JCPenney in Frisco, TX (Photo credit: Wikipedia)

When J.C. Penney's CEO Ron Johnson arrived at the company, he embarked on a journey to fundamentally change how the retailer operates.  Upon his arrival, the aura of his success as Apple's head of retail was believed to inject much needed life in what appeared to be a dying company.  After the hoorahs quieted, the reality of the task before Mr. Johnson set in.  And, for the 15 months that he has been at the helm, it seems the firm has struggled.  When instant gratification did not occur, analysts and the media were quick attack.

What is Mr. Johnson's plan for the company?  Actually, it's nothing new.  He's simply extending a concept that has been in retailing for years.  So, what's that?

If one walks into most any big-name retailer - Macy's,Nordstrom, etc. - you will typically find the beauty products on the entry level.  Whether it is Chanel orLancome or some other brand, each product maker is "showcased" at its own counter.  It turns out that the retailer sub-lets the space to the product maker and the counter is actually staffed by an employee of the product maker, not the retailer.  In essence, each of these beauty product counters is a store within a store.

As was mentioned above, the concept of a store within a store has been around for years.  The difference for J.C. Penney is that Mr. Johnson is extending the concept to the entire range of products from clothing to bath to housewares.  In doing so, one might argue that the retailer has become no more than an operator of real estate . . . simply sub-letting to others.  In one sense, this is probably true.  Alternatively, there might be a value-add in the way this is accomplished.

Staging the physical layout to enhance the customer experience is no different than staging a home for sale.  Staging can be quite sophisticated and can even go beyond sight.  Consider Disneyland.  Of course, the park is visually rich.  And, the obvious added sense is sound.  But, the less obvious sense that Disney employs is smell.  The scents that one experiences at Disneyland are not coincidental.  As one walks down Main Street, one will encounter a scent.  Using large blowers, Disney pumps scent into the area.  In the morning, when excitement is high, one specific scent is used.  In mid-day, when energy is peaking, a different scent is use.  As the day comes to an end and everyone is settling down for the Main Street Electric Parade, yet another scent is used.  Disney uses scent to create or enhance a mood.  One must admit that this is pretty sophisticated.

Bringing it back to retail, consider walking into an Apple retail store.  Now, consider walking into some other retailer - use your own example - with a less thoughtful physical layout.  It seems that this is where Mr. Johnson believes he will make a difference.  His success with Apple's retail store is in part due to their staging's effect on the customer's experience.  And, most certainly, he believes that he can extend this concept to J.C. Penney.

Beyond the aspect of staging, there are potential operational benefits of the store in a store model.  With the majority of staffing of stores coming from the product makers themselves, J.C. Penney might have lower overhead expenses.  With each product maker operating its own "store", the product makers would have greater control over sales, which might increase sales.  Given a sales override, higher sales by the product makers would lead to higher income to J.C. Penney.

Of course, the proof is in the pudding.  For several quarters under Mr. Johnson, the company has experienced losses.  Its dividend was suspended.  Naturally, questions arise.  However, should Mr. Johnson's strategy prove correct and be the future of retail, J.C. Penney should be well ahead of its competitors.  We believe that asRome was not built in a day, J.C. Penney will rise to greatness over time.  As such, our firm established a position in JCP for our clients in Summer of 2012.

Update:

There have been many comments about J.C. Penney.  Some readers might not be familiar with certain issues.  As such, we provide the following.

Prior to being head of retail for Apple, Ron Johnson was the head of merchandising at Target.  Prior to that, he was in retailing at Mervyn's.  It would be an unfair criticism of Mr. Johnson to assert that he does not have any background in retailing or that his retailing experience is limited to Apple.  One of our firm's clients worked under Mr. Johnson at Target and has stated that Mr. Johnson is the "real deal".

The store-in-a-store concept is in fact being rolled out.  The operative phrase is "being rolled out."  There are many store locations where it has not yet been introduced.  Customers who frequent -- or used to frequent -- those store locations will still see the former store layouts and would understandably think nothing is changing.

Some JCP customers have asked why anything had to change.  "I liked the old store."  The fact is that fewer and fewer people liked the old store.  There was simply not enough people who liked the old store to sustain it.  And, the reality is that if nothing changed, it would have likely shut down in due time just like Montgomery Ward.  Sentimentality is great, but that sentimentality needs to be shared by enough people to keep the dream alive.  For those who liked the styles and fashion that were available at JCP, those styles and fashions will no doubt be available through other stores.  Let those stores become your new favorites and let the old JCP be a fond memory.