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Can An Outsider Fix J.C. Penney?


Marketing: Retailing

Can an Outsider Fix J.C. Penney?

New CEO Allen Questrom faces a retailing nightmare

When a group of J.C. Penney Co. Inc. retirees extended an invitation to the retailer's new chief executive to attend their Florida convention in September, they figured he wouldn't show. After all, he had been on the job only two weeks, Penney had been mired in trouble for nearly a decade, and its stock, which many of the former employees rely on to get by, had been falling for years. Who would want to face such a cantankerous crowd? Allen I. Questrom would.

Indeed, Questrom gave what was by most accounts a passionate speech about rejuvenating Penney, the nation's largest department store chain. Those 40 minutes of encouragement earned plenty of goodwill with the frustrated retirees. "We left feeling pretty confident that he will bring us into the 21st century right on target," says Wallace J. Paprocki, head of the 2,000-member group.TOO BIG? The performance was quintessential Questrom. The veteran retailing executive has been charming employees, customers, and creditors for years, mostly with his flair for turning around prestigious stores gone wrong. Questrom brought Federated Department Stores out of bankruptcy in the 1990s and revived luxury emporiums Neiman Marcus and Barneys New York.

Now the 60-year-old merchant prince has taken on the biggest challenge of his career, and it's in Plano, Tex., of all places. Penney, once the department store of choice for Middle America, is trapped in a no-man's-land. It's been struggling for years to fend off discounters such as Wal-Mart and Target on one side and moderately priced chains like Macy's and Kohl's (page 62) on the other. But its fashions are tired, its prices unreasonable. Penney has lost its cachet with its shoppers--not to mention its credibility with investors. Its stock has fallen 80% over the past two years, to about $13. "The company is severely challenged," says analyst Richard L. Church of Salomon Smith Barney. "The question is: Is this too big even for an Allen Questrom?"

It may be. After relocating to Texas, Questrom took a few months to acquaint himself with Middle America. Then, on Jan. 25, he made his first move: Among other things, he closed 44 of Penney's 1,000 stores and laid off some 5,000 staff, taking a restructuring charge of $275 million.

Cutting costs alone won't save Penney, though. Questrom has to give people, especially younger people, a reason to shop there again. Plus, he has to do so in the midst of a slowing economy. He's counting on a new centralized buying system (introduced by his predecessor) to keep fresh merchandise on the shelves and help lower the company's cost structure, which is far higher than average. Like CEOs before him, Questrom is redesigning Penney's aging, cluttered stores. But unlike any other executive, he wants to recruit more outsiders to the top ranks. Penney is known for its unresponsive, some call it stodgy, corporate culture. Questrom, in fact, is the first outsider to run the company in its 99-year history.

In many ways, Questrom is an odd fit with Penney. After all, this is a man who once modeled in a Neiman Marcus catalog and posed in a Bloomingdales' window. The tall, lanky fitness buff concedes that he has yet to don a Penney's private-label Stafford suit, the uniform for most senior managers. "I can't buy all new clothes. I just got here," he jokes. Given the magnitude of his task, you might think he'd be a little uneasy. But no. "I've been involved most of my life in turnaround situations," Questrom says. "I look at this as another mountain to climb."

Questrom earned his reputation at Federated with smart financial restructuring. The stores were doing well, but the company was burdened by debt. By cutting costs, improving inventory discipline, and streamlining its far-flung buying operations, Questrom and his team led Federated out of bankruptcy in 1993. Two years later, he engineered the $4 billion hostile takeover of its chief rival, R.H. Macy & Co., which helped transform Federated into one of the nation's largest department store chains.

But Penney is no Federated. Its troubles are not of the balance sheet variety; it is nowhere near bankruptcy. Its problem--poor performance--is harder to fix. And there are no obvious acquisitions or buyers to bail Penney out either. For fiscal 2000, which ended Jan. 31, analyst L. Wayne Hood of Prudential Securities Research figures Penney's net income will plunge 85%, to $50 million, on flat sales of $32.7 billion. Next year's sales are estimated at $32.6 billion. Plus, the company owns the ailing $13 billion Eckerd drugstore chain. "I believe Penney is a tougher challenge for Questrom than Federated was," says Robert F. Buchanan of A.G. Edwards & Sons Inc.

So what does Questrom have going for him? Penney at least knows what market it should be in, the "broad middle," as Questrom calls it. That's where the bulk of the consumers are. Besides, Penney doesn't have the status to move upmarket--it tried and failed in the early 1990s--or the moxie to go downmarket against Wal-Mart. It also has a national presence and a track record selling through catalogs and online.UNHAPPY MANAGERS. But Penney lacks a clear image. At Neiman Marcus and Barneys, Questrom didn't have to worry about making good impressions. Both stores were suffering from poor management, not poor images. At Penney, "his main task is to redefine what the brand is all about," says Alan Bergstrom, head of The Brand Consultancy in Atlanta.

For now, Questrom is hoping better selection will bring customers back. Its new buying program, implemented over the past year by Chief Operating Officer Vanessa J. Castagna, reverses a longstanding system that gave store managers nearly complete purchasing discretion. But the old way slowed delivery time and left a lot of last season's fashions on store shelves. Not surprisingly, many managers have resisted the change. But Questrom says a little success should help them get over that.

The style maven also wants to give Penney an edge by developing more private labels. He believes that any department store without strong house brands won't be able to hold out against specialty stores such as Old Navy for long. But Penney's last big hit was The Original Arizona Jean Co., and that was in the early 1990s.

And, of course, at a time when stores of all kinds boast everything from coffee kiosks to exercise rooms, Penney has to at least get rid of the bad lighting. For now, remodeled stores (there are about 250 in various stages) have wider aisles, fewer walls, and less clutter. One prototype even boasts play stations for kids, large-screen televisions broadcasting teen shows, and a "comfort zone," complete with Internet access.

As for Eckerd, the idea is to rein in the chain, which expanded somewhat recklessly in the late 1990s. Questrom isn't saying so, but most analysts believe he'll eventually spin off the unit.

Questrom says he'll need two to five years to remedy all that's wrong with Penney. If he succeeds, he'll be paid handsomely for his efforts. On top of his $1.25 million annual salary, he gets stock options valued at nearly $60 million that will vest at 20% a year during his five-year contract.

Such riches are a far cry from Questrom's modest upbringing in blue-collar Waltham, Mass., where his father owned a machine shop. After graduating from Boston University, Questrom joined Federated's Abraham & Straus division as a management trainee in 1965. He worked his way up, transforming both Atlanta-based Rich's and the glitzy Bullock's of Los Angeles.

Still, his career path hasn't been as straightforward as it looks. In 1984, he left Federated on a sabbatical to travel around the world with his wife, Kelli. Then he abruptly retired in May, 1997, a year early, and shocked colleagues by suing Federated for $47 million in back pay. He lost. For now, Questrom seems to be settling into Texas. He has bought a townhouse in a tony Dallas suburb. He probably won't be wearing Stafford suits anytime soon, though. And that may mean he's just what J.C. Penney needs.By Stephanie Anderson Forest in Plano, Tex.Return to top


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