JCPenney, long a cornerstone of American retail and a low-cost innovator whose marketing brilliance helped it survive the Great Depression, has filed for bankruptcy. While once a personal inspiration for the young Sam Walton, founder of the megafirm Wal-Mart, JCPenny is now trading under 20 cents USD on the stock market, and is facing a troubling situation that appears to be unrecoverable.
While it is true that the bankruptcy filing of JCPenney was mostly due to Covid-19, the company has been in trouble for a long time. The primary issue to date for JCPenney has been the sheer inability of the famous retailer to adapt their business model to online shopping, as customers continue to turn to Amazon, and other traditional retailers such as IKEA, Target, and Wal-Mart, who have successfully created a formidable online presence.
Today, however, JCPenney faces major problems with its finances and customer base. The issue is no longer just digital, as the marketing leadership of the storied company continues to fail.
The retail giant has been successful in negotiating with lenders for a $900 million debtor-in-possession loan, which essentially allows it to finance its operations while under bankruptcy protection. However, JCPenney finished its most recent fiscal year with revenues being down 15% over a five year period, and the firm further failed to pay $12 million in interest on senior notes that are due in 2036.
While the company’s lenders offered a reprieve of 15-days to make the payment, if JCPenney fails to pay within that new time period, then lenders will have the right to force an immediate repayment of $388 million. In other words, instead of having a $12 million annual payment for 16 years, the company would have the entire loan immediately. This would spell disaster for a firm that is already struggling to finance its operations.
JCPenney filed for bankruptcy protection in May, just after the coronavirus pandemic forced all nonessential businesses to close, and since the filing, the company has actually managed to reopen many stores. However, about 150 of the 850 total locations are now being shuttered permanently, and this will have a profound impact on JCPenny’s ability to showcase to customers.
Remember Circuit City? The once retail giant who rivaled Best Buy, who is now nothing more than an obscure website? JCPenney will likely follow a similar fate.
As we saw with Circuit City, the closure of many stores can be a major long-term mistake. While initially closure and liquidation may provide quick cash flow and reduce the overall debt burden, it does not reduce the value of inventory on the balance sheet. The result of this approach is lower net sales and thus a decrease in gross margin, which leads to an overall decrease in net profit.
While JC Penney may offset these losses by reducing capital expenditure and selling off some of its long-term assets such as vehicles, property, and in-store merchandising fixtures, it seems likely that JCPenney will follow the same mistaken approach taken by the doomed tech retailer Circuit City, when it invested heavily in redesigning it’s remaining stores. The result was that Circuit City squandered whatever money it had left on merchandising for stores with no customers.
The hard truth for JCPenny, as well as many traditional big-box retailers, is that trying to drive customers into the store with gimmicks simply won’t work. Shoppers today leave the house for either experience or expediency, as anything else can be found online and delivered for free.
The end is nigh
While all of these issues spell disaster, the ultimate end for JCPenney will most likely come from the company being unable to deal with an impossibly competitive promotional environment and the reluctance of suppliers to partner with the ailing retailer. Both of these issues were faced by Circuit City, and neither of them were workable.
The first issue will come because competitors such as Macy’s, Sears, and Kohl’s, will need to slash their prices in order to remain competitive while JCPenney liquidates inventory. The result will be lower market price points, further fueled by economic recession and online competitors such as Amazon who have more than enough liquidity to run aggressive promotions in order to squeeze the struggling traditional retailers. Once customers become used to low prices, they don’t go back, unless they have no other options.
The supplier problem for JC Penney is directly related to the bankruptcy filing. With cash problems looming, suppliers will likely stop shipping to JCPenney on credit, especially if they default on the senior notes. Perhaps worse yet, suppliers will be quite reluctant to enter into any type of inventory management agreement, which is typical in retail and allows retailers to return unsold and unused inventory.
In other words, without credit, JCPenney will have to pay for goods before receiving them, and without inventory agreements, JC Penney will never have the option to return excess merchandise. This mix of problems is almost certainly terminal for a company experiencing major cash flow problems driven primarily by declining sales and customer traffic.
While it will truly be sad to see yet another classic and legendary American retailer go up in smoke, it serves as a powerful lesson for marketers and retailers: Heed the lessons of the past, and never forget to pay attention to the future.