Penney's-Martha Deal Seen as Tired Formula

The agreement will replace a deal Stewart has with Macy’s Inc., which expires in January 2013.

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Martha Stewart

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Ron Johnson

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Ron Johnson, the new chief executive officer of J.C. Penney Co. Inc., says he wants to reinvent the department store — but is Martha Stewart really the way to go?

Johnson on Wednesday said the retailer bought a minority stake in Martha Stewart Living Omnimedia and will install Martha Stewart shops inside Penney’s beginning in February 2013 — an announcement that left retailers and analysts questioning the wisdom. Some were even shocked. The Penney’s agreement will replace a deal Stewart has with Macy’s Inc., which expires in January 2013, although Macy’s said Wednesday it is reevaluating its agreement to determine its next step.

Johnson is formulating a strategy to turn around the struggling Penney’s as rivals Macy’s Inc. and Kohl’s Corp. eat into its market share, but his moves so far have left the industry puzzled, unimpressed — or both. He’s been telling vendors that Penney’s pricing will change, though it won’t be until a January analysts conference when he spells it out. Penney’s has a very promotional, “high-low” pricing posture, but is believed to be shifting to more of an everyday low pricing format — one that flopped at Wal-Mart. He’s also brought in a new president, Michael Francis, formerly head of marketing at Target Corp., and a new chief operating officer, Michael Kramer, formerly of Kellwood Co., both with huge pay packages. Neither has real retail merchandising experience.

Now there is the deal with Stewart, whose company has been on the block for almost a year with no takers and whose magazine has seen consistent declines in circulation.

Penney’s needs to attract greater traffic to its stores and generate some buzz. However, many question whether establishing Martha Stewart as “the centerpiece” of the strategy, as Johnson described it Wednesday, is the right answer. It’s a brand that’s been bounced around from retailer to retailer, has lost some cachet and embraces styles and a color palette that’s tasteful, safe and not particularly compelling. The Stewart deal is far from the groundbreaking pact that outgoing Penney’s chairman Myron “Mike” Ullman 3rd made to bring Sephora shops into Penney’s stores, which moved the retailer into the beauty category in a major way, brought in a slew of high-end brands — and lured younger, hipper consumers.

“I find the deal with Penney’s highly questionable, just looking at the math,” said Allen Questrom, the former chairman and ceo of Penney’s and earlier Federated Department Stores Inc., which became Macy’s. “Macy’s is a $26 billion company and Penney’s is an $18 billion company and Macy’s has a higher-income customer, on average $15,000 to $20,000 more than Penney’s. So she’s going to have to trade her products down with lower price points,” which, Questrom noted, could lead to a reduction in quality and sales volume once the business goes to Penney’s.

A retailer who has done business with Stewart said, “Her merchandise has never been a barn burner in terms of sales. The category is not something that ever skyrockets. This is not like Target investing in Michael Graves and creating really edgy highly acclaimed product,” a strategy Johnson, previously head of Apple Retail, is credited with during his tenure at Target, where he was a senior merchandiser.

Other sources agreed, pointing out that Stewart’s business has been in decline and also said the 10-year deal with Penney’s will mean Stewart will be in her 80s when it expires.

Penney’s investors gave the deal a lukewarm reception as the stock rose 0.6 percent, or 21 cents, to $33.51 Wednesday. The arrangement was seen as a godsend by stockholders of Martha Stewart, which hired Blackstone Advisory Partners to help it explore strategic partnerships in May. Martha Stewart also said it would pay a special 25 cent dividend on Dec. 30 and its shares jumped 33 percent, or $1.04, to $4.16.

Execution has been an issue in the past. Two decades ago at Kmart, the collection was dropped, and after a hiatus, revived. At Sears Canada, where Martha Stewart launched in 2004, the business never set any sales records but performed OK, though Sears encouraged Stewart to provide higher-quality products compared with what was being sold at Kmart. The Macy’s business is said to be OK, as well.

Many believe that Macy’s was blindsided by the Penney’s deal, and that it’s possible Stewart didn’t disclose her intentions with Penney’s, though Macy’s would have expected her to, and to try to work on improving her Macy’s business before taking it to the competition. Martha Stewart products are also sold at Michael’s and Home Depot.

On Wednesday, Macy’s Inc. said, “In light of the proliferation of Martha Stewart-branded product in the marketplace, Macy’s is reviewing the Martha Stewart products sold at Macy’s for potential changes in the future. No decisions have been made at this time.”

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