Downstairs at a mall on the edge of Austin, Texas, a J.C. Penney sales assistant reels off the same announcement every 30 minutes in a bored, monotone voice.
It goes like this: “Have you been looking for the new major appliance? Well, you’re in luck because we now sell appliances; come on down to the first floor and take advantage of our Black Friday deals.”
Unfortunately for J.C. Penney (JCP), this pitch is falling on deaf ears. On the afternoon of one of the busiest holiday shopping weekends of the year, only a handful of customers are in this section of the store.
J.C. Penney, under the leadership of new CEO Marvin Ellison, is bringing appliances back to its stores after a 33-year hiatus in the hopes of cashing in on the collapse of rival Sears, attracting first-time millennial homebuyers, and shifting focus from declining apparel sales.
Ellison, who has helped bring J.C. Penney back from the brink since his appointment in August 2015, knows the appliance business well as he spent 12 years at Home Depot.
Recognizing that the current housing market is strong and spending patterns are shifting away from apparel into homeware, he is hoping to capitalize on the $29 billion appliance industry, which is expected to exceed $38 billion by 2020, according to Euromonitor International.
In October, after a completing a 22-store pilot, the department store partnered with appliance-makers GE, Samsung, and LG to bring these big-ticket items to 500 of its stores.
Appliances are one piece of a larger, long-term growth strategy from Ellison. He has improved the online platform, adding ‘Buy Online Pick Up In Store’ to every location; has increased the amount of Sephora in-store beauty spots; and is now expanding the private label clothing collection which has higher profit margins and is a way to differentiate the brand. Investors are responding well; J.C. Penney’s stock surged 32 percent this year, far outweighing rivals Macy’s and Kohl’s.
But there’s a faint feeling of déjà vu. Ellison is bringing in a category that may not translate well into J.C. Penney’s business; it’s a trap the company fell into before with previous CEO Ron Johnson, who hailed from Apple. He tried to make the store more upmarket, and in turn alienated its core customers, nearly running the business into the ground. This cost the store a third of its revenue in 2013 and left it drowning in $5 billion of debt.
A drop in sales of homeware also contributed to J.C. Penney’s decline during the Johnson era. The department store was a leading seller of window treatments and blinds in the US for decades. By 2014, it was capturing just 12 percent of home business compared from 21 percent in 2007. Ellison believes bringing this section back to life and adding appliances strengthens homeware and replaces a previously unproductive space.
“We really feel like it’s a win-win across the board financially,” said Ellison in an investors call.
Appliances could also draw in millennials, who make up 27 percent of the US population. According to the National Association of Realtors, Millenials make up the largest share of suburban homebuyers in the nation. Ellison wants to lure these customers in with appliances—by adding features like mobile shopping—in the hopes of making them more loyal to the brand.
But Penney’s main opportunity in this market comes at the expense of Sears.
Sears has lost $8 billion over the last 5 years and closed 18 percent of its stores, most of which can be found in the same malls as J.C. Penney. As one door closes, another opens at J.C.Penney, who hopes to catch these customers.
Ellison is hoping these big-ticket items will drive sales and boost store credit card use. The average sale of appliances is around $1,000, considerably higher than any other section at the store, and a reason to pay on credit. Customers also get a 5 percent discount when they buy with a store card.
“It’s turbo charging their sales,” said Steve Ruggiero, head of research at R.W. Presspich & Co. “They are going to have more visits and very likely to have more transactions from it,” he said.
So far, appliances have had a negative impact on other parts of the store that can’t afford to take more of a hit. Last quarter, same-store sales fell 0.8 percent, well underperforming analysts’ expectations for 2.7 percent growth. As a result, management trimmed full-year sales forecasts from 3 to 4 percent to between 1 and 2 percent for the year. Ellison said this was because of disruptions caused by appliances being fitted in store.
But he’s expecting to reap the rewards in the fourth quarter of the year and well into 2017 as these short-term hitches will be outweighed by the long-term strategic benefits, he said.
“Knowing what I know today, would we do it again?” he said. “We would do it 100 times over.”
However, the scene at the Austin store told a very different story on Black Friday, despite the banners and announcements celebrating the arrival of appliances.
“It doesn’t work,” said Cheryl Cohee, a long-time J.C. Penney shopper, who also worked in the store for 20 years, referring to the appliances. “J.C. Penney is a soft-line store, you just don’t think about it having hard-line products.”
It’s a delicate dance between keeping J.C. Penney’s core customer—the middle-aged American “mom”—happy, while finding new ways to appeal to millennials. By diluting its offering and trying to be all things to all people, the company risks losing out altogether. It needs to work out how to connect with the customer long-term.
“I have not heard them clearly say who their customer is,” said Kathy Gersch, founder of consultancy firm Kotter International. “Ultimately they’ve got to make a decision around who they are trying to attract and then answer the question with the experience they create,” she said.
This un-targeted approach opens them up to more competition and it becomes “harder to be heard in all the noise,” added Gersch.
“I view it as a bit of a Hail Mary pass,” said Mark Cohen, former CEO of Sears Canada and a professor at Columbia Business School.
Cohen is critical of the initial pilot scheme. Ellison said he wouldn’t “make a blind march” to force this new line into stores if it wasn’t working. “We’re going to listen to the customers. We’re going to read the data,” said Ellison in January this year. But appliances were rolled out four months later.
“It’s a bogus test,” said Cohen. “There is always a surge when a store does something new. A viable test would have been to run it for the better part of a year,” he said.
There are complications in its vendor agreements. The store has said that to ensure it doesn’t haemorrhage cash, it will not own any of the inventory. As vendors are likely concerned about being killed by Sears’ decline, this agreement works well for the moment but whether this will be the case long-term, remains to be seen. It’s a tough business to make profitable because of the extra costs in delivery, installation and returns, and without subsidies, these expenses bite into margins.
Appliances are also infrequent purchases – on average bought every 8 and a quarter years – and usually out of necessity. This creates problems in driving foot traffic and spurring sales in other parts of the store.
“Let’s say you fall in a love with a washer dryer, does that mean you are going to buy a dress and underwear from J.C. Penney?” said Cohen. “There is a big disconnect that I don’t think they are even remotely ready to overcome.”