Department store Analysis and Recommendations (JC Penney)

Sunday Group I
Mary Foster, Sharon Lahey, Maegen Lane, Roman Yakhin
MGMT 6359, Seminar in Strategic Management
Spring Semester 2017, Dr. P. Cloninger
JC Penney: Team Case Analysis

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TABLE OF CONTENTS
1.0 Executive Summary ...................................................................................................... 3
2.0 External Analysis
2.1 General Environmental Analysis
2.1.1 Demographic Segment................................................................................. 5
2.1.2 Economic Segment ...................................................................................... 6
2.1.3 Political/Legal Segment............................................................................... 7
2.1.4 Socio Cultural Segment ............................................................................... 7
2.1.5 Technological Segment................................................................................ 8
2.1.6 Global Segment............................................................................................ 8
2.1.7 Summary of General Environment Analysis ............................................... 9
2.1.8 Driving Forces .............................................................................................10
2.2 Industry Analysis
2.2.1 Description of the Industry ..........................................................................10
2.2.2 Industry Dominant Economic Features .......................................................13
2.2.3 Market Size..................................................................................................14
2.2.4 Market Growth Rate ....................................................................................15
2.2.5 Industry Trends ............................................................................................17
2.2.6 Five Forces Analysis....................................................................................17
2.2.6.1 Threat of New Entrants ..................................................................17
2.2.6.2 Power of Suppliers .........................................................................18
2.2.6.3 Power of Buyers .............................................................................18
2.2.6.4 Threat of Substitutes.......................................................................18
2.2.6.5 Intensity of Rivalry.........................................................................19
2.2.6.5.1 Industry Competitors .....................................................19
2.2.6.5.2 Rivals’ Anticipated Strategic Moves .............................20
2.2.6.6 Summary of Five Forces Analysis .................................................21
2.2.7 Industry Key Success Factors (KSFs)..........................................................21
3.0 Internal Analysis
3.1 Organizational Analysis
3.1.1 Corporate Mission........................................................................................22
3.1.2 Products and Services ..................................................................................22
3.1.3 Leadership & Organizational Culture..........................................................23
3.1.4 Structure & Strategy ....................................................................................24
3.1.4.1 Current Structure and Strategy.......................................................24
3.1.4.2 Components of Strategy.................................................................24
3.1.4.3 Competitive Strength......................................................................25
3.1.5 Summary of Organizational Analysis..........................................................26
3.2 Analysis of Firm Resources & Capabilities
3.2.1 Tangible and Intangible Resources..............................................................26
3.2.2 Value Chain Analysis ..................................................................................27
3.2.3 Core Competencies and Sustainable Advantages........................................29
3.2.4 Summary of Firm Resources & Capabilities ...............................................29

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3.3 Financial Analysis
3.3.1 Valuation Analysis.......................................................................................30
3.3.2 Growth Analysis ..........................................................................................30
3.3.3 Profitability Analysis ...................................................................................31
3.3.4 Financial Strength Analysis.........................................................................32
3.3.5 Management Efficiency Analysis................................................................32
3.3.6 Summary of Financial Analysis...................................................................33
4.0 Strategic Issues Analysis
4.1 Critical Challenges .................................................................................................34
4.2 Resources and Capabilities.....................................................................................34
4.3 Strengths or Weaknesses Analysis.........................................................................35
4.4 Opportunities or Threats Analysis..........................................................................36
5.0 Recommendations
5.1 Recommendation One
5.1.1 Goal and Project Objectives.........................................................................37
5.1.2 Action Plans.................................................................................................38
5.1.3 Deliverable...................................................................................................38
5.1.4 Milestones....................................................................................................40
5.1.5 Resources Required .....................................................................................42
5.1.6 Technical Requirements...............................................................................42
5.1.7 Budgeting ....................................................................................................43
5.1.8 Feedback Mechanism...................................................................................45
5.2 Recommendation Two
5.2.1 Goal and Project Objectives.........................................................................46
5.2.2 Action Plans.................................................................................................47
5.2.3 Deliverable...................................................................................................48
5.2.4 Milestones....................................................................................................48
5.2.5 Resources Required .....................................................................................51
5.2.6 Technical Requirements...............................................................................51
5.2.7 Budgeting ....................................................................................................51
5.2.8 Feedback Mechanism...................................................................................53
5.3 Risk Assessments and Contingency Plans .................................................................53
5.4 Limits and Exclusions..................................................................................................55
5.5 Long-Term Effects.......................................................................................................56
6.0 References.....................................................................................................................57
7.0 Appendix.......................................................................................................................64

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1.0 EXECUTIVE SUMMARY
JC Penney is a large department store chain with 1,021 stores and revenue of $12.5
billion. The company has developed partnerships with upscale cosmetics and clothing retailers,
and has also attracted a strong customer following on their website. JC Penney has also shifted
its product selection by selling appliances again, to compete against its struggling rivals, such as
Sears. The company also launched several different yet successful private labels. However, the
department store industry has experienced significant difficulties due to the rise in competition
from online retailers, such as Amazon.com, as well as from brick-and-mortar Supercenters and
Warehouse Clubs. This paper analyzes the external environment of the department store
industry, the forces that are driving change, and how these factors impact JC Penney.
Recommendations for future action are also included.
We examine the profitability of department stores by using the five forces analysis:
bargaining power of suppliers, threat of new entrants, industry rivalry in the industry, bargaining
power of buyers, and threat of substitutes. JC Penney’s primary consumer groups currently
include lower- to middle-class households, which include the elderly, and mothers or housewives
who provide for their household. JC Penney was among the companies most negatively affected
during the past decade by the redistribution of wealth from the middle-class (which is the core
customer base for department stores) to the wealthiest 10% of Americans. More than 100
underperforming JC Penney stores are scheduled to be closed soon, and thousands of employees
will be displaced because of the economic difficulties that the company is experiencing.
A strategic analysis of JC Penney and its value chain, distinctive competitive advantages
and its competitive position industry is included. We will examine the financial ratios,
advantages and disadvantages of JC Penney’s structure compared to its competitors in the

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department store industry to determine its profitability and potential for growth. This paper will
also identify JC Penney’s strengths, weaknesses, opportunities, and threats (SWOT analysis).
Proposed are two solutions to improve the current situation for JC Penney and which
hold promise to benefit the company in the long-term. The first recommendation involves
placing independent capsule Trader Joe’s stores (or other grocery stores) inside existing JC
Penney stores to increase foot traffic and potentially increase revenues. Trader Joe’s was selected
due to their convenience foods—prepared family meals and innovative products that should
attract Millennial Moms, one of JC Penney’s target demographic groups. Grocery stores are
commonly situated in shopping malls in Canada and the UK and the concept should work well in
the U.S due to cultural similarities. This strategy supports JC Penney’s goals to provide the
experience of total convenience for its customers, from hair salons to online order pickup to
home repair appointments, and it will now become a destination to pick up groceries for dinner
on the way home after shopping.
The second recommendation is to create pop-up shops within select JC Penney stores that
act as testing grounds for new products. The inventory is delivered, merchandised, and removed
by the designer, which results in reduced financial risk to JC Penney. These pop-up shops will
feature new items each month, such as handbags from the factory lines of famous midrange
designers, or for example, HGTV decorator/Food Channel celebrity chef home goods, depending
on agreements. The purpose of this project is to attract fashionable Millennials, as well as more
upscale customers. These two strategies will help revive JC Penney as a stronger contender in
the industry by increasing foot traffic, attracting younger-generation customers, and subsequently
increasing profit margins, while reducing risk by negotiating contracts where other companies
assume the major responsibilities for inventory product lines, transportation and stocking.

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2.0 EXTERNAL ANALYSIS
The external environmental analysis will focus on a general industry environmental
analysis, a competitive analysis of the industry, five forces analysis, and key success factors.
2.1 General Environment Analysis
This section of the report analyzes the general environment of the department store
industry. Trends in the six major macro-environment industry components are examined,
including demographic, economic, political/legal, socio-cultural, technological, and global
segments.
2.1.1 Demographic Segment
Management analysis firm McKinsey & Company predicts several major trends that will
have a significant impact, with one of these being demographic changes, specifically the
increasing impact of baby boomers, Hispanics and Millennials. Each segment is predicted by
McKinsey to affect the retail market differently:
 Baby boomers will impact services and experiences more than products. They head
households that account for 92% of food purchases, 73% of housewares, and 56% of
apparel.
 Hispanic households spend 1.5 times more on children’s apparel, fresh food, and
footwear than non-Hispanics, and their retail spending will double over the next 10 years,
eventually accounting for one-fifth of total retail spending.
 Millennials will account for one-third of total spending by 2020 and their shopping
preferences are not easily predictable (MacKenzie, 2013).

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2.1.2 Economic Segment
The Department Stores industry is an important contributor to the U.S. economy, with
2016 revenues of $157.4 billion, and wages expense of $21.4 billion. Management analysis firm
McKinsey & Company views the retail industry as experiencing ongoing significant changes at
present and for the foreseeable future; however, the firm believes that changes happen slowly in
this industry and their impact will take time to be felt (MacKenzie, October 2013). Industry
analysts state that the department stores industry will continue to contract but at a slower rate due
to increases in per capita disposable income as the economy improves.
Annual growth from 2012 to 2017 was -3.8% while predicted annual growth from 2017
to 2022 is expected to be -2.5% (IbisWorld, Industry at a Glance, Department Store Industry,
2017). Online shopping with smartphones has changed the way consumers interact with both
online and physical stores, as consumers peruse items for sale in-store and check reviews online
as they shop. The research firm points out that despite the growth of online shopping, brick-and-
mortar stores “should still account for approximately 85 percent of US retail sales in 2025”
(McKinsey, October 2013).
The current US GDP growth rate for fourth quarter 2016 is 1.9 %, down from 3.5% in 3Q
2016. With the industry growth rate lower than GDP, declining numbers of employees, low
revenue volatility, stores closing, declining revenue and strong, growing competitors, the
Department Store industry fits the definition of a declining industry (GDP Press Release,
February 28, 2017, Bureau of Economic Analysis).

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2.1.3 Political/Legal Segment
The Department Store industry is considered lightly regulated with regulations mostly
enacted by state governments. Federal laws include the Federal Consumer Credit Protection Act
(Truth in Lending); The Federal Fair Credit Reporting Act; The Fair Debt Collection Practices
Act, for consumers. State laws include: Fair Labor Standards Act, minimum wage regulations,
and laws regarding working conditions. As an industry that relies heavily on minimum wage
regulation, due to most workers requiring minimal skills and training, any rise in state-regulated
minimum wages strongly negatively affects profits. Congress has also enacted laws against the
formation of monopolies, price discrimination and has instituted environmental regulations to
protect consumers. Tariffs are also levied again imported merchandise. While consumers often
prefer lower-priced goods, cheap imports from China and Mexico demand lower profit margins
and therefore produce less revenue for the industry. (IBISWorld, Operating Conditions, 2017).
2.1.4 Socio-Cultural Segment
Child-labor abuses are a global concern for the fashion and retail industries. A high
proportion of imported goods are manufactured in countries where child labor regulations and
safety regulations are poorly enforced, such as Bangladesh, Pakistan, Cambodia, and China
(Moylan, 2013). Sustainability in terms of harvesting natural fibers or producing synthetic
materials that may harm the environment is another high-profile social concern that affects the
purchasing decisions of many consumers. Authenticity and corporate responsibility are ideals
tied to both labor laws and environmental concerns, along with other issues such as diversity,
body image, and perceived value for price that especially affect purchasing decisions of
Millennials, the most crucial buying segment for the future of retail, due to this group’s size and
income (Figure 1). Not only will Millennials demand that companies act responsibly and

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authentically, they will punish companies that do not meet expectations by refusing to purchase
their goods (Barakat, 2014). Therefore, it is important that companies clearly state their beliefs,
set goals, and publicly state their record on how they have met those social goals (Mak, 2016).
2.1.5 Technological Segment
The evolution of department store cash registers, from ornate brass appliances to
handheld tablets, is a compelling visual representation of the evolution of technological design in
retail. The use of RFID chips in supply chain management, loss-prevention, electronic tracking
of packages to fulfill customer expectations, point-of-sale information gathering, and
exploitation of customer use of mobile phones, are all examples of technology that affects how
department stores do business. Effective use of these technologies can increase profit margins.
Failure to implement can mean almost certain economic loss (IbisWorld, Technology &
Systems, 2017). Department stores adopt technology both to improve the customer experience
overall and to increase the speed of transactions, effectively competing with online businesses,
with the additional benefit of the customer seeing and trying the merchandise before it is
purchased. Farla Efros, president of retail strategy firm HRC Advisory states, “I think the reality
is brick-and-mortar will never go away because of tactile experiences, or the need to look at and
feel products…that’s why a lot of retailers are investing in buy online, pickup in-store” (Mak,
2016).
2.1.6 Global Segment
Department stores form a large part of a country’s cultural identity, but many chains have
crossed borders to establish a loyal following from customers who have travelled internationally
and wish to replicate the experience and obtain goods at home. These international chains are
increasingly competitive with American national chains. As well, imports from Mexico and

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China form a large segment of lower-priced goods that are offered in department stores, which
directly affects revenue (IbisWorld, International Trade, 2017).
2.1.7 Summary of General Environmental Analysis
The above analysis shows that department stores have lost their importance as a means of
acquiring goods in the national economy. The convenience of online shopping, and ability to
compare prices and read reviews, has resonated with consumers, and department stores must
respond to that challenge by integrating technology into the shopping experience—something
many of their customers are already doing. Department stores have the advantage of providing
instant gratification because the items desired are in front of the customer, ready to be touched,
tried on and purchased on impulse. By providing extended choices in offsite warehouses that can
be instantly ordered and shipped for free in two days, the customer is also reassured that their
purchase is exactly what they wanted.
Shopping in department stores is an integral part of American culture, and a favorite past
time in other countries. Experiences in many of the country’s iconic stores are shared and
treasured. Their imminent demise is more a confirmation of other losses—centralized
communities with mixed use buildings that people are now eager to reembrace after the move to
suburban sprawl left so many people feeling isolated and disconnected from community life. By
reinvigorating urban centers, embracing consumer-friendly technology, and reminding
consumers that department store shopping is a pleasurable, social experience, industry analysts
believe the department store industry could see a resurgence of profitability in the not-too-distant
future (Jinks, 2017).

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2.1.8 Driving Forces
The external environmental analysis of the department store industry reveals that there is
cause for concern if the industry does not respond to the driving forces of technology, namely
online shopping and fast, free shipping that amounts to almost-instant gratification. Additionally,
the department store industry must consider the growth of a new industry, one-stop Supercenters
and Warehouse Clubs that carry everything a consumer could desire, including groceries, in
bulk, at very cheap prices, but lacking personalized customer service. By creating pleasurable
environments that people wish to explore and experience, department stores can compete by
providing an element of social experience that online shopping cannot. They can also provide
goods conducive to impulse purchase, especially the department stores that cater to lower
budgets.
With society on the edge of impending change, as Baby Boomers age and decide to
acquire less goods, department stores must satisfy the demands of Millennials and Generation X,
before these demographic groups willingly part with their money. Both groups are very different
from the Baby Boomers who grew up with department stores as destination experiences. By
getting to know their target demographics for the upcoming decades, department stores can
provide the consumer goods that will bring in these groups, who demand social awareness and
environmental responsibility from the businesses they patronize, and who value new experiences
more than acquisition of goods.
2.2 Industry Analysis
2.2.1 Description of the Industry
The Department Stores industry is analyzed in industry reports under NAICS 452111,
“Department Stores, except discount department stores (primary industry).” Many of the

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businesses in this industry are also included in NAICS 454113, Mail Order Houses or 45411a (E-
Commerce & Online Auctions in the US. The Department Stores industry is in the decline life-
cycle stage, with high competition, low revenue volatility and high concentration level
(IbisWorld, Department Stores, 2017). This combination of factors, which would deter new
startups and further contribute to the decline stage, supports the prevailing view that the industry
has been in decline for several years with revenues continuing to fall for the near future at a rate
of -3.8% (IbisWorld, Department Stores, 2017).
The Department Store industry (excluding discount stores) consists of a range of retailers
that extends from high-recognition brand-name stores selling luxury goods to national and global
chains targeting middle and lower-income families. Many stores sell house brands to compete
with national brands and have expanded from brick-and-mortar businesses to include ecommerce
sites of their own to effectively compete with purely online shopping giants such as
Amazon.com, and (for used goods) eBay.com, as well as other online businesses that direct
marketing at niche markets, such as etsy.com (handmade, personalized, low volume goods), and
retail aggregators, such as Google Shopping.
The dwindling fortunes of the department store industry are a widespread phenomenon.
In 1950, there were 600,000 stores in the United Kingdom; in 2012, 290,000 (Jinks, 2017). Store
closings in the United States are common as retailers struggle to regain pre-recession per-square-
foot profitability. Industry-wide, 800 department stores from major chains would have to close to
regain productivity (Wahba, 2016a.) David Jinks, in his article, “2030: the demise of the high
street,” believes all is not lost yet. He proposes that department stores satisfy social needs and
could be central to reinvigorating town centers, which were abandoned as families moved to the
suburbs. Jinks sees town centers as mixed-use, with homes built in commercial areas to bring
people back to urban centers, and “reimagined department stores…that return to a Victorian

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model, with shopping becoming a social experience again” (Jinks 2017). While department
stores may be less of a social hub now, online businesses such as Google and Amazon are
beginning to see the value of hands-on experience and are considering opening brick-and-mortar
stores (Poggi, 2012).
While one of the reasons for the contraction in the industry is the change in consumer
shopping habits from department stores to online shopping, department stores are also facing
increasing competition from their own bargain versions, and from department stores that have
morphed into Supercenters by offering groceries, which moves revenues to other industries.
(IbisWorld, Industry Performance, Department Store Industry, 2017). Consumers appear to be
chasing convenience by preferring one-stop shopping in person, so are purchasing groceries,
household goods and apparel at one location, or switching to online shopping. As a comparison
to the Department Store industry’s negative growth, expansion was positive in the highly
competitive, mature Warehouse Clubs & Supercenters industry, with annual growth from 2011-
2016 at 2.1% and predicted to be 3.3% for the five-year period from 2016-2021. (IbisWorld,
Industry at a Glance, Warehouse Clubs & Supercenters, 2016).
This decline means that department stores no longer dominate the retail industry. In 1990,
six of the retailers on the National Retail Federations’ top ten list were department stores. Wal-
Mart, a discount store, was at the top of the retail industry list in terms of revenue, with $32.6
billion in 1990, compared to 2016 revenues of $353.1 billion. On the 2016 list, Wal-Mart still
ranks at number 1, far outpacing grocery chain Kroger, which rose from number 5 in 1990 to
number 2, in 2016, with revenue increases from $32.1 billion to $103.8 billion. The next three
spots on the 1990 list of top retailers are no longer on the top 10 list—Kmart, Sears, and
American Stores have fallen off, as have J. C. Penney and May Department Stores. Only one
department store remains, Target (formerly Dayton-Hudson on the 1990 list), at number 6, with

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revenues of $73.2 billion (McKenzie, 2013; National Retail Federation, 2016). Significantly,
several grocery store chains have expanded their reach, from selling primarily groceries to
offering clothing, shoes, housewares and home décor, a reverse strategy of the Wal-Mart
Superstores expansion into perishable goods, which may prove yet another threat to department
stores. (Business Insider, September 14, 2015).
Department stores are responding to the changing landscape by expanding their online
retail sites to accommodate the change in consumer preferences. A study by eMarketer ranked
the top 15 US retail websites by visit share in December 2015. Amazon ranked first, with 34.5%;
Supercenter & Discount industry leader, Wal-Mart, ranked second, at a distant 6.03%, while
traditional national department stores who have expanded into online sales had rankings of third
(Target, 3.18%); sixth (Kohl’s, 1.68%); seventh (Macy’s, 1.59%); eleventh (Sears, .98%); and
twelfth (J C Penney, .96%) (eMarketer, October 24, 2016).
2.2.2 Industry Dominant Economic Features
The industry is characterized by high levels of competition, low revenue volatility, and
high concentration, as defines an industry in decline. The reasons for the decline include loss of
revenue to online retailers and Supercenters who compete by selling groceries, thus moving
revenue to a different industry; however, many of the existing Supercenters are former
department store chains who expanded to remain competitive (IbisWorld, Industry at a Glance,
2017).
The Department Store industry experiences greater operational costs than does the online
retail sector, due to energy costs throughout its supply chain and distribution channels, owing to
the need to supply goods to stores and stock distribution centers. like online retailers, if they also
offer that service. Department stores have construction and maintenance costs for their many

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locations (or lease costs), and wages, due to its greater need for sales assistants. While discount
department stores can operate with fewer sales assistants due to lower customer expectations,
higher-end stores must provide more personalized service, meaning employing sufficient staff to
meet the service level that management promises and consumers expect from the department
store experience.
These higher operational costs for the Department Store sector reduce the ability to
compete with online retailers. The average wage per employee has remained almost unchanged
since 2008 ($21,277), is currently $21,539, and is predicted to remain stable until 2022 (est.
$21,294), while the per capita disposable income rose from $36,082 in 2008 to $44,023,
predicted by 2022. This means that the average yearly income in retail is less than the average
per capita disposable income, making the retail trade an unattractive industry for a career for
many workers. During this same period, employment in the industry decreased from 1,292,007
(2008) to 998,012 (2016) and is predicted to decrease to 867,831 in 2022, while revenue per
employee dropped from $175,000 in 2008, to a predicted $159,800 in 2022. The number of
establishments is expected to decrease from 8,813 in 2008, to 7,107 in 2022, and enterprises
have decreased from 30 to 25 and are expected to fall to 22 in 2022 (IbisWorld, Key Statistics,
2016).
2.2.3 Market Size
Department store industry revenue increased until 2012, when it dropped from $879
billion in 2011 to $700 billion in 2012 (IbisWorld, 2017). The sharp decrease correlated with the
decrease in the number of companies in the industry during this same period. This was the lowest
point for overall revenue since 2006, and the decline continued. In 2013, revenues decreased to
$385 billion (Gale Business Insights). The number of businesses in the department store industry

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grew slowly, but steadily, until the economic recession in the mid-to-late 2000s, then started a
swift decline from 271 companies in 2009 worldwide to 91 companies in 2013, which was more
of a free fall. Since 2013, there has been a slight recovery—in 2015 there were 126 companies in
this industry (Gale Business Insights). Revenues have also rebounded to $587 billion, which is
not a full recovery back to the healthier numbers of 2011, but does show a significant and
promising increase. Figure 2, Appendix, shows revenue in the industry, and Figure 3 breaks
down the change in the number of companies over time.
Major product and service segments for this industry include: Women’s clothing and
footwear (26.4%, $41.55); Drugs and cosmetics (20.70%, $32.58); Home goods and appliances
(18.7%, $29.43B); Men’s clothing and footwear (13.6%, $21.41B); Children’s clothing and
footwear (11.4%, $17.94B); Non-grocery food items (4.3%, $6.77B); Toys and hobbies (3.0%,
$4.72B) and Other (1.9%, $2.99B) for a total industry value of $157.4 billion (IbisWorld, 2017)
(Figure 4, Appendix).
2.2.4 Market Growth Rate
Annual growth from 2012-2017 is predicted to decline -3.8%, but the decline could slow
to -2.5% from 2017-2022. Although in decline, the industry generates revenues of $157.4 billion
with profits of $10.7 billion and pays wages of $21.4 billion (IbisWorld, Products and Markets,
2017). Each of the segments affects the growth rate in different ways (IbisWorld, Products and
Markets, 2017):
The Apparel and Footwear segment is a group that includes Women’s, Men’s, and
Children’s and remains popular in the department store industry because people like to try on
these articles. This combined segment is expected to remain strong for the department store
industry because of this advantage over online retailers. This segment supports a slower rate of

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decline as industry revenues increased $10 billion or 5.6% from 2015-2016 (IbisWorld, Products
and Markets, 2017). However, it should be noted that once a consumer is familiar with a product,
that apparel brand and size can be reliably ordered online, which means a potential movement to
online sales.
Drugs and Cosmetics are increasingly available through specialized stores, such as
Sephora, which adds to competition for department stores. Sephora offers a full-service
cosmetics experience, with in-store makeovers and consumer-friendly apps, which Millennials
prefer to traditional department store shopping. This competition positively affects total
department store industry revenue and slows decline. Revenues in this segment increased $9.5
billion or 6.6% from 2015 – 2016 (IbisWorld, Products and Markets, 2017; Reay, 2017).
The Home Goods and Appliances segment demand is closely related to new housing
starts; however, the number of industry operators has limited expected growth, which also
positively affects total department store industry revenue. From 2015-2016, revenues increased
$2.6 billion or 2.3% (IbisWorld, Products and Markets, 2017).
The Toys and Hobbies segment demand has decreased in department stores as
consumers switch to purchasing online, which negatively affects overall industry revenue and
contributes to decline. From 2015 to 2016, revenues in this segment declined $5.4 billion or
3.2% (IbisWorld, Products and Markets, 2017).
The Other products segment includes “non-grocery food items, such as confectioneries
and sodas; household supplies, such as gift wrapping and cleaning supplies” (IbisWorld,
Products and Markets, 2017). These products contribute to the decline of department store
industry revenue, because consumers are now purchasing at department stores that have
transitioned to warehouse clubs or they shop for the products at grocery stores. From 2015-2015,
revenues declined $23.7 billion dollars or 14.4%. (IbisWorld, Products and Markets, 2017)

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2.2.5 Industry Trends
The Department Store industry will continue to decline as sales are lost to online
commerce, and department store chains convert to Supercenters to compete with established
Warehouse Club brands. If disposable income increases, as is predicted, decline should stabilize.
Opportunities for growth exist, as marketers shift focus from acquisition-eager Baby Boomers to
include new demographic groups with different values and expectations, which could fuel a
resurgence for department stores who know how to cater to these unpredictable Millennials,
Millennial Moms, and the booming, brand-loyal Hispanic market (MacKenzie, 2013).
2.2.6 Five Forces Analysis
This section of the report will focus on the five competitive forces in the department store
(except discount stores) industry: (1) Threat of New Entrants, (2) Power of Suppliers, (3) Power
of Buyers, (4) Intensity of Rivalry
2.2.6.1 Threat of New Entrants
The threat of new entrants is low. The industry is declining, so starting a new
department store chain in an area where foot traffic would bring in sufficient revenue to compete
against online shopping means that the new location would have to be in an urban area with
associated high rent or high construction costs. Since the market is already considered to be
highly concentrated with high competition, it is not an easy market to enter, due to high costs of
entry, i.e. acquiring inventory. Technology Change is medium, because technology costs are
limited to loss prevention and point of sale electronics and software. The threat of entry can be
moderate if existing brands create alternative Supercenter sub-brands that cannibalize their own
stores but also offer a segue into the more profitable Supercenter and Warehouse Club Industry,
such as Wal-Mart with Sam’s Club.

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2.2.6.2 Power of Suppliers
The power of suppliers is high for brand-name goods that buyers prefer over all
substitutes, but these are very few products by comparison to the number of items offered for
sale in the industry, and demand may only be high periodically at certain times of the year (e.g. a
certain toy during Christmas or roses on Valentine’s Day or Mother’s Day). Otherwise, power of
suppliers is low for most goods. Department stores in the luxury range have high profit margins
and work with high-in-demand suppliers who can raise prices on their luxury goods and demand
exclusive rights to prime store locations and displays. Moderately-priced department stores often
operate on thin margins. Supplier price increases can have a negative impact on the store’s
profitability. The high competition level in the industry may give suppliers an edge if they offer a
product that captures the attention of the desirable young adult market and have negotiating
power with competing retailers. An example is when a toy becomes the star of the Christmas
season and there is a run on the product wherever it appears.
2.2.6.3 Power of Buyers
The power of buyers is high. Buyers for consumer goods sold in department stores could
be looking for the best price, or merely looking at an item that they want to buy online, or could
be impulse buyers who have no idea what they want and need to be wooed. Switching costs are
low to non-existent. There are many brands of clothing, for example, brands of jeans that are
available everywhere at different prices, and many other types of pants can substitute for them,
which holds true for almost any other article of clothing, type of home décor, or appliance.
2.2.6.4 Threat of Substitutes
The threat of substitutes is high. Substitutes for department stores include online stores,
craft boutiques, designer stores, hardware stores to make items yourself, craft and sewing stores,

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discount department stores, charity shops and the corner store. Any place or event that sells
goods or services can substitute for anything that a department store can offer. Its appeal lies in
its collection of goods under one roof with a certain “look” that a consumer can rely on, identify
with, and become a loyal customer. That loyalty could disappear in an instant with a bad
experience at the store, or with a product.
2.2.6.5 Intensity of Rivalry
The intensity of rivalry is high. Department Store industry is highly concentrated, in the
declining life cycle stage, with low revenue volatility, medium barriers to entry, and low capital
intensity. Existing rivalry is high due to saturation and near identical goods sold within
competitors’ stores. Stores compete within the industry, as well as with potential substitutes,
especially online stores. With six stores forming 92% of the market share, rivalry is high.
Department stores must find a way to differentiate themselves from their rivals, either through
auxiliary services, delivery features, loss leader sales, exclusive celebrity agreements, and house
brands (IbisWorld, Department Stores, 2017).
2.2.6.5.1 Industry Competitors
JC Penney’s consumer base is low-to-moderate income, and much older than the
desirable youthful group that spends money on clothes and disposable goods. According to a
2013 survey by Prosper Business Group (Stock, 2013) almost half of JC Penney’s customers are
over 55 years old, while close competitors Kohl’s and Macy’s over-55s comprise just 36% of
their customer base. Only 20% of JC Penney’s customers are under 35, while market leader
Target’s 35-and-under group comprise 36% of their customer base. JC Penney’s customers are
not wealthy, either. 29% of their customer households earn under $35,000 with only 13% over
$100,000 (Stock, 2013).

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Revenue from each of the three closest competitors has remained stagnant. JC Penney
had revenues of approximately $12 billion every year from 2012 up to and including forecasts
for 2017. Macy’s revenues for the same period hover around $25 billion each year, and Target,
steady at $60 billion over the same period. Operating income varies considerably, but strong
competition between the rivals is reflected in their unvarying revenues over an identical period.
(IbisWorld, Department Stores, Major Companies, 2017).
2.2.6.5.2 Rivals Anticipated Strategic Moves
Rivals Macy’s, Target, and Kohl’s must increase revenues, so may decide to join the
Supercenter and Warehouse industry. Target has already made moves in that direction, which
may account for its position as industry leader. While Target has a youthful, energetic persona,
good food, Starbucks kiosks, and interesting home goods brands, Kohl’s, Macy’s and JC Penney
are far behind in terms of style, and perceived energy and innovation. Macy’s is still the epitome
of a traditional department store, with its traditional layout and classic brand names. Kohl’s is
nearly indistinguishable from JC Penney in its clothing brands, jewelry offerings, and price
points. If they decide not to move into the Supercenter industry, they must increase customer
experience (expensive and difficult) or offer online shopping sites that compete with leaders in
that sector. Figure 5, Appendix, provides the strategic group analysis of the main competitors in
the US department store industry. Figure 6, Appendix, provides the market share for each
competitor.

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2.2.6.6. Table 1 - Summary of Five Forces Analysis
Summary of Five Forces Analysis
Brick-and-Mortar Store eCommerce Expansion Expansion into Perishable
Goods
Now Future Now Future Now Future
Buyer Leverage High High High High High High
Supplier Leverage Low/High Low/High Low Low Low Low
Threat of New Entrants Low Low High High Moderate Moderate
Threat of Substitutes High High High High High High
Intensity of Rivalry High High High High High High
Profit Potential Low/Moderate Low/Moderate High High Moderate Moderate
2.2.7 Industry Key Success Factors
Determining Key Success Factors for the Department Store industry involves considering
whether department stores need to transform and therefore enter another industry (Supercenters)
or if they need to revitalize the industry. Since there is a move towards reviving town centers,
which offers hope for the department store as a central part of that reimagining, extreme
transformation may be premature. IbisWorld.com offers several Key Success Factors, of which
the most pertinent for the future health of the industry are:
1. Ability to control stock on hand – to provide an excellent customer experience and
immediate satisfaction to compete with online experience.
2. Attractive product presentation – to stimulate customer interest and differentiate the
industry in a positive way from online shopping.
3. Having a wide and expanding product range – to provoke impulse buyers to visit and
desire the goods at hand rather than searching online for cheaper alternatives
4. Ability to expand and curtail operations rapidly in line with market demand – to optimize
variable costs and stay profitable while keeping their reputation as excellent shopping
destinations.

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3.0 INTERNAL ANALYSIS
3.1. Organizational Analysis
3.1.1. Corporate Mission
J. C. Penney Company, Inc. (JC Penney) is one of the nation's largest home furnishings
and apparel retailers in the United States with 1,021 department stores in 49 states and Puerto
Rico, with a broad assortment of products from a prominent portfolio of private, exclusive and
national brands. The company was founded in 1902 and is headquartered in Plano, TX. JC
Penney sells family apparel, jewelry, shoes, home décor, furnishings (some custom), electronics
and appliances at both brick-and-mortar stores and online (in its earlier history, mail-order sales
preceded online sales). JC Penney is on a mission to make certain every customer's shopping
experience is worth their effort, money and time, whether it is shopping at one of more than
1,000 store locations or visiting jcp.com. JC Penney’s three strategic priorities are: strengthening
private brands, becoming a world-class omnichannel retailer, and increasing revenue per
customer.
3.1.2. Products and Services
JC Penney offers a wide range of family, business and leisure apparel, shoes, home décor,
appliances and furnishings in-store and online at competitive prices, directed at middle-market shoppers.
Many of its products have earned consumer-valued awards such as the Good Housekeeping Seal of
Approval, attesting to customer satisfaction in terms of value (Durham, 2015). JC Penney is a full-service
department store. In attempt to revamp its product lines, JC Penney is adding beauty products, toys,
appliances and home goods to appeal to its customer base.
In addition to departments as listed above, in-store boutiques provide services such as
hair styling salons, optical, portrait photography and custom decorating services. The company’s

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website is fully integrated with its physical stores and customers can find the same items online,
often with extended selections available to order and have them delivered to their homes. JC
Penney’s mobile application of its website is available but does not have a strong preference to
consumers. Orders can be placed through the website or JC Penney app using mobile
smartphones, instore kiosks, and at home. JC Penney’s current focus in on shifting the store
products and services to be better in line with what the modern customer wants.
3.1.3. Leadership & Organizational Culture
In 2011, JC Penney hired Ron Johnson as CEO to revitalize the company, which had
declining revenues, due to the company’s image as frumpy and consumers favoring online
shopping over brick-and-mortar. Seventeen months later, Johnson was fired and JC Penney is
still recovering from his changes, which led to a decrease in revenues of 51%, a workforce
reduction of 40,000 employees, a huge $5.35 billion debt load from store renovations, and a
plummeting share price. Johnson made changes too quickly, retail industry experts decided.
(Tuttle, 2013; Wahba,2016b).
Johnson eliminated many of JC Penney’s private brands (and created others), which were
dear to JC Penney’s customer base. He did so without testing concepts or surveying customer
preferences and ignoring JC Penney’s traditions and history (Tuttle, 2013). JC Penney is selling
assets, including land and buildings at its home office site. JC Penney’s goal is to reduce its debt-
to-EBITDA ratio from its current 5.4 to less than 3 (Figure 7, Appendix). Under new CEO
Marvin Ellison, the share price has increased 50%, but has yet to regain pre-Ron Johnson levels.
(Wahba, 2016d). At the end of 2010, just before Johnson’s hiring, JC Penney was selling at $35
per share and now trades at approximately $6 (JCPenney.com, 2017). JC Penney has recently
added new management titles in recognition of the new roles needed to take JC Penney back into

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profitability and revamp its image to keep the current Baby Boomer customer and attract the
Millennial Moms and their children (Figure 8, Appendix).
3.1.4 Structure and Strategy
3.1.4.1 Current Structure & Strategy
JC Penney operates as a Best-Cost Provider, which gives customers more value for their
money by satisfying buyers expectations on quality, features, performance and service attributes
while beating their price expectations. JC Penney originally provided customers with value
products at a lower cost through coupons and discounts and shifted to an everyday low price
tactic. JC Penney offers a mid-range selection of goods, superior in quality to those typically
offered in dollar store and discount warehouse clubs, but lower quality than luxury brands. JC
Penney’s selection is comprised of special sized apparel such as big and tall, plus size and petite,
and a significant proportion of in-house brands exclusive to JC Penney. JC Penney has been
offering private brands for more than 100 years, generating approximately half of its revenue
from private labels (Wahba, 2014).
3.1.4.2 Components of Strategy
JC Penney is now focusing on regaining its market share by reinstating sales and coupons
to win back former customers, increasing in-house boutiques and services, creating online
storefronts to attract online customers, and adding additional private brands to their portfolio. JC
Penney’s main advertising strategy is through television, online advertising, magazines, catalogs
and emails. JC Penney has attempted to compete with online retailers by improving its
omnichannel retailing, offering same-day in-store free delivery (purchases over $25) and free
shipping anywhere (purchases over $99). JC Penney continues to expand its private brand
portfolio to attract Millennial Moms and add Sephora boutiques to additional stores. JC Penney

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eliminated its dependency on third parties and reduced their costs by operating through a
distribution network which allows them to achieve higher margins by operating in a cost-
effective manner and provide customers with lower prices at the same time.
3.1.4.3 Competitive Strength
In JC Penney’s core merchandise, 50% is private label and the rest is exclusive brands
that customers know and trust such as Nike, Levi and Dockers. J.C. Penney’s private brands J.C.
Penney, JC Penney, J.C. Penney Home Collection, Arizona Jeans, Liz Claiborne, Okie Dokie, St
John’s Bay and Stafford to name a few have all generated gross profit margins that are 3-5
percent higher than national brands. JC Penney has developed partnerships with upscale
cosmetics and clothing retailers, and has also attracted a strong customer following on their
website. JC Penney also sells through online and mobile channels which allows them to reach a
market that may not enjoy or have the time to visit a store location. They also allow customers to
sign up for an email subscription which will send coupons, promo code to their email or notify
them of upcoming sales or promotions. They have similarly initiated a rewards program in order
to give customers an incentive to return, make larger purchases, or shop more frequently at the
store by offering them the benefits of additional discounts.
Table 2. Competitive Strength Scores

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3.1.5 Summary of Organizational Analysis
The department store industry is considered an industry in decline. The market is not
attractive to newcomers, and competition is high for the current survivors. JC Penney is one of
the top ten in terms of market share, despite its calamitous redesign during CEO Johnson’s
tenure. The company seems to be recovering under CEO Ellison’s direction and recently
reported positive net income for the first time in many quarters. Because of the company’s
current market share, established position, and recent turnaround, this is still a desirable industry
for this company.
3.2. Analysis of Firm Resources & Capabilities
3.2.1. Tangible and Intangible Resources
The company operates 1,021 department stores in 49 states and Puerto Rico, 417 of
which are owned, the remainder leased. Total retail space is 103.3 million sq. ft. The company
owns 13 distribution centers dedicated to various activities (distribution of store merchandise,
online fulfillment, furniture, etc.) for a total of 15,760,000 sq. ft. (JC Penney, Form 10-K, 2017).
JC Penney purchases merchandise from 2,600 domestic and foreign suppliers and maintains
buying and quality assurance offices in 10 foreign countries (JC Penney, Form 10-K, 2017). The
company employs 106,000 full- and part-time employees (JC Penney, Form 10-K, 2017). JC
Penney announced that 138 underperforming stores will start liquidation proceedings in April
2017 (JC Penney Press Release, Feb 24, 2016). Infrastructure and technology spending are
greatly hindered by the amount of debt maturing in relation to free cash flow. In 2019, JC
Penney estimates that it will have $450 million free cash flow compared to $400 million in
unsecure debt maturities (JC Penney, Form 10-K, 2017).

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3.2.2. Value Chain Analysis
A company’s value chain consists of the primary and secondary activities that a company
performs internally to bring value to a customer (Figure 9, Appendix) (Thompson, 2016; Arline,
2015). JC Penney uses its well-established supply chain, distribution channels, a strong sales and
marketing scheme and customer service as its primary activities in its value chain. The secondary
activities are human resources, general administration, and information technology because the
workers providing all those primary activities need support from corporate. JC Penney has
vertically integrated its supply chain with private labels. This also means that JC Penney can
offer a lower price and sales on the private brands as they are cheaper for JC Penney to create.
This adds significant cost savings to the customer, but also increases the profit margin and
therefore revenues for JC Penney.
JC Penney’s primary activities consist of:
Inbound Logistics – the receiving, storing and distribution of goods from manufacturers
to JC Penney’s distribution warehouse. JC Penney operates deconsolidation centers, which
breakdown the manufacturers’ shipments, then ship to distribution centers and online fulfillment
centers throughout the US (Figure 10, Appendix). The company procures merchandise from
2,400 foreign and domestic suppliers, providing flexibility in suppliers (JC Penney, 10-K, 2016).
With such a wide network of suppliers, it can shop around for the best deal on an item to supply
to its customers. With distribution centers dedicated to specific segments of the stores’
operations, JC Penney can optimize each location for efficiency (JC Penney, Analysts Day
Presentation, 2016).
Outbound Logistics – the goods are shipped to stores, customers or to online fulfillment
centers. If an item is not available in its online fulfillment center, it can find the item in a store
and ship to the customer, or another store. Data analysis will help locate items and enable

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decision making for the best location from which to ship, supporting JC Penney’s goal of
meeting customer needs and competing with online retail shipping speeds.
Marketing and Sales – advertising, sales, sales associates, pricing and customer
relationship management are all part of the omnichannel experience that forms an integral part of
JC Penney’s strategy (JC Penney, Analysts Day Presentation, 2016).
Services – activities in support of the products sold, plus specialized boutique services,
such as salons and home repair services. JC Penney is offering services, such as its InStyle Salon
partnerships, appliance installation, and home services online storefront to differentiate its
business from online retailers, to bring potential shoppers into the store after service is complete
and to improve customer retention (JC Penney Analyst Day Transcript, 2016).
Support activities include: Procurement – activities involved in contracting and
delivering the manufactured goods to distribution warehouses. JCP owns an international
purchasing subsidiary that maintains buying and quality assurance offices in 11 foreign
countries. Its network of 2,400 domestic and foreign suppliers gives JCP flexibility to source
from the most advantageous supplier.
Technology Development – supports all activities from Procurement to Inbound
Logistics to Firm Infrastructure to Service and enhances the customer experience through the
JCP strategic pillar of omnichannel support. JCP has fully integrated Oracle software into its
operations and customer experience (Hildebrand, 2015). It has also transitioned from
automatically shipping the same number of each item to every store and now relies on data-
driven inventory information for shipment ordering information (Wahba, February 24, 2016).
Human Resource Management – hiring the right employees to lead and support JCP’s
vision of warrior spirit customer associates, whose goal is to bring satisfaction and value to all
customers. JCP celebrates its long-term employees with a bronze medallion award and even new

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appliances for long-term employees. The company refers to its associates as having a “warrior
spirit” bringing them into the equation for success, while also increasing transparency by
admitting that they have a battle on their hands.
Firm Infrastructure – all administrative personnel and management, the structure of the
firm, including reporting lines, finance, organization, and quality control. JCP has recently added
new management titles in recognition of the new roles needed to take JCP back into profitability
and revamp its image to keep the current Baby Boomer customer and attract the Millennial
Moms and their children (Figure 7). At every point in the value chain, JCP has built in flexibility
to allow making data-based decision to optimize value for its customer.
3.2.3. Core Competencies and Sustainable Advantages
JC Penney’s main core competency is its private brand selection in the categories of
apparel, shoes, home goods and jewelry. JC Penney can tweak almost any aspect of the brands to
increase margins, or to keep prices below the limit that its target customer will accept. Because
of JC Penney’s large network of suppliers, its revenue, market share, reputation, number of
stores, and associated bargaining power, private brands are JC Penney’s core competency and a
sustainable advantage that a competitor would find difficult to overcome, due to the exclusivity
of the lines to JC Penney. Along with private brands, JC Penney also offers convenience through
its instore salons and boutiques. It concentrates on offering an omnichannel experience, or the
ability for a customer to find exactly what she needs either online or instore and having the item
shipped quickly for same day pickup.
3.2.4. Summary of Firm Resources & Capabilities
JC Penney’s resources include a wide distribution network that includes foreign and
domestic resources, large market share, and a historic reputation as an icon of the American

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retail industry and a fixture of American culture. It is an honorable brand that seems a little
dusty, but that deficit is being addressed. There is a strong affection for the brand and a solid
customer base that returns to the store because it is reliable and provides value and convenience.
The company has had difficult financial times for about 10 years; the worst being experienced in
the last 5 years. Its recovery strategy consists of three pillars: private brands, omnichannel
experience, and additional revenue per customer. Of these, private brands and the online
experience are resources that could be assessed for competitive power and are supported by all
JC Penney’s resources and capabilities. JC Penney must rely on the customer’s perceived value
of those brands to maintain a sustainable competitive advantage, by ensuring the quality received
for the price paid exceeds the customer’s expectations on a regular basis. With all JC Penney’s
resources and capabilities focused on doing exactly that, JC Penney may be able to sustain a
competitive advantage through its private brands.
3.3. Financial Analysis
3.3.1. Valuation Analysis
JC Penney has not paid a dividend to shareholders in over five years and the book value
per share is $4.39 based on the 2017 balance sheet. There is no dividend payout expected for the
2018 fiscal year either. This is not currently a strong stock and has steadily declined from a
recent high on January 4, 2017 of $8.47 to around $5.85 lately, just over half as much as it was
worth a year ago, about $10 per share (Figure 11, Appendix) (MarketWatch, 2017).
3.3.2. Growth Analysis
JC Penney’s gross profit margin has hovered around 3.5% for the past three years with
2016 being the strongest fiscal year in terms of sales revenue verses cost of goods sold.
According to IBISWorld, there was 2.9% drop in revenue from the 2016 to 2017 fiscal years, but

31
an increase in operating income of 3.7% over this same period. JC Penney also has the largest
chain of salons in the US with currently 850 locations. With JC Penney bringing back appliances
to gain foot traffic in the stores and the partnerships with Sephora, Nike and Adidas to have
small in-store boutiques, the shift back to sales and coupons may go even further to bring back
the previous customer base. If JC Penney finds ways to bring in Millennials with things that
people want to buy rather than trying to sell whatever they happen to have, they may be able to
bring in another generation of price-conscious shoppers.
3.3.3. Profitability Analysis
The operating profit margin has improved tremendously over the past three years with the
biggest increase being in the 2017 fiscal year with the first positive margin in a few years. JC
Penney’s operating margin is 3.15% which has improved from the negative numbers in the past,
but is worse than department stores industry average operating profit margin of 4.79%. The net
profit margin has seen the same sort of increase and while it is now .00008 cents per dollar of
sales in profit it is up from negative cents per dollar of sales in the prior two fiscal years. The net
return on assets is also much improved at .0001 cents per dollar of assets used and while this is
still very low, it is positive which is more than can be said for prior years. The department store
industry has an average net return on assets of 5.7 for April 2015 to March 2016 which is many
times more than JC Penney alone (IBISWorld, 2016). This means that while the industry is
reported to be struggling JC Penney is struggling much more than others in terms of profit after
taxes divided by total assets. JC Penney’s return on stockholders’ equity is the strongest of the
profitability ratios other than gross profit margin because it is currently at .0007 cents per dollar
of stockholders’ equity used.

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3.3.4. Financial Strength Analysis
JC Penney has maintained a strong current ratio in that they keep current assets and
current liabilities in line with each other. However, in the past two years this ratio has slid from 2
to 1.69 which is up a little from 2016. This means that the company could turn assets into cash
when it needs to cover liabilities which it is currently doing by trying to sell their corporate
headquarters. JC Penney lines up closely with the industry median of 1.6 for April 2015-March
2016 (IBIS World 2016). The final ratio that helps to provide a clear picture for JC Penney’s
current creditworthiness is the times-interest-earned ratio or coverage ratio which most lenders
require to be at least 2.0 and JC Penney’s is positive in 2017 for the first time in three years and
is only barely over 1.0. They are just now able to cover the interest of some of their long-term
debt and this along with all the previous ratios in this section speaks their lack of
creditworthiness. They are too risky to lend to and has caused them to close stores and sell off
their headquarters to raise funds.
JCP’s credit rating was severely affected by the debt incurred under CEO Johnson.
Moody’s downgraded JCP from Baa1 in April 2009, to B2 in May 2013. It has upgraded since
then to Ba1 in September 2016. Moody’s states that the upgrade reflects the company’s
“continued improvement in operating performance in the face of challenging market conditions
for the department store sector (Figure 12, Appendix) (Moody’s Investors Service, 2016).
3.3.5. Management Efficiency Analysis
Ratios of management efficiency shows how efficient company’s management run the
company. It indicates if company mange inventory efficiently, if company has too many or too
few assets. inventory turnover ratio measures how fast a company sells its inventory. JC
Penney’s 2017 inventory turnover is 2.59 which is worse than department stores industry average

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inventory turnover ratio of 6.14. CEO Ellison is a supply chain manager and inventory specialist
by training and experience, which means that he can help improve the out of stock inventory
problems that have plagued JC Penney in recent years. One major issue that is being corrected is
“demand-based logic” or shipping replacements for what is being sold using real sales data and
not a set number monthly regardless of demand (Wahba, 2016d). Asset turnover ratio measures
the efficiency of company’s assets to generate revenues. JC Penney’s asset turnover ratio is
1.34. It is worse than department stores industry average asset turnover ratio of 2.12. Goods are
now more readily available whether it is online or in-stores for customers to purchase. In-store
pick up was also added recently so that customers can shop online and then pick up their items in
store. Ellison is working to make JC Penney less intuition driven and more data driven with real
time numbers and in store visits by management to make sure that their ideas and innovations
work in real spaces (Wahba, 2016d).
3.3.6. Summary of Financial Analysis
Overall JC Penney is still recovering from the recession of recent years and poor
management decisions. It has a negative growth rate of 0.62% and a below industry standard
operational margin of 3.15%. The net profit margin is almost zero. JC Penney has serious issue
with its long-term debt obligations. JC Penney’s long-term debt/equity ratio is about 5 times
greater than the industry standard, and the debt to equity ratio is dangerously high at 3.57. Both,
inventory and asset turnover are low compared to competition however. While the recovery is
slow and lumbering, it is picking up speed as the net profit margins and return on stockholders’
equity improve as well as cash flows. The 2017 fiscal year which ended in January was the first
to be profitable in nearly 5 years, but still a long way from providing dividends to shareholders
or increasing JC Penney’s creditworthiness. The net income last year of nearly $1 million is a

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substantial increase from the -$513 million net income for 2016, or at its worst, the net income of
-$1.39 billion in 2014 (JC Penney income statement, 2017). The road to recovery is long, but
with many of the new initiatives and data driven plans, JC Penney has the chance to come out of
this slump.
4.0. STRATEGIC ISSUES ANALYSIS
4.1. Critical Challenges
JC Penney has a few major challenges. The department store industry is shrinking in size
partially because conventional department stores keep losing ground to internet retailers. The
consumer switch from physical stores to internet outlets is one of the main driving forces in the
industry. The traditional customer base of JC Penney is gradually changing. Per Kyle Stock
writing for Bloomberg, almost half of the customers shopping at JC Penney are over 55 years old
and 29% of them make less than $35,000 per year. This does not compare well to Macy’s or
Kohl’s where only 36% are over 55 years old and only 20 or 19% respectively have an annual
income below $35,000. This means that in comparison JC Penney customers tend to be older and
poorer, which helps to explain the success of coupons and sales. The sales numbers reflect two
things “They are relatively price sensitive; 2) they are probably more set in their shopping ways
than customers at discount stores or competing department stores” (Stock, 2013). Because JC
Penney and many department stores have traditionally skewed a little older, there is a need for
stores to increase their online presence and bring them back onto people’s radar.
4.2. Resources and Capabilities
JC Penney has a strategic fit for selling appliances and providing remodeling services.
It’s perfectly fit in its value chain. It perfectly fits JC Penney’s customer base that consists
mostly of middleclass women homeowners. There are 850 hair salons in JC Penney stores

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making it the largest hair salon chain in the US and bringing in almost 5% of total sales, which is
something than cannot be easily duplicated by other department stores (Wahba, 2016d). Along
with the partnership with Sephora, the salons could be an even bigger draw for special events
because they could be one stop shop for Prom or a wedding as a guest. The online features to
look at current inventory is already up and running so people can look online to see if their size
is in stock at their local store.
4.3. Strengths or Weaknesses Analysis
JC Penney strengths are comprised of the following: the company has old history. By
being around for more than 100 years means that J.C. Penney or JC Penney are names that most
people have heard and nearly everyone has shopped at so using their strengths is vital to staying
in business. JC Penney has a good reputation among American consumers. JC Penney has a
multiple channeling strategy, a strong liquidity position, a diverse product and service line and an
efficient supply chain which are all vital strengths. The company has an excellent understanding
of their customer base, and a good degree of vertical integration. It also has several store brands:
such as Arizona Jeans and St. John’s Bay. The huge niche market of having salons in many of
their stores is something else that is not available in other department stores that could easily be
capitalized on.
JC Penney’s weaknesses: the company received majority of its revenue from selling
apparels in physical stores. This industry is rapidly reducing in size. JC Penney also has very low
productivity per employee, $110,061 vs $214, 958 industry’s average, and its inventory turnover
is much worse than industry’s average, 2.59 vs 6.14 which are all serious weaknesses that must
be addressed by JC Penney leadership (IbisWorld, 2017). JC Penney also has extensive
weaknesses in terms of outdated technology and the recent shifts in marketing strategy that drove

36
many longtime customers away. While many other department stores have tried to keep up with
the changing technology with strong apps for mobile devices and online shopping being
integrated into in-store inventory, JC Penney is playing catch-up on all fronts right now in terms
of technology.
4.4. Opportunities or Threats Analysis
The largest opportunity for JC Penney is expanding in the appliance segment of the
industry. It presents a chance to increase revenue without being dependent on apparel sales.
Another great opportunity for JC Penney is the possible demise of its most direct competitor,
Sears. It presents a chance to get a significant part of Sear’s customer base, because 85% of
Sears and JC Penney customers are the same. Also, returning to their older methods is another
way for JC Penney to entice new customers to stores. Expanding and advertising the salons with
tie in deals for Prom season or during the summer for wedding guests is another opportunity that
JC Penney should be taking advantage of. A major threat for JC Penney is the continuous trend
away from department stores to internet retailers. Another threat is the reduction of the
traditional middleclass customer base of the company. The internet and sites like Amazon are an
ongoing threat that is true for everyone in retail not just department stores. JC Penney must make
sure that their online presence and availability is up to the challenge because online only stores
have much less overhead, and can charge much lower prices. Clinging to what has worked in the
past is no longer a feasible strategy in the age on online retailers. Also, more stores are rising to
compete with different aspects of JC Penney, Kroger and HEB have added clothing and some
housewares to some of their stores (Kaplan, 2014).

37
5.0 RECOMMENDATIONS
5.1 Recommendation One
We recommend investigating a partnership with a grocery store chain. For the purposes
of illustrating the potential of such a partnership, we use Trader Joe’s as the preferred partner.
Placing a small grocery store inside JC Penney will dramatically increase traffic in stores, and
help better compete with other department stores that have begun offering grocery store
products. JC Penney stores with low sales per sq./ft. are ideal candidates for the added items and
offer potential for increased foot traffic.
5.1.1 Goal and Project Objectives
Adding Trader Joe’s will increase foot traffic inside of JC Penney stores. Consumers
shop for groceries regularly, but tend to shop in malls or standalone traditional department stores
less often. Having a grocery store within the mall makes it much more convenient for customers
to shop at one place as opposed to having to visit separate locations for groceries, and yet another
for clothing and shoes. Selling clothing, décor, housewares and food will allow JC Penney to be
a one-stop shop for customers and introduce JC Penney customers to the Trader Joe’s brand,
providing the company with a new customer base. JC Penney’s revenues should increase several
times due to the greatly increased customer traffic. The idea of placing supermarkets inside
shopping malls is very popular overseas and we believe it can be successful in the US as well.
Whole Foods, which is Trader Joe’s most direct competitor, is already opening grocery stores
around the country in malls around the US (Parmley, 2017). These Whole Foods or ShopRites
are replacing anchor stores in malls. However, Trader Joe’s stores are much smaller compared to
these stores, and traditionally much more frugal.

38
This strategy will benefit Trader Joe’s by allowing them to actively compete against its
other competitors, Wal-Mart, Target, Whole Foods and now Kroger, who all offer clothing,
gourmet food and housewares. Within two years Kroger is expected to surpass Whole foods,
Trader Joe’s biggest competitor, and become the nation’s top seller of organic and natural food.
The latest Kroger store locations include upscale services, such as a deli and prepared food
section, a craft beer and wine bar for customers to wine test and socialize and an extensive
offering of clothing and footwear, with an emphasis on children’s clothing to appear as an
attractive option for families who would normally shop at Target or Walmart, which are also
competitors of JC Penney. Placing a Trader Joe’s within JC Penney would be a reverse of
Kroger’s latest strategy by selling food within the department store as opposed to selling clothing
in the grocery store. This strategy would also work well in stores outside of malls as well. Of the
more than 25 stores in the greater Houston area, 10 are in shopping centers or strip centers rather
than malls (JC Penney store finder). This holds true around Dallas-Fort Worth as well. If malls
are not ready or willing to allow such a change in their stores, then there are many options that
involve stores separate from malls.
5.1.2 Action Plans
JC Penney should identify a pilot location to test the project. An ideal location is a stand-
alone JC Penney suburban store with a large parking lot, near large population area, but not too
close to grocery stores. The revenue per sq./ft. in the targeted store must be below the company’s
average. This would be a capsule store like Sephora, but larger in size. Trader Joe’s will pay for
the construction and JC Penney will provide the space. There are only 461 Trader Joe’s around
the US and there are over 1000 JC Penney stores. Few places would have a Trader Joe’s too
close to a JC Penney store with a Trader Joe’s that would cannibalize the business. There are

39
many communities that would welcome an additional grocery option, so would benefit from
upgrading a standalone JC Penney to a new version with a grocery store.
5.1.3 Deliverable
Remodeling JC Penney by installing a Trader Joe’s capsule store has the potential to
greatly increase revenues. As of now, an average JC Penney customer shops in its stores maybe
once a month. However, with the addition of a grocery store inside, customers are likely to shop
in JC Penney more often as groceries are shopped for more frequently. This could also add new
customers that have not shopped at JC Penney but that are interested in Trader Joe’s. Grocery
shopping has been resistant to fully online shopping and delivery, however there are some places
that it is coming back (Wohlsen 2014). JC Penney has started allowing customers to shop online
and pick up in stores. This is not something that Trader Joe’s does yet, but other grocery stores
have started so it could be something that JC Penney brings to the table. According to Richard
Kestenbaum at Forbes, the grocery industry brings in about $675 billion in the US and over 90%
of American households shop for groceries weekly. For online and delivery grocery sales to
work, there should be high population density as well as high incomes in areas where people do
not have time to shop, this makes population and wealth dense places like London, New York
and San Francisco where online groceries are starting. Much of the US however does not fall
into this very specific category so being able to pick up groceries ordered online is more the
direction that grocery stores and retailers are headed (Kestenbaum 2017). Typically visiting the
mall is optional while making a trip to the supermarket is a necessity. This will allow JC Penney
to incur sales from a different customer base who would not normally shop in their stores. The
Sephora capsule stores have increased traffic and the construction cost would be similar.

40
Training for new staff to work in the Trader Joe’s as well as hiring those with grocery
experience is another important deliverable. Working with Trader Joe’s to make sure that the
store is up to standards and the staff is fully trained is vital to this partnership working.
5.1.4 Milestones
Month 1 & 2 - Locate and select the appropriate location for the pilot project. The location must
consist of the following characteristics: standalone store, near a subdivision, far from other
grocery stores, and has very low revenue per sq./ft. JC Penney. Hire Training manager as well as
food service managers to begin planning, training for future staff.
Month 3 - Plan the remodeling process. Initiate clearance sell in the targeted store. Free up
10,000sq. ft. of space for expense of not profitable and low margin merchandises. Or in a smaller
format store free up about 7,000 sq. ft. Begin working on website additions of Trader Joe’s to JC
Penney website at pilot location.
Month 4-9- Proceed with construction of the Trader Joe’s capsule store. Begin hiring and
training grocery store staff for pilot location.
Month 10 – Open JC Penney/Trader Joe’s pilot store and begin working out kinks that will
invariably crop up. Work with Trader Joe’s consultant to make sure that everything is delivered
in a timely fashion and that the store is working as efficiently as possible.

41
Figure 13. JC Penney with a center Trader Joe’s capsule store
End of Year 1 – This is 12 months from the start of the project. Have year-end numbers to be
able to compare year over year foot traffic and revenues. Make necessary small adjustments such
as placement of goods in store or personnel at this point. Begin scouting stores for possible
additional Trader Joe’s locations.
End of Year 2 – Make 2 year comparisons of income statement and balance sheet to show
where things are working and where things are not. Make sure the numbers still justify the
partnership. If the numbers are good, then begin adding Trader Joe’s to the next round of stores
that meet the requirements laid out and that are ready for this sort of change.
End of Year 3 – Compare all years and locations with a Trader Joe’s to continue making sure
that the revenue and customer traffic at each store lines up or exceeds expectations based on the
original pilot store. Continue making small changes to allow for product or display differences
and customer preferences.
End of Year 4 – Monitor numbers and begin remodeling or new construction on more Trader
Joe’s inside JC Penney. Tweak product placement and tastes based on customer feedback and
begin renegotiating contract with Trader Joe’s. Run the numbers to make sure that this strategy is
still working.

42
End of Year 5 – Finish renegotiations with Trader Joe’s to continue partnership if still profitable
for all. Make sure that the terms allow JC Penney to continue expanding if that is what the
returns suggest. Now do long term comparison of before the stores had Trader Joe’s and now
based on four or five years’ worth of income statements and customer traffic and customer
reviews.
5.1.5 Resources
For a project with a very aggressive 10-month deadline, multiple resources are needed.
Some of these resources are internal and will be provided by JC Penney while the external
resources will be provided by Trader Joe’s and third party contractors.
Internal resources include the real estate for the project, JC Penney store. It also includes
time spent by members of JC Penney team working on this project. The team should consist of
members of multiple departments. Advertising the remodel and the addition of Trader Joe’s is
something else that would be required of JC Penney and Trader Joe’s. Both would need to
advertise for this partnership to work.
The external resources also include financial input by Trader Joe’s. It will be expensive,
but it could be on the lower end because constructing a capsule store inside a building with
existing foundation, roof and parking lot is more affordable than building a store from scratch
also a much smaller footprint store.
5.1.6 Technical Requirements
The technical requirements required data analysis of all the JC Penney stores by sales,
size and location to select the perfect location. An engineering assessment of a building
designated for a project.
A whole new methodology of training would be required because grocery stores have
completely different internal requirements than clothes and home goods. However, the

43
employees of the Trader Joe’s would be hired and trained by Trader Joe’s so this should not be a
new skill set that JC Penney must acquire.
The website at the JC Penney/Trader Joe’s location will need to be remodeled as well.
This will require IT support and expertise to update and change the JC Penney website to reflect
the Trader Joe’s goods.
5.1.7 Budgeting
Construction
JC Penney will provide space and Trader Joe will provide financing for the project.
Table 7. Construction Costs for Grocery Store – Trader Joe’s
The construction cost is estimated from $313,000 to $447,200 depending on the store
size. The cost of training employees that will work in the Trader Joe’s/JC Penney stores or hiring
those with grocery store experience will fall to JC Penney. The cost incurred by Trader Joe’s is
expected to be recuperated by Trader Joe’s within one year of opening the doors and profitable
within two years.
Training
The first employees needed would be Training and Development Managers specifically
with grocery store experience which has an annual mean wage of $117,590 and Food Service

44
Managers for the pilot store then one or two each per each additional location later in the process
with annual mean salaries for $51,980 (Labor Statistics 2017). These would need to be in place
before hiring and training new employees. Possibly hiring a Trader Joe’s Training Manager or
bringing on in as a consultant could ensure that both get the best possible version of their stores
and the cost of the manager could be shared between the companies. Unlike Sephora inside JC
Penney employees, the Trader Joe’s would be staffed by Trader Joe’s employees (JC Penney
jobs website). This would be a departure from how things have been done in the past for JC
Penney partnerships, but it would be a little like pharmacies in grocery stores, separate
businesses inside one building. It would be cheaper and easier for JC Penney, because Trader
Joe’s already has the expertise to handle food safety and other grocery store concerns. Trader
Joe’s has been exclusively in the grocery store business since they opened after World War II, so
they can bring expertise on layout of store and how to run the stores.
Advertising
Use Google search to put JC Penney with Trader Joe’s high on the list of sites when
using the search engine. Push Facebook ads and banner ads to people with organic or clean
eating statements on their pages or in the search history and those with searches for either JC
Penney or Trader Joe’s in their history. Push emails to anyone that has an account online with
either JC Penney or Trader Joe’s and lives near the pilot store and subsequent stores as the
project expands. Advertise in newspapers as well online papers and community pages for the
surrounding area that is being targeted as potential customers for this new store. Adding new
marketing or advertising staff with experience in online marketing may help to push further into
new ways to advertise electronically.

45
Website
The JC Penney website for this pilot location and all later locations will need to be redone
to allow customers to shop online and pick up in store Trader Joe’s items as well as JC Penney
items. This project should start at the same time as the store remodeling phase begins.
5.1.8 Feedback Mechanism
To determine if the pilot project was successful or not we recommend monitoring two
important parameters: revenue and customer traffic. We must know the base, prior to project
implementation, an average number of customers over a given time period and revenue in the
store over the same period. By monitoring and comparing with these base parameters every week
the new number of customers and revenue it would be possible to assess if the project was
successful and to what degree.
5.2 Recommendation Two
Recommendation Two is intended to address J.C. Penney’s aging demographic and associated
impending reduced revenues (Stock, 2013). The ideal target demographic would be younger than JC
Penney’s current Baby Boomer consumer profile and would have a greater inclination to follow fashion
fads and more inclined to spend disposable income rather than save. To attract higher income consumers
with greater disposable income, JC Penney must introduce mid-range goods that allow a greater profit
margin. To avoid repeating the mistakes of the past, when CEO Ron Johnson cancelled value-priced
house brands and brought in expensive replacements without testing the products (Tuttle, 2013), we
propose that JC Penney install limited-time (one month) “pop-up” factory outlet shops within JC Penney
department stores to attract fashion-savvy shoppers on a budget. Every month, the pop-up shop would
feature a new designer.
Target began using designer collaborations back in 2003 but they shifted toward the month-long
format in 2009. Target is a competitor for JC Penney with aims at a similar demographic, younger, middle

46
income customers. Target has increased buzz monthly as their pop ups start and have had more than 150
designers collaborate over the past 15 years. These do not create huge additional revenue on their own,
but have moved Target up in reputation and esteem in people’s minds (Peterson, 2015). This allows
people to shop for designer goods a price they can afford. These are fashionable young people overall and
this is a demographic that JC Penney can also tap with the addition of pop-up factory outlets for
handbags. Sephora has paved the way for these shoppers to come into JC Penney and this could move
even more to shop JC Penney. It could also bring up the reputation of JC Penney like it has done for
Target.
CEO Marvin Ellison stated in an interview that JC Penney’s handbag selection was “ugly” and he
felt that they had missed an opportunity with a recent upsurge in handbag demand (Wahba, 2016d). The
demand for designer-brand handbags, shoes and small luxury leather and fabric goods is still strong and
JC Penney can profit from offering these goods. IbisWorld’s analysis of the handbag retail industry
predicts that growth will remain strong due to “aspirational luxury shoppers [who]…do not have the
strong purchasing power of older generations with better-established careers” and that “growth [will be]
driven by strong sales of high-end leather handbags and men’s accessories” (February 2017). This
younger, aspirational demographic is a potentially profitable target market for JC Penney.
5.2.1 Goal and Project Objectives
Placing a pop-up shop inside JC Penney would increase foot traffic into the stores due to
the limited-time nature of pop-up shops and the desire of shoppers to take advantage of
availability and low prices for designer goods within a specific time frame. Pop-up retail is a new
phenomenon that has proven profitable for various reasons and in many scenarios (Nicasio,
2014). The narrow window of opportunity would allow JC Penney to create and maintain an
associated mailing list to alert loyal customers of upcoming pop-ups and contact them with other
marketing promotions. Targeted designers would include Coach Factory, Michael Kors Factory,
Kate Spade New York, Burberry Outlet, Tory Burch Outlet, Armani, and Prada, among others.

47
These are not designers that have collaborated with Target but are in the same vein as what has
worked in Target stores (Peterson, 2015). The Coach Factory outlet in Cypress, TX, often
benefits from long line-ups on Mother’s Day, the holiday season, and special events. The
presence of a line-up during these times are an indication that the goods inside are popular with
consumers, and can potentially lead to promoting JC Penney as a retailer of choice with a
younger demographic. In addition, JC Penney can also market-test rising new designers with less
risk through the pop-up store, effectively positioning itself as a source for informing consumers
of rising fashion trends.
5.2.2 Action Plans
JC Penney should dedicate a location for recurring pop-up shops within the store interior
and heavily promote upcoming events in media, social media and through email lists. The pop-
up shops should have their own branding that attracts younger demographics and is instantly
recognizable. Contracted events with designer outlet stores would require the designer’s
branding within the pop-up that would be supplied by the designer brand and removed at the end
of the event. The designer would be required to promote the pop-up event on its main website as
well. JC Penney would dedicate space that was previously allocated to low-performing goods
and either reduce the space for those goods or eliminate them completely. Currently, services
provide the lowest revenues, but JC Penney management views services as successful
enticements to enter the store and purchase additional goods. In the future, JC Penney should
also try to offer pop-up opportunities from brands such as European manufacturers that would be
attractive to professionals who have travelled and are familiar with those brands names, for
example Smythson, Bottega Veneta, and Victoria Beckham. These shops would be stores that
have a Sephora as well, they would not be in locations with a Trader Joe’s.

48
5.2.3 Deliverables
JC Penney should have a pop-up area that is closed between events to build anticipation.
The dedicated area should look modern, high-end, and offer only highly-desirable brand names
that are offered in current factory stores, or are last-season’s unsold full-price merchandise, or
lower-end interpretations of higher priced handbags sold in designer full-price boutiques (for
example, made of fabric instead of leather). These would be very similar to the collaborations
used in Target, H&M and others. The construction costs would be similar to the Sephora capsule
stores and the pop-up should be located near Sephora capsules to promote additional sales at
both in-store shops. JC Penney should also promote a “V.I.P Club” whose members receive
advance notification of the events as well as a coupon for additional discounts, and JC Penney
can include ads for regular in-store merchandise. By requiring collaborating designers to
advertise the events on their own websites, JC Penney also becomes associated with higher-end
fashion that will attract more Millennials and professionals.
5.2.4 Milestones
Months 1 & 2 – Identify appropriate JC Penney stores, which should have Sephora capsules,
have relevant demographic groups within a one-hour drive and be of a sufficient size to avoid
displacing higher revenue-producing merchandise. Locate and select the appropriate physical
location for the pop-up store within selected JC Penney stores. The boutique should be modern,
stylish, and generic enough to satisfy the designers’ needs, allow for flexible shelving and layout,
and be located near other JC Penney women’s fashions and Sephora. Begin negotiations with
designers who have outlets or would agree to provide goods at drastic markdowns or lower price
exclusives.

49
Months 3 & 4 – Secure first quarter designers and promote events through mass media. Begin
construction on the stores. Build email marketing for the “V.I.P. Club” and send out emails.
Promote through social media similar to how they currently do for their “Penny Days” program.
Secure additional designers for future events. Research trends for designer popularity and contact
the top 5 to 10 handbag/leather goods/shoe designers in the industry.
Months 5 & 6 – Complete construction and hold first monthly events.
Months 7 – 12 – Hold additional monthly events, evaluate foot traffic, revenue increase or
decrease, growth in pop-up email list requests, website visits and if consumer demand is
indicated by line-ups on opening day of each event.
Figure 14. JC Penney with the new Factory Pop-up
End of Year 1 – This is only twelve months after the idea was decided on. Have year-end
numbers to be able to compare year over year foot traffic and revenues. Make necessary small
adjustments such as placement of goods in store or personnel at this point. Begin scouting stores
for possible additional factory pop-ups. Make sure that the following year’s design
collaborations are lined up.
End of Year 2 – Make 2 year comparisons of income statement and balance sheet to show
which designers are working and which are not. Make sure the numbers still justify the
collaborations. If the numbers are good, then begin adding factory pop-ups to the next round of

50
stores that meet the requirements and would benefit from this capsule store. Continue
collaborations that are working and discontinue those that are not. Begin searching for up and
coming designers or looking to the shows like “Project Runway” for new design collaborations.
End of Year 3 – Compare all years and locations with a pop-up to continue making sure that the
revenue and customer traffic at each store lines up or exceeds expectations based on the original
pilot store. Continue making small changes to allow for product or display differences and
customer preferences. Keep collaborations that are being successful and continue hunting for
new designers to feature. Begin allowing for more than handbags if people seem interested in
added accessories from the same designers. There is now an established email list of loyal VIP
Club members that could be surveyed to find out if expanding offerings from the most popular
designers is something they are interested in.
End of Year 4 – Monitor numbers and begin remodeling or new construction on more factory
pop-ups inside JC Penney. Tweak product placement and tastes based on customer feedback and
search for new options. Run the numbers to make sure that this strategy is still working. Always
be looking for new hot designers or ones that are looking to expand into handbags and
accessories.
End of Year 5 – Now do long term comparison of before the stores had factory pop-ups and
now based on four or five years’ worth of income statements and customer traffic and customer
reviews. Discontinue collaborations that are not working and keep looking for what is working
and what might work next. The need for continued searching and negotiating for new designers
will not change, but now some should be coming to JC Penney instead of JC Penney going to
them.

51
5.2.5 Resources
JC Penney would provide internal resources, such as the sales staff to support the pop-up,
in collaboration with the designer brand staff for each event. This could be provided from
existing staff as the event requires only hourly employees for the duration of the event. Design
and construction of the pop-up capsule structure would be completed by JC Penney contractors
or staff and paid from JC Penney budgets due to required specialization for each store. Store
fixtures would be provided by JC Penney. The pop-up shop would be stocked by the designer
brand staff, and signage and required merchandising and styling to be performed in collaboration
with JC Penney to ensure it meets company standards. All leftover stock would be removed by
the designer brand staff at the close of the event, or purchased at discounted wholesale prices, if
desired, by JC Penney. Training and hiring of additional staff will also take up time and money
for these pop-up shops.
5.2.6 Technical Requirements
JC Penney would provide cash registers and payment hardware and software, as well as
theft prevention hardware and software. JC Penney would provide data analysis of the event and
forward the negotiated proportion of sales. This arrangement provides minimal expenses to JC
Penney and helps to avoid transportation and inventory costs. The website will need to be
updated to reflect the designer being featured and tease the next designer. Also, the merchandise
will need to be updated to reflect the current options and inventory.
5.2.7 Budgeting
JC Penney will provide space of approximately 2,000 sq. ft for each pop-up shop, as well
as electricity, costs of sales staff, and labor assistance for unloading inventory from the designer
brand delivery. The estimated cost of remodeling JC Penney stores for Sephora capsules was

52
about $200,000 for construction per location according to Tiffany Holland at The Roanoke
Times in January 2015. The Sephora stores range from 1,500 to 2,500 sq. ft and required fixtures
and new lighting and branding much like the pop-ups would. The pricing per store with the pop-
up would be similar. The return on this investment is expected to begin within one year of
opening the pop-up.
Training and Hiring
The employees would work for JC Penney but would only work in the Factory Pop-up
just like the employees that work only in the Sephora capsules inside JC Penney (JC Penney jobs
website). This would be a cost to JC Penney to either find the right employees for this space or to
train existing employees. These would need to people with a background in mid-range sales or
experience in sales. Working closely with the collaborating designers would also be very
important to make the space unique for each new collaboration.
Advertising
Push Facebook ads and banner ads to people with fashion or mid-range designers on their
pages or in the search history and those with searches for either JC Penney or collaborating
designers in their history. Push emails to anyone that an account online with either JC Penney or
current designers and lives near the pilot store and subsequent stores as the project expands.
Advertise in newspapers as well online papers and community pages for the surrounding area
that is being targeted as potential customers for this new store. Adding new marketing or
advertising staff with experience in online marketing may help to push further into new ways to
advertise electronically.

Department store Analysis and Recommendations (JC Penney)

Department store Analysis and Recommendations (JC Penney)

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