Penney’s search for its next CEO is now officially two weeks old. According to the company’s formal announcement, the new CEO must be someone focused on “modern retail”. But that term can mean 10 different things to 10 different people. So here is my advice for the CEO Search Committee. Select a person who:
1. Recognizes the importance of fixing JCP’s inventory accuracy problem
2. Is open to applying Customer Based Corporate Valuation principles
Before drilling deeper into these two recommendations, it is important to also note that significant changes to Penney’s mix of product categories makes good sense too. Jamie Salter, the CEO of Authentic Brands Group (“ABG”), highlighted this in his recent interview with WWD. In addition to shaking up the product mix, Salter believes JCP should sign exclusive distribution deals more frequently with lifestyle brands. He also suggests a greater focus on categories like food which increase the frequency of visits to the store.
ABG has a vested interest in the success of Penney’s. It recently became a minority shareholder. Simon Property Group SPG and Brookfield Asset Management are the other two shareholders. ABG has a very tight relationship with Simon, having partnered now on several retail acquisitions. Its relationship with Brookfield appears solid too.
Fixing The Inventory Accuracy Problem
There once was a time when Penney’s operated with a level of inventory accuracy comparable to Macy’s M and Target TGT , two of its direct competitors. Those days are long gone. Each of those companies dramatically increased their use of an inventory management technology called RFID. Penney’s, by contrast, failed to make this a priority. From a proficiency perspective, I estimate Penney’s now lags Macy’s and Target by more than five years.
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Not only is RFID giving Macy’s and Target (and their customers) an accurate picture of each store’s true inventory holdings, it is also helping their store employees work more efficiently. For example, they are able to locate and retrieve items more quickly.
Clarity into the inventory positions of each store in the fleet can lead to big savings on transportation costs and improve the unit economics of omnichannel retailing. It also lets a retailer trim inventory levels without negatively impacting product availability.
The good news for JCP is that it isn’t starting from scratch. In fact, prior to the 2013 departure of former CEO Ron Johnson, JCP’s RFID program was on par with Macy’s and ahead of Target. The program isn’t dead. But it has been adrift for many years.
One last word on RFID. The retailers who today put it to greatest use all treated it as a strategic initiative, championed by the CEO. JCP’s next leader needs to treat it this way too.
Customer-Based Corporate Valuation
CBCV is an emerging doctrine, conceived by Pete Fader and Dan McCarthy, that can be applied to improve the health of a company’s customer base. Fader and McCarthy are the founders of Zodiac, the predictive customer analytics firm acquired by Nike NKE in 2018. Their latest company is called Theta Equity Partners. Fader is a professor of Marketing at Wharton, where he has taught for over 30 years. McCarthy holds a PhD in Statistics from Wharton and now teaches Marketing at Emory University.
To understand the growing importance of CBCV, think of the way professional baseball improved when historically sacred statistics, like Batting Average for hitters or Wins and Losses for pitchers, were eclipsed by new metrics and data sets that have proven to be far more valuable. The teams that clued into this earliest, like Billy Beane’s Oakland A’s and Theo Epstein’s Boston Red Sox, enjoyed a distinct competitive advantage for many years. All teams now rely on this data, most undoubtedly wishing they had done so much sooner.
Rob Markey, one of the co-creators of the Net Promoter Score management doctrine, is a partner at Bain & Company who is known for his expertise growing Customer Lifetime Value. He has closely evaluated Theta’s analysis. In Markey’s 2019 letter to the Financial Accounting Standards Board he noted that Theta’s proprietary methodology produces “surprisingly reliable projections of future revenue and margins”.
JCP must determine what it wants to be and to whom. Changing the perception of the brand will likely involve migrating away from certain consumers and pivoting aggressively towards others, including many who do not currently shop at Penney’s. These are tough decisions. CBCV can make them a little less tough.
JCP should lean on experts like Fader, McCarthy, and Markey to better understand the:
1. Future profit potential of its existing customer base
2. Projected acquisition costs and retention rates of various customers
3. Different paths to growing Customer Lifetime Value
This analysis can improve the effectiveness of future marketing investments. It can also inform important decisions that must be made regarding product mix and customer experience improvements.
The Bottom Line
I am not suggesting that the CEO Search Committee should only be interviewing candidates who are already familiar with CBCV. That would be silly. Nor am I suggesting that the committee only interview candidates who appear to possess a high RFIQ. That too would be silly. But I do suggest that candidates be asked about these topics in the interview process ……. even if the questions might initially elicit a few blank stares.
Source: Forbes – Business