four year period. Many of the shops were designed to pull in younger shoppers, a deficit
in J.C. Penney’s current customer base.

The “Street” would consist of wider aisles with a fresh, clean look, more streamlined with less
signage and bold, colorful, upscale graphics featuring the square from the new logo (see Exhibit 8).
Each month would have its own unique personality and color-coded signage that changed the look of
the store to freshen its appeal. Ten thousand square feet at the center of the store would be
designated for the “Town Square.” In this area, J.C. Penney planned to offer complimentary services,

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such as gift wrapping, and special promotional events to create fun and excitement. During the
summer of 2012, the company offered free hot dogs and ice cream, free “Go USA” Olympic t-shirts
during the Summer Olympics, and free back-to-school haircuts for school children.

Johnson summarized his vision for the new environment, “We are going to make the store a place
people love to come-just to come. We’ll transform the buying experience not unlike what we did at
Apple.”21

New Sales Structure

To support the new retail environment, Johnson needed to re-energize J.C. Penney’s sales force.
His goal was to create a team of specialists who were product experts, much like Apple’s Geniuses.
J.C. Penney sales clerks had always been paid commissions based on how much they sold. This
system encouraged sales clerks to sell aggressively to customers. Johnson felt that this aggressive
sales culture did not fit with the new “Fair and Square” positioning and set out to change it by
eliminating all sales commissions. It was a controversial decision, especially among the sales
employees, many of whom had just been through a wave of layoffs and were nervous about keeping
their jobs. Johnson explained his rationale for the change, “A lot of great retailers don’t use
commissions. We never used them at Apple. . . . And I think it’s a better thing to do to pay people in
advance for what you want them to do and let them look in the customers’ hearts and try to help
them. . . . We think we’ve got a great way to do business for the middle class, where we really put a
big bear hug around the middle class and help them look better and live better every day.”22

But some employees expressed dissatisfaction, “I must take offense at Ron Johnson’s reason for
eliminating commission. Ron Johnson should remember that J.C. Penney is not Target, we are better.
When people come into our store they expect to be greeted, they expect someone to be available to
help, they expect good service,” said a sales associate. Another associate claimed, “I lost about $250
per pay period and Mr. Johnson thinks this is FAIR and SQUARE. From all of J.C. Penney’s little
workers, this stinks.” Another lamented, “We long-term employees are heartbroken at what we see
around us. Ron Johnson may have a grand plan, and it may work, but we feel like he is destroying
‘us’ in the process of implementation. It has become an awful place to work, short-staffed to the point
that we struggle to properly service what customers we do have.”23

But without a doubt, the cornerstone of the change program was a new pricing scheme that many
believed to be the riskiest part of the strategy.

The New Pricing Strategy

Looking at the numbers, Johnson believed that he needed to address the existing high-low pricing
structure that had gotten out of control. J.C. Penney’s customers had become hooked on the deals;
over the past ten years, the average discount to get customers to buy went from 38% to 60%24. “At
some point you, as a brand, just look desperate. J.C. Penney spent over $1 billion [on price
promotion], and the customer didn’t even pay attention,” he agonized.25 In his first report to
shareholders, he spoke about the detrimental long term effects of excessive price promotions,
“Plagued by the ‘games’ of the industry over the last several decades, retailers-including J.C. Penney-
barraged customers with a constant stream of promotions that proved to be ineffective. Each time we
participated in this pricing war, we were discounting our brand and eroding the trust and loyalty of
our customers.”26

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The company announced its “Fair and Square” pricing plan in January 2012. The plan had three
pricing tiers. First, the company reduced prices by an average of 40% to offer consumers an “Every
Day Fair and Square” price. Second, every month the company ran a “Month Long Values Event”
with special pricing on seasonal items, marked down an additional 20-29%, meant to coincide with
events such as Back-to-School and Father’s Day. Third, every first and third Friday of each month
(paydays for many working Americans) were designated “Best Price Fridays,” where J.C. Penney
would offer special deals on items it was looking to liquidate, about 20% of the store’s stock, at deals
of about 1/3 off of the every day price. Each price point was supported by unique signage at retail,
(see Exhibit 9). J.C. Penney eliminated its famous “Doorbuster” sales, such as those that it
traditionally held on Black Friday, the day after Thanksgiving and the busiest shopping day of the
year, that featured outrageously low prices on over 500 items from 4:00 a.m. to 1:00 p.m. Exhibit 10
shows an example of the different price tiers.

Importantly, J.C. Penney avoided using the words “sale” and “clearance” in its messaging of the
new program to consumers. Said Johnson, “Sale is not in our vocabulary. . . . Every item in the store
is priced to be its best price every day.”27 The “Fair and Square” price was the only price listed on the
price tag, moving J.C. Penney away from the practice of listing the manufacturer’s suggested retail
price (MSRP) and the sale price, which was intended to show customers how much they were saving
relative to somewhat fictitious list price. In the highly competitive world of retailing, nearly no one
priced goods at the MSRP. Breaking with another retailing best-practice, J.C. Penney ended all of its
“Fair and Square” prices with .00 instead of .99, rounding up to the nearest dollar. Johnson also
instituted a no restrictions “Happy Returns” return policy, designed to take the hassle out of
returning items, even without a receipt.

In effect, the new plan combined elements of two traditional pricing strategies. The “Every Day
Fair and Square” prices represented an everyday-low-price (EDLP) strategy, while the “Month Long
Values” and “Best Price Fridays” maintained some emphasis on high-low pricing.

High-low pricing strategies are intended to allow retailers to use price discrimination to maximize
the average price paid by customers who differ in their willingness to pay. Customers who are highly
price sensitive wait for sale days to purchase, use coupons and rebates, scour the crowded clearance
racks to find a bargain, and take advantage of retailer’s door buster specials on big shopping days
like Black Friday. Customers who are less price sensitive buy when it is convenient for them, tend not
to use coupons and rebates due to the time it takes to clip and organize them, and rarely join in on
door buster specials or clearance sales. Thus, the retailer reaps higher non-sale prices from many of
their purchases. However, given the predominance of high-low pricing strategies across retailers in
today’s marketplace, even less …