Schafer: With retail turnarounds, sometimes less is more

It was not even 10 months ago that Ron Johnson of J.C. Penney Co. did what Hubert Joly of Best Buy Co. Inc. did on Tuesday -- unveil a turnaround plan to a ballroom of investors and analysts in New York.

Johnson's meeting had more star power than Joly's, with Martha Stewart and a video appearance by Ellen DeGeneres, the talk show host and new pitchwoman. Johnson peppered his remarks with allusions to "Steve," and everyone in the room understood that he meant Steve Jobs, Apple's iconic co-founder and his former boss.

Investors initially responded with some enthusiasm. Yes, it's hard to turn around a retailer that's been sliding for years. But you couldn't dismiss the possibility that Johnson's vision, his "plan to transform" the company, might have been just what was needed.

Three quarters into Johnson's first year there's not much enthusiasm left. As a result of a thoroughly reworked pricing strategy, last week the company announced that its same-store sales in the third quarter declined 26.1 percent.

Johnson's plan now feels roughly akin to a home remodeling project that entailed burning down the house as its first step.

Joly faced the same question in September as Johnson did a year ago, whether his company is in need of a "transformation" that upends its whole business model, as Best Buy's harshest critics insist it is.

Joly stopped short of announcing that, so maybe he's learned something from watching J.C. Penney.

He learned of daily sales, specific store sales, specific product sales, free shipping, even better prices if you walked in between 10 a.m. and noon. When he first got to the Texas-based company he learned of 11 promotional circulars the previous week and 590 unique promotional events during the year.

There were so many sales that the buyers spent half their time just reworking prices for ads. Nearly three-quarters of the revenue came at 50 percent or more off.

J.C. Penney, he concluded, was dying one coupon at a time.

So Johnson chucked the whole pricing structure, announcing a "fair and square" strategy of just three prices -- a regular price, a one-month discount price and best price.

Johnson met with investors again late last week after the disastrous quarter was announced, beginning his remarks with "this was another quarter of unbelievable learning for us."

Still, Johnson sounded optimistic pressing forward with a tweaked pricing strategy and a shops-within-the-store initiative that was the second major part of this plan.

Analysts, on the other hand, now suspect that sales growth from the new store format won't come fast enough to offset damage being done to the traditional business.

Credit Suisse analyst Michael Exstein and his research colleagues reported that of 17 retailers that reported a decline of more than 15 percent in annual revenue from 2000 to 2011, only four were able to recover that lost ground.

The sharpest criticism of Johnson is based on the conclusion that what he is really doing is chasing a new customer rather than seeking to better serve a Penney's customer. He doesn't seem to appreciate anyone who comes into one of his stores with a fistful of coupons, seeking deals on the clothing her family needs.

Retailing turnarounds are rare for a host of reasons, including a hyper-competitive industry, but there are proven approaches other than Johnson's bet-the-farm strategy.

In early 2007, new CEO Alex Smith took over as the company reported a fiscal year that included a same-store sales decline of more than 11 percent and a whopping operating loss.

Smith closed more than 100 stores and ended the latest fiscal year with about 1,050. The company got rid of its UK and Pier 1 Kids operations and pulled back entirely from e-commerce.

Smith took out expense across the company, including restructuring leases to lower occupancy costs, but he added management depth in buying and merchandise planning.

The company as a result was able to reduce its inventories, and thus the amount of product sold on clearance, even as sales per square foot increased. With 12 straight quarters of comparable store sales growth and profitability surging, Smith has turned his attention to growth, including bringing back an e-commerce channel.

In looking back at Smith's achievement, there was no radical transformation. There was no effort to chase an entirely different customer.

But for now, Joly seems focused on the same customers, the same product categories, the same brand, with plans for much better execution within its vast store base and growing online presence.

There's still time, it seems, before Joly needs to risk burning down the house.