JC Penney: Taking the Internet to the Catalog and the Storefront
Q: You recently retired from the position of CIO at JC Penney. How long were you at JC Penney?
A: Thirty-seven-and-a-half years.
Q: That's a pretty good stretch.
A: I couldn't get another job! 
Q: Can you describe your responsibilities as CIO of JC Penney?
A: I became CIO a little over 13 years ago. I didn't really have that title at first, but essentially I filled that capacity. It became official about five years ago. I oversee all of the traditional IT infrastructure, network data centers, systems development, and telecommunication services for JC Penney stores. I also oversee our catalog and the Internet-presence, which is about an $18 billion business.
For the past year, beyond the traditional CIO role, I had been Chairman of the company's Capital Appropriations Committee, a member of the executive committee, and for a brief time I oversaw construction services and real estate. I've been busy.
Q: Regarding technology and adopting new forms of e-business, JC Penney has led the way. Your company successfully integrated a catalog and bricks-and-mortar presence to create a successful, interactive e-business resource. Where did you find information to assist you with decision-making?
A: Well, I'm constantly reading on the Internet, which is where I find a great deal of the news and information a CIO needs. I also study technical print magazines and bulletins, though the print publications have kind of gone down as the Internet-based portals have grown. We've also capitalized on our own 30-years of experience of our catalog operation. We knew when we started that we had an advantage in e-commerce. We had a tremendous catalog operation that already had fulfillment, customer service, and order processing and payment systems capabilities in place. We also realized that was only an advantage if we could completely integrate the e-commerce operation into the catalog business, because then would we would be able to leverage economies of scale.
From the earliest days of our e-commerce site, it was always our intent to make sure that orders coming off the website looked like a catalog order taken by one of our sales associates at one of our telemarketing centers. We also hoped that it resembled any order taken at one any of our 55,000 cash registers. When a customer hits the "submit order" button at our site, it looks just like any other catalog purchase. It proceeds through our billing systems, fulfillment systems, and customer service systems. We're proud of this seamless type of integration of our capabilities.
Q: What is the most important information you've learned about your customers? How have you leveraged that information?
A: Well, we've learned that customers want exactly the same merchandise on the Internet as they want in our stores and catalog. So we now offer the entire content of our catalog on the Internet. In fact, the website actually offers an expanded assortment of merchandise.
In the catalog business, there exists what we call a "bogey" for each page - each page has to earn so much in order for it to merit publication. So obviously there are some items you might like to show but don't, because they won't generate enough volume to justify the printing and distribution costs. Of course the add-cost component is completely different on the Internet; there are production costs, but you really don't have all the print and circulation costs.
For example, we carry a full line of Bose sound systems on our Internet site; I think everything Bose sells. And we carry an ever-expanding Sony line. In fact one of the things we're currently doing is organizing the site beyond a classic departmental approach by adding a series of brand shops.
Another thing we've done is to fully integrate all of our customer history between stores, catalog, and the Internet. We're able to benefit from this information when making decisions about sending out catalogs. We ask ourselves, "Did they use the Internet along with the catalog? Does it appear that they used the catalog as a shopping aid before using the Internet store?"
The education, of course, is ongoing as we're constantly trying to improve how we use that history. For example, we now have an email list of 4,000,000 customer email addresses. Email marketing is now our number one vehicle for promoting the Internet store. And of course we try to customize those emails so that we don't fill up your in box with ads for things that don't interest you.
Q: Many retailers that have been successful in generating sales on the Internet have had trouble delivering those products in a timely fashion. How has JC Penney been so successful in getting the products delivered quickly and efficiently?
A: Well, again, from our base catalog operation we do something in excess of 50,000,000 customer orders per year. We have five gigantic distribution centers around the country. So while our Internet store has been a huge success, we're going to do aproximately $300 million dollars this year, which is equal to about 10% of our total catalog business, which is not a huge amount. It's a simple matter for us to handle that type volume.
Q: When it comes to the integration of all these different components, as well as reaching out to other suppliers and transportation mechanisms, who puts all of that together?
A: That's really a function of the distribution organization. For example, I think we're the largest customer of UPS, excluding the U.S. Government. So UPS does all of our home deliveries. About 45% of our catalog business is delivered directly to the home, and the other 50% or so is made available for the customer to pick up at a convenient store location.
Another advantage that we have logistically for our customers is that in any kind of catalog business, returns are a hassle - and we certainly don't want to hassle our customers. Another built-in advantage of the bricks-and-mortar operation is that customers can order something on the Internet and have it delivered directly to their homes. If for some reason they decide to return it, they're perfectly welcome to take it to the nearest JC Penney store and have their account credited.
Q: I notice that JC Penney is now spinning off a 3PL. How has that come to be?
A: Our catalog operation has become substantially more efficient in its use of space and facilities over the last eight or nine years due to improvements in technology. So we ended up with a large, fixed distribution center that we no longer needed for catalog orders. When it came time to decide what to do with that center, we realized we could close it completely, we could sell it to a potential competitor, or we could use it to provide third-party services. We decided to help other companies with their Internet fulfillment since we knew we could apply the expertise we've gained for catalog. We now have a number of customers including Anne Taylor and the garden purveyor, Smith & Hawken. Previously, we just did telemarketing services for them, as we have for other companies.
Again, it's a tactical business, not strategic. We have an asset and we try to optimize the use of that asset. Basically, we're sharing our expertise in fulfilling individual orders from a wide range of SKUs, and so we're taking advantage of our asset. We probably would not spend a $100 million or $200 million to build a second logistics center if there were not enough customers.
Q: How has dynamic pricing helped you distribute more merchandise?
A: We're experimenting quite a bit with pricing on our website. We have special "clearance shops" where we carefully examine the pricing and how things move. We have auction capabilities through a company called Fair Markets; we have a couple of different types of auctions where we're trying to identify the best way to liquidate excess goods and to get the most recovery. We offer lots of options to keep our customers engaged. Obviously, if people like the site, they spend a lot of time - and money - there. That is one of the secrets of eBay, for example.
Q: JC Penney is noted as an organization that takes full advantage of new technology. Do you build your own solutions, or do you look to specific vendors for help? How do you implement solutions once you decide on moving forward?
A: I would say that our bias is to build our own. Historically, we've developed our own fulfillment and logistics systems. As an early adopter of IT in point-of-sale and retail, there too we built a great deal of our own infrastructure. Now, having said that, we also use outside packages, generally not the big SAP approach, but more of the best-of-breed variety. For example we use Peoplesoft for general ledger and payroll. We've also used a variety third-party firms to help us. We have a strategic relationship with Accenture who has helped us tremendously over the last 18 months or so in transform-ing JC Penney's merchandizing process.
