Guessing Game

ow does a 98-year-old, 1,230-store general merchandiser and leading national cataloger adapt to the realities of post-Y2K retailing? It makes logging into the e-tail revolution a key part of a multi-divisional strategy that emphasizes one well-known store name: JCPenney.

Under the auspices of its new, all-encompassing "Come in. Call in. Log on." slogan that leverages its high-profile, store-as-a-brand presence across brick-and-mortar, catalog and Internet channels, JCPenney is transforming itself into an omnipresent retailer that serves its consumers wherever, whenever and however they choose.

JCPenney launched its web site in 1994. But a year-long refocus on its site emphasizes the $31-billion retailer's long-term expectations for jcpenney.com, which has seen sales escalate from $15 million in 1998 to an estimated $75 to $80-plus million last year. The site also draws on JCPenney's existing expertise in catalog retailing, including fulfillment capabilities. Annual (paper) catalog circulation is 400 million.

"The JCPenney consumer is now beginning to migrate to the Internet," says Rich Last, executive vice president of the Dallas-based retailer's Internet commerce solutions team. Last, a 25-year JCPenney veteran, spent nine years in business development before joining the company's web team a year ago. "This holiday period, 2000 and 2001, we're going to see a rapid migration. Our customers are beginning to go more and more online and are beginning to shop more and more online."

The site, in response to e-mail feedback, now offers the complete assortment found in the retailer's existing mail-order catalogs. Dossiers include the Fall/Winter Big Book, Christmas catalog and specialty catalogs. In total, there are a whopping 200,000 SKUs available online. Next year, jcpenney.com will expand its product offerings.

Although JCPenney's site represents what Last labels "a small part of the total equation," its explosive growth is a beacon for a company plagued by solid yet slow growth in its older, more traditional mediums. The site began through alliances with proprietary Internet services in 1988.

Of JCPenney's $31 billion in sales in 1998, approximately $15 billion came from storefronts, $4 billion from its combined catalog and Internet sales, $10 billion from its Eckerd drug chain and $2 billion from the company's direct marketing insurance business.

Both in and out of the box, JCPenney's new strategy involves putting muscle into targeting and growing two consumer segments, internally dubbed Modern Spenders and Starting Outs. Modern Spenders are defined as 35- to 54-year-old consumption-oriented, dual-income households with up to two children. They currently account for 27 percent of the retailer's customer pool. Starting Outs are 18- to 35-year-old singles or young families with one child. Still developing store loyalties, they account for 19 percent of JCPenney's base. The two groups have a median household income of $48,000. Women account for 80 percent of the retailer's apparel purchasers.

Carl Steidtmann, director and chief retail economist at PricewaterhouseCoopers, views JCPenney's new strategy in a positive light in today's over-stored, over-branded world. "The Internet offers them a huge opportunity," he says. "It lends itself to people with strong brands and a strong sense of who their customer is. And we're not building any more regional malls. In many regions, malls are very late in their life cycle."



Converting Net Potential

To JCPenney's credit, the site gives consumers what an Ernst & Young LLP survey says shoppers are looking for in e-retailing: convenience, a trustworthy name brand, value pricing and selection. jcpenney.com was named by PC Computing as one of the I-BIZ "Top 10 Internet Sites by Brand Recognition."

Pages consistently emphasize sale items, special discounts and contests. And through a cascading menu, which was added to the site in time for holiday 1999 shopping, products are within an easy-to-navigate two to three clicks from the home page.

A nod to the convenience of stereotypical midnight browsing, the site's best-seller is JCPenney's Big Book. In other words, the web site literally sells the paper catalog. The popularity of the catalog itself is followed by what sells best from its pages—home furnishings and apparel. Home and secondary page product focuses are based on a combination of catalog and Internet data. "Because it's so closely integrated with the catalog, and databases are merged with the catalog, it's available so that you can look at trends, events, hot-selling products. And you're not limited to the Internet," Last notes.

With one caveat: Still experimenting with online shopping, customers are sticking to more basic home products and apparel. As consumers become acclimated and advancing technology enhances imagery, Last expects those issues to go the way of Prodigy's text rolls.

As another way of drawing consumers into its site, stores and onto its phone lines, JCPenney is exploring one of the strongest opportunities offered by its web presence—building one-to-one relationships with consumers.

In mid-November, a Net Perceptions plug-in was introduced to recommend additional products to online shoppers as they approach the virtual check-out. Eventually, Last expects that ability to tailor product suggestions will move to the home page.

The Internet's way of putting tailored product selections on the home page greatly enhances an e-tailer's sales opportunities. Using Internet booksellers as an example, Mark Doss, national director of e-tailing for Ernst & Young, a New York-based accounting and consulting firm, says more books are sold from the home page than from the depths of the site. "Every retailer with a store knows this: When you walk into a store there's a sweet spot. If you put something there, it sells," he says. "If that's the home page on the web site and most consumers don't buy back three clicks, you really need to move that product into the sweet spot."

JCPenny is not ignoring his advice. It is e-mailing customers with its latest promotions, products and event news. Although Last declined to discuss the frequency of electronic advisories, the chain has included Father's Day promotions and an announcement that Levi's and Dockers were being added to the site. Conscious of consumer privacy, JCPenney asks individuals—on the home page if they're surfing, over the phone if they're placing a catalog order—to subscribe to the e-mail service. So far, consumers are reacting positively. "We're finding it to be very effective," Last says. "Our customers are opting in, raising a hand and voting for receiving e-mail."

JCPenney is further reaching target audiences through secondary sites that play-off specialized businesses, like the Just4Me line of women's sizes and Arizona Jeans, a trendy, denim-driven private brand. Spotlighting private brands is a way for JCPenney to differentiate itself from competitive retailers and manufacturers selling direct, says Doss. Through clever content—such as arizonajeans.com's focus on pop culture—JCPenney can also build the loyalty of niche market segments.



Advertising & Promotions

In the spirit of cross-marketing, JCPenney's new "Come in. Call in. Log on." media campaign is bringing attention to its multi-channel accessibility. jcpenney.com is just as conspicuous, running across everything from the retailer's national ads to its store's shopping bags. While companies without similar vehicles are shelling out big bucks to publicize their URLs, Last says JCPenney's free tag-on exposure is literally in the billions.

The chain's catalogs, for example, are used to drive 800-number sales and as a "billboard" promoting the site. "Every other page of the catalog has a URL," Last says. "The first spread of the Big Book tells the Internet story. And there's a lot of marketing value. Postcards for Internet-specific promotions are even inserted into catalogs at a fraction of the cost of stand-alone mailings."

Another traditional marketing effort—the gift registry—has expanded the retailer's boundaries, too. Interested consumers can log in at home or access the registries through in-store kiosks, further enhancing the already broad synergies between the retailer's storefronts, catalog and web site. "It's a multi-channel idea that makes us truly a nationwide registry," Last says.

While the advent of e-commerce is destined to alter the retail landscape—geographically as well as psychologically—Doss believes that savvy general merchandisers are positioned to prosper. "When you look at the breadth of service and strength of the brands, I think Penney, Sears and Wal-Mart have the potential to dominate the market," he says.

By capitalizing on its substantial resources and on favorable changes in online demographics, jcpenney.com is poised for continued—if not explosive—growth. "There doesn't seem to be a let up in sight," Last says. Although he says the long-term shift toward .com purchases is "anybody's guess," he concludes, "We're going to let the customers vote. We're certainly positioning ourselves. If it goes that way and gets that big, we'll be able to manage."



Logging On

Being among the first in flight on the Internet may be viewed as a dramatic departure from JCPenney's traditional and sometimes slow-to-change mode of doing business.

As early as 1988, JCPenney courageously jumped out of the box, signing onto Prodigy, Compuserve and other proprietary online services at the time when these services were still in their infancy. The virtually prehistoric sales tools were lines of descriptive text instead of today's more sophisticated zoom images and gyrating 3-D models.

"We were really trying to look at the future and potentially this could be a new channel of distribution," says Last. "While a small and controlled environment, it was a good opportunity to test and learn about the channel early enough so that when customers did want it, we'd be ready."

Asked if JCPenney would have been better off taking a wait-and-see approach while competitors sorted out the kinks, Last opts for the far-sighted approach. "It's played to our advantage," he says. "With the speed that the Internet is growing, it is a different kind of environment than most business environments we've experienced before. In the past, we've taken the approach as a fast follower, but in this environment, it's questionable whether you can be."

The Prodigy petri dish allowed JCPenney to work through the unique marketing, technological and servicing issues posed by e-commerce. When companies began moving toward freestanding sites, JCPenney was—to the surprise of some observers—the first department store to join them.

Initially, the company's web development team—now consisting of dedicated and shared employees culled from JCPenney's creative, technical and marketing departments—found that translating catalog to web was not as easy as imagined. They struggled to repurpose two-page paper spreads with shared headlines and a common feel to electronic pages that might only highlight a single or handful of items simultaneously.

As anticipated, however, the synergies far outweighed the difficulties. "We wouldn't be where we are today if we didn't have the catalog infrastructure," Last explains. "Not just the catalogs themselves, but customer service, fulfillment centers, the back end." Noting that it is difficult for e-tail-only and brick-and-mortars to meet the customer service, distribution and fulfillment requirements necessary to support national direct sales, he adds, "Those pieces were already handed to us because we had the catalog."



Guessing Game

How important e-commerce will become to JCPenney's overall business profile is anyone's guess. But in looking at the potential of the e-retailing market as a whole, Ernst & Young LLP's 1999 Internet Shopping Study reports the channel is in no way near reaching anything resembling a plateau.

Retailers expect e-tail to rise from 1 percent of sales in 1998 to 9 percent by 2001. Over the long term, 15 to 20 percent of shopping could be done online, according to Ernst & Young's Doss. Overall, 10 percent of U.S. households shopped online in 1998 versus 7 percent in 1997. In the last six months of 1998, online sales grew a phenomenal 200 percent to between $10 and $13 billion.

Looking ahead, Forrester Research projects e-commerce to grow from 17 million households and $20.2 billion in sales in 1999 to 49 million households and $184 billion by 2004. The projected spike is largely credited to the increasing numbers of consumers with home Internet, a breakdown of customer's hesitance toward shopping online and an explosion of available goods and services.

As more households go online and more shoppers succumb to the highly advertised ease of the Internet shopping mall, the customer demographic has been reaching more deeply across America's diverse class, ethnic and educational spectrum. The move away from male techno-geek surfers to an average reflection of mid- to upscale America, has already benefited jcpenney.com. Last spring, the site supported 200,000 hits a week. By fall, the figure had escalated to between 1 and 1.6 million hits a week. Historically, the JCPenney shopper has been described as very middle-of-the road.

In comparison, says Ernst & Young, in 1998, 49 percent of shoppers were male heads of household and 39 percent were female heads of household. The majority, 68 percent, were 40 or older, with 45 percent aged 30 to 49. A full 36 percent have incomes of $30,000 to $50,000, while 46 percent have incomes in the $50,000-plus bracket.

Still, there are some online areas where consumers may hesitate. Doss says online shoppers are still having difficulty perceiving the step-up value of, say, a $25 golf shirt versus a $60 golf shirt, particularly if the details are not outlined through text or visuals. Simultaneously, he sees overall price sensitivity diminishing as upscale retailers log on.

"Price in the general merchandising category is important, but increasingly, convenience and brand lift are growing in importance," Doss says. "In the beginning, online was thought of as just a cheap place to buy things. Price isn't going to be the only player here in the long-run as the diversity of price points expands."