J.C. Penney: Not Fair Nor Square
It’s only Wednesday yet so much has happened this week in the world of fashion law I can hardly keep up! I feel like I could do a post about the week in review right now and just phone it in for the next few days! But, that would not be very tenacious of me and frankly, when it comes to fashion law; I am like a dog with a bone. So let’s dive in and begin!
J.C. Penney has recently garnered headlines due to their major business model overhaul. The company fired and hired a whole new team of upper level management to help stop the hemorrhaging of profits and giant drop in sales the department store has seen in the past few years. The once behemoth retailer used to have a real edge in the lower priced goods market. However, over the past ten years many more stores have exploded on the scene and Penney’s lost a huge percentage of their market share as a result. Kohl’s, for instance, really hit Penney’s where it hurt. Even though their stores were smaller in size, the Wisconsin based retailer was able to capitalize on their private label clothing lines driven by designers like Vera Wang and Lauren Conrad of “The Hills” fame. This sort of name brand quality design meets mass marketed clothing was not really in Penney’s repertoire. Penney’s had a knack for picking up brands that had lost their luster to create lines for their store like BONGO denim after the 80’s-90’s were over. Target, another major competitor, followed the same sort of business model: get the designers to create private label lines for the store while they were still hot. Clearly, this past fall’s Missoni for Target madness proves that customers are not drawn in by brands that are now unpopular enough to team up with a department store. Customers know brands, they know labels and thanks to various forms of fashion media, they know what’s hot. They are savvy and want what they want when they want it hence, the popularity of Target and Kohl’s diffusion lines, which has driven their sales and profits through the roof. As a result, Penney’s profits have been driven into the ground.
Penney’s also offers more than clothing- they have a huge assortment of home goods. From furniture to blenders to drapes and mattresses, you could use Penney’s to outfit an entire house. But that was part of Penney’s problem. They simply offered too much stuff and were a jack-of-all-trades but master of nothing. Again, Target came in with a much narrower, more thoughtful offering of home goods that kept consumers focused. Target also drew upon the power of hot home goods designers like John Derrian to create a private label collection of goods that would draw “in the know” customers into the store by droves. Wal-Mart and Kohl’s took control of what I call the “portable appliances market” (things like coffee makers, blenders etc.) by buying more of the goods in bulk and continually offering the goods at a lower everyday price than Penney’s whose customers would have to wait for sales to score the same goods at the Wal-Mart/Kohl prices.
So Penney’s decided to reinvent themselves and the way they do business. If you’ve watched any TV recently, you’ve undoubtedly noticed their non-stop ads touting their “new” retail strategy/image: Fair and Square. The idea being, customers would no longer have to put up with having to wait for “BOGOs,” buy one get one sales. Or “Doorbusters,” sales that start early in the morning and reward the shopper for skipping the snooze button with a limited time lower price offering on items.
On a personal note, I find it funny that Penney’s talks about these sales like they are superior to the mindless drones that created such “horrendous” retailing methods because, well, Penney’s is the store that created this mob mentality of shopping. (“I must get there NOW! NOW! Push grandma out of the way! Penney’s and I are busting doors!!!!”) Their tone in some of these commercials makes them sound disgusted that anyone could ever have created such a pitiful marketing campaign. I kind of want to shake them and say, “You know YOU created all this, right?!”
I should probably take a moment to make fully disclose that I did work for Penney’s corporate offices for a short while; very short.
Penney’s new business model of just buying in bulk and reordering based on their vendor’s predictions of sales and not their buyers’ research led them to just cut over 300 merchandising positions from their corporate Plano, Texas headquarters. They now essentially have a computer system analyze sales and send those reports to their vendors instead of human buyers doing the legwork. From those reports the vendor decides what, when and where to replenish goods. It shifts the allocation responsibility from the retailer to the vendor; something I am not sure is the best idea. (Again, full disclosure, I was an allocator in past lives and that is what I did at J.C. Penney.) I am sure many other retailers use a similar system of buying and replenishment so I am not going to knock Penney’s for that.
I will, however, knock Penney’s for something I recently read about in WWD. As part of their new business model, Penney’s wanted to create a new major marketing campaign to get their “Fair and Square” tagline out there. The idea behind the tagline is that Penney’s will no longer be partaking in mob mentality sales like their old “Doorbusters.” Now, with the replenishment program by vendor in place, they will buy in bulk and just offer everyday low pricing a’la Wal-Mart and Kohl’s. Hence, their product pricing will never be full of gimmicks like the days of yore; just everyday “Fair and Square” prices.
In December 2011, Penney’s top level executives hired New York visual merchandising and branding firm Hudson + Broad “to discuss the creation of an exclusive fixture that could be an iconic symbol for their stores. The fixture would need to change colors to match the retailer’s color of the month.”
As a result of this meeting, Hudson + Broad developed an oversize Plexiglas LED square fixture with a remote control for changing the color of the square. Penney’s, obviously pleased with the design, ordered 1,800 units of the fixture for their stores. The square was installed at Penney’s Manhattan Mall store for CEO Ron Johnson’s January 25, 2012 presentation of the new J.C. Penney “Fair and Square” initiative. “Hudson + Broad also were then asked to create a pair of fixtures that were installed outside the entrance to Johnson’s executive suite at Penney’s headquarters.” In February and March 2012, Hudson + Broad planned the full rollout of the 1,800 ordered units with Penney’s. It seemed at this point, the square design was a whopping success.
On April 3, 2012, however, Penney’s informed Hudson + Broad that they “had sourced the custom-designed proprietary fixtures elsewhere.” Obviously shocked by this breach of their proprietary agreement, one that was reached before the firm even came up with the design, Hudson + Broad immediately reminded Penney’s that it would not authorize the retailer to have the fixture procured elsewhere per the terms of their contract. Penney’s response? To stop all communication with Hudson + Broad.
As a result, the firm was forced to file suit in Manhattan’s U.S. District Court against Penney’s in which they accuse the retailer of allegedly breaching their contract with the firm and misappropriating trade secrets. The firm seeks $20 million in compensatory damages and an additional $20 million in punitive damages. Hudson + Broad said they would also inform Penney’s spokesperson Ellen DeGeneres of the conflict.
However, as in a lot of IP cases, money does not seem to be the driving force behind this suit- performance is. Maharg said the firm still wants to work with Penney’s. In fact, he stated that the firm wants an apology and they “want to produce this order and work with [Penney’s] for many years to come.” This leads me to believe that if Penney’s simply made good on their original order of 1,800 units, this suit would likely go away. But more on that during Part II: The Legal Analysis portion of this story.
All in all, there are a lot of elements to this story that are exciting for a fashion law / IP nerd such as myself. Not the least of which there is a trade secret claim, which is extremely rare these days. Know that in my legal analysis of this story, I will be fair and open-minded. But as far as my personal feelings at this point, I am not at all surprised Penney’s would pull something like this. My personal experience is that the company operates on a “Good Ole Boys” platform and has for years. They seem to think the law applies to everyone else but them. They do what they want and throw money at problems. In my opinion, this lawsuit alone proves the retailer thinks it is somehow immune to the rules we all have to play by. The agreement before the design process began was clear. Penney’s was clearly very happy with the result. They went public with the product during their huge launch of the “Fair and Square” campaign and ordered 1,800 units of the product. I completely agree with Maharg: