JCPenney CEO: E-Commerce Is Going To Hit A Ceiling

JCPenney CEO Ron Johnson believes E-Commerce is a toothless threat to stores. On July 18 Johnson told a conference audience he thinks that E-Commerce is like the catalog craze of the 1980s—its share of retail sales will eventually plateau, making it only a minor challenger to brick-and-mortar sales.

That theory is crucial to the century-old chain's makeover, which Johnson said will also include all-RFID sales ticketing within six months, elimination of cashwraps by the end of 2013, and a plan to combat showrooming by making 75 percent of its inventory JCPenney-only products to make direct price comparisons impossible.

In the interview at Fortune's Brainstorm Tech conference, Johnson filled in some of the technology details for the chain's 1,100 stores: By Feb. 1, 2013, all stores will have tagged all merchandise with RFID tags, which will be used for both checkout and inventory management, and new Wi-Fi networks will support mobile checkout that will be rolled out through this fall—all as JCPenney is ripping out customized mainframe systems and replacing then with Oracle applications.

"We are going 100 percent RFID with ticketing this fall," Johnson said. "So February 1st next year, the entire Penney's platform will be on RFID tickets. Now, most people use RFID for internal operations inventory management. We're going to jump right to the customer, and my goal in 2013, by the end of 2013, is to eliminate the cashwrap."

That decision reverses JCPenney's previous RFID plans—the chain has been testing RFID for inventory control at dozens of stores since 2010 but had ruled out using it for checkout.

Johnson also said he plans to cut showrooming by increasing the number of private-label products to 75 percent of what the chain carries. The new products will be tied in with the village of mini-shops inside the redesigned stores. "For instance, Michael Graves will be designing housewares products for JCPenney now. It will be the only place in America you can buy Michael Graves housewares. He'll design, we'll source," Johnson said.

That's a clever way of undercutting mobile apps that support showrooming, such as Red Laser and QThru, which scan a UPC code and then search the Internet for lower prices on the same product. Going with a high percentage of private-label items means there is no "same product" from competitors. Customers can still comparison shop online by searching for similar specifications, but the process is a lot less automated.

Though Johnson didn't spell it out during the interview, the private-label strategy also connects with his chain's decision to mimic Apple Stores in other ways, including eliminating commissions. The idea is that associates focus on making customers happy instead of on making sales.

That's fine for Apple Stores, which only sell Apple products. If a customer fondles an iPad at an Apple Store and then buys it at Walmart, the store loses a sale—but Apple still makes money on the product sold.

That's usually not possible for a retailer that doesn't do its own manufacturing. But if the only place customers can buy those Michael Graves products is from JCPenney, closing the sale immediately becomes less critical—if the customer likes the product, she may eventually buy from another JCPenney store or the Web site, but the chain will still get the sale somehow.

Will it work? Maybe, but it certainly shows a lot more finesse than, say, Target's ham-fisted anti-showrooming tactics.Still, Johnson's most interesting revelation was that he thinks E-Commerce is overblown as a threat to stores.Still, Johnson's most interesting revelation was that he thinks E-Commerce is overblown as a threat to stores. He believes it's a reincarnation of the catalog fad of the 1980s.

"My take is that the physical store will have a permanent place, and it will vary by category," Johnson said. "When I came out of Harvard Business School in the '80s, stores weren't going to work because the catalog was going to take over. What woman who's working, who could sit there and read a catalog and call 1-800 and have it delivered to the door, would ever go to a store?"

He added, "The catalogs went through, in many ways, a small version of what the Internet did. After six or seven years, catalog had 7 percent of general merchandise retailing [and] stayed there. There were certain things that happened for that category that required you go to the store."

Considering how much retail chains focus on E-Commerce as a channel—and fear pure-play E-tailers as competition—that sounds wildly optimistic. Maybe it's not so unrealistic, though. The U.S. Commerce Department has tracked retail E-Commerce as a percentage of U.S. retail sales since 2003, when online was 1.6 percent of all retail. After nine years of a steady rise (except for flatlining for a year in the depths of the recession), as of Q1 2012. E-Commerce is at 4.9 percent of U.S. retail sales. That's a pretty small tail to be wagging the in-store dog.

At the current rate, E-Commerce won't hit that catalog-plateau point of 7 percent of sales until the end of 2017. And assuming nothing changes (which is a truly silly assumption), E-Commerce will eventually overtake in-store—in about 120 years.

That leaves a lot of running room for conventional stores.

Another lesson from catalogs that JCPenney learned even before Johnson arrived: When the chain killed its catalogs, it actually lost some E-Commerce sales, apparently because of customers who browsed the catalog and then went online to buy. Johnson also claimed on Wednesday that site-to-store represented as much as 40 percent of E-Commerce sales. It seems customers figured out merged-channel before most chains did.

So maybe there's something to the idea that E-Commerce won't hurt most chains that much (although that's going to be a tough sell at Best Buy). Wi-Fi, RFID ticketing, all-mobile checkout and anti-showrooming measures will all help. But that's only if Johnson is right—and lasts long enough to see those initiatives through.

That's a long way from guaranteed. None of the in-store IT helps if the number of customers in the stores keeps dropping and sales continue to decline. Stock analysts have a long track record of having trouble understanding the complexities of multiple channels and strategies for dealing with them. And when stock prices droop badly enough, boards tend to whack the CEO.

If JCPenney's stock keeps spiraling down and Johnson is replaced relatively soon—or even six months from now—the grand plans to rip out cashwraps and convert JCPenney into Apple-for-apparel could all become irrelevant.

Of course, any chain could switch CEOs—and thus direction—at any time. But right now, no one is particularly concerned about the long-term prospects for the CEOs of Amazon, Walmart or Target. It's whoever is running Best Buy, JCPenney and maybe Walgreens that have something to be worried about.