Transcript: JC Penney CEO Ron Johnson

July 18, 2012: 4:54 PM ET

The JC Penney CEO has his work cut out for him in turning the discount chain around. Fortune's Jennifer Reingold interviewed Johnson at Brainstorm Tech. What follows is an unedited transcript of the conversation.

JENNIFER REINGOLD:  Good morning, everybody.  Good morning, Ron.

RON JOHNSON:  Good morning.

JENNIFER REINGOLD:  Thank you so much for being here.  You should all know that Ron ahs really not spoken to the press in several months, and decided to venture into this space, partly because he's very familiar with it.  He is the CEO of J.C. Penney, as you know, but he is also the man behind the Apple retail store, which is the most profitable retail store in the world.

So a lot of people thought he was a little bit crazy when he left, and last November became CEO of a company that is not exactly the most profitable retail store in the world, far from it.  So I guess the question for you is a lot of people in this room think that online shopping is the wave of the future, and that in-store retail is dead.  So is it?

RON JOHNSON:  Yeah.  Well thank you for having me here Jennifer, and it's a pleasure to be here.  You know, when I joined Apple in 2000, I came from a physical retailer, Target, and people thought I was crazy to go to Apple, because at that time Apple was, you know, losing market share.  Gateway was closing stores, you know.  What was Apple's future?

But you knew that Apple had a great future because of the tech revolution that was coming, with the Internet and the digital world. So I wanted to be a part of that, and the time at Apple though taught me that ultimately, the physical store has as important place in a connected world, you know.

So if you really look at what's happened at Apple, you know, during the last decade these stores have become the most productive in the world, and while we had the best products you could imagine any retailer would want, Apple broadly distributed them on Amazon and at Target and Wal-Mart, Best Buy, everywhere.

Yet people turn to the Apple store and it's time to buy.  So the Apple store kind of played out a model --

JENNIFER REINGOLD:  Right.  Why was that?  I mean why -- I mean people could even buy it for cheaper if they went online, yet they still wanted to go into the store.

RON JOHNSON:  You can get every Apple product every day cheaper at Amazon, many times elsewhere.  But people come to the store, and that's because the store offers something people need, which is really help and support and connecting, because I think there's always been this idea in a high tech world, people really strive for high touch.

We see that in everything you create.  When you can create a high touch experience that's grounded in the integrity of the brand of the product, people want to (inaudible), and these Apple stores are like magnets for people.  If you really look at what happens at an Apple store, it's connections happening.  It's a genius with a person trying to solve a problem.  It's someone getting personal training.  It's someone getting their products set up before they leave the store.  It's someone learning about something that might change their life.

You know, so there's these connections that are really necessary in a digital world, you know, because you want that offset of the physical world.  You want that physical experience.

JENNIFER REINGOLD:  So I think it's fair to say that this was not the experience that people have or have had when they walk into a J.C. Penney store.  How are you going to bring that technology experience and the experience of actually being happy in a store?  I mean I don't know about you guys, but I actually bring my kids to the Apple store when they have nothing to do, just to entertain them.

(Laughter.)

JENNIFER REINGOLD:  Of course, I end up spending money, so it works.  But J.C. Penney is not really a place I'm bringing my kids to hang out, so --

RON JOHNSON:  But that's true with all retail stores.  You know, very few retail stores, I think, have truly navigated this digital future and how the digital and physical worlds come together, and that's why I came to Penney's, you know, to create really a new interface for retail.

The thing I learned from Steve, Steve was really proud of saying that in his career, in his life, he had three times he got to be part of the interface:  the mouse and how that changed, you know, personal computing; the scroll wheel and how that changed the iPod, it gave you access to all your music; and then the big one was the touch screen, which became the (inaudible) on that.

The interface design change is what enables the change in customer experience for your product.  So I keep thinking about how do we create a new interface for retail, that starts really from home or wherever you are in a digital way.  When you come to the store, it's a totally different experience.  But it makes the physical store indispensible in a digital world.

JENNIFER REINGOLD:  So what is that experience going to be?  What can you share about -- I mean I know this is a long process, and you've said it's going to take several years.  But you are rolling out a new store format and --

RON JOHNSON:  Sure, sure.  Well, it's way too long to get into today.  But to do it --

JENNIFER REINGOLD:  Just a couple of highlights.

RON JOHNSON:  You just have to -- like any business thing, a transformation is a marathon, it's not a sprint.  It's been interesting for me watching all these analysts.  They think this is going to change overnight.  As you recall, when we were in New York in January, we said this could take four years.

JENNIFER REINGOLD:  You did say that, but you also made a huge proclamation about the transformation, and I think that it was so impressive and so positive, in a sense, that the four year part may have gotten a little bit lost in it.

RON JOHNSON:  Really?  No clue.

JENNIFER REINGOLD:  Do you regret that at all?

RON JOHNSON:  No, no, no.  I think it's -- all you can do as a leader for your own team, for your vendors, for all your stakeholders is to tell them where you're headed.  You know, if people want to know what the vision is, and we tried to lay that out quite clearly, but it doesn't mean it's going to be easy.  You know it's going to take time.

But the big thing is stores historically have been designed to pick something up.  They're very transactional.  They're not experiential.  In the day of the Internet, when you can search anything you want, get it today from your phone and have it delivered to your door, clear the store to compete has to offer so much more.

It really harkens back to what retailing was hundreds of years ago, where you had to have the right products, but you had to have the right service, that a digital experience can't do.

Like at Apple, when we offered personal setup, it was amazing.  So Apple would create the most easy, out of the box user experience.  Yet we noticed that it took eight days for the average person to buy a product to set it up.

JENNIFER REINGOLD:  Really.

RON JOHNSON:  There's a disconnect, right?  So people, as easy as an Apple product is designed to be, they hesitate to start using it.  So obviously there was a gap there.  There was an intimidation, as easy as it might be, because most people aren't that tech savvy.

So we said what if we could set up every product in ten minutes before they left the store, and they were using that product, falling in love with that product before they left?  That would be transformational.

So we did that, and then 90 percent of the products were set up.  That was an insight that really made the Apple store relevant, versus buying online.  We can do that with every product we carry at J.C. Penney.

JENNIFER REINGOLD:  You have millions of products at J.C. Penney.  There were, what, 15 products at Apple.  I mean it's a very, very different and much more complex experience.

RON JOHNSON:  Yeah, but I'll give you an example, like apparel retailing, and this is what's fascinating.  My take is that the physical store will have a permanent place, and it will vary by category.  When I came out of Harvard Business School in the 80's, stores weren't going to work because the catalogue was going to take over.

What woman who's working, who could sit there and read a catalogue and call 1-800 and have it delivered to the door, would ever go to a store?  The catalogues went through in many ways a small version of what the Internet did.  After six or seven years, catalogue had seven percent of general merchandise retailing, stayed there.  There were certain things that happened for that category that required you go to the store.

JENNIFER REINGOLD:  So do you think that online retailing will actually level out?

RON JOHNSON:  It's going to level out.  I really do.  I think it's going to level out by category, by business, and you know, if I had to pick today, would I rather be an online only retailer and try to compete ten years from now, or a physical retailer trying to complete ten years from now?

Knowing that the digital and physical worlds come together, I'd take a physical retailer in a heartbeat.

JENNIFER REINGOLD:  With an online presence --

RON JOHNSON:  Because it can do everything an online person can do and more, because it has that physical presence.  You know, when you offer pickup, as many as 40 percent of the people choose to select online, pick up in store, right?  That's a relatively new thing surprisingly for retail.

But then when we enhance that pickup experience, you know.  So if you order clothes and you come and they're in the fitting room to try on, and you can pick several items, and you don't have to worry about a return if you don't like it, we're now solving problems that exist for a online-only retailer, with returns of 40 percent.

JENNIFER REINGOLD:  But the convenience factor is worth a lot of money as well.

RON JOHNSON:  Yes, yes.

JENNIFER REINGOLD:  I mean just not having to be there and spend that time.

RON JOHNSON:  Sure.

JENNIFER REINGOLD:  So while you are working on a store transformation, and I think you're going to start rolling out some of these new looks later this year, is that right?

RON JOHNSON:  Right now, we have 3,415 unique stores under construction.  So next week, we'll open up a lot of new stores, because we're creating all these specialty stores.  Like we'll be the best place in America to buy a pair of jeans.

Buying a pair of jeans is actually quite hard for people.  There are a lot of fits, a lot of finishes.  We're putting in what's called the Denim Bar with Levis that will launch next week.

JENNIFER REINGOLD:  This is next week, that we can actually go, and where are you opening?

RON JOHNSON:  We're opening in about 700 of our stores.  So most Penney stores.

JENNIFER REINGOLD:  Just so I'm clear, not the entire store is being remodeled at this point, but a section of the store?

RON JOHNSON:  But there will be a Levis store.  There will be other stores within the store.

JENNIFER REINGOLD:  Okay.  Now before you even have had the opportunity to get people in to see this new stuff, you did a very radical move in announcing that J.C. Penney was going to basically give up couponing and sales and 90 percent off, and I believe when we spoke in January, you told us that, I think it was something like 540, is that right, the average consumer gets something like 540 emails or communications with J.C. Penney in a year, and that translated into very, very little in terms of purchases.

So his idea, if I can paraphrase, is basically get rid of all that stuff.  Be fair and square, as you called it, and don't pretend that something costs $300 and mark it down to $100.  Tell everyone that the price is actually $120 and stick to it, with a couple of specials along the way.

Now this seemed to make a lot of sense.  This surged on the announcements and so forth.  So far, however, the public does not seem to be responding, or they seem to be confused about the message.  So what happened?

RON JOHNSON:  So fundamentally, we're changing our pricing strategy, because we want every day to be a great day to shop, and if you're designing a new interface designed by its nature, whether it's a product or an experience, what's the most important thing it has to have?  It has to have integrity.

If you're going to build a relationship, you've got to have integrity to that.  So it's hard to have integrity when you artificially mark up products just to mark them down.

JENNIFER REINGOLD:  But people like that.  Don't they get -- they get something out of that, because they feel they've gotten something over on somebody.  I mean I certainly feel that way.

(Simultaneous speaking.)

RON JOHNSON:  But if you look at the largest retailer in the world is Wal-Mart.  They serve moderate income America, and they have an everyday pricing strategy.

About half of what we buy is bought every day.  When you go to Starbucks and get a cup of coffee, it's an everyday price.  When you buy an Apple product, it's an everyday price.  When you go get gasoline, it's every day.

Every business has its own pricing strategy.  We've chosen to go to every day.  The reason we've done that, though, is because every brand has its own DNA.  When Steve came back to Apple in '97, what made that work, and remember the "think different" campaign, is he connected with what Apple's unique DNA was.

If you go back to J.C. Penney, the first ten years of our store it was called the Golden Rule.  It was founded --

JENNIFER REINGOLD:  This is over 100 years ago.

RON JOHNSON:  It's 100 years ago, but it's founded on the principle of do unto others as they do unto you.  In 1920, Mr. Penney wrote a letter to shareholders or to customers saying you know, we do not believe in marking up goods beyond a fair profit.  We will not mark things off 10, 20 or 50 percent off.  We do not do that type of business.

That's a business model choice, and we're going to honor that as part of everything we do.  It takes time.  When Wal-Mart changed its pricing back in the 80's, and went back to everyday low, after about seven months, David Glass and Sam looked at each other and said "Can we do this?  It's really hard."  Their sales go back.

JENNIFER REINGOLD:  Did they have significant drop off right away?

RON JOHNSON:  They had a huge drop, and everyone's going to, because you're basically taking an unsustainable business model and you're depromoting.  And you're going to do that is you reduce your expenses by more than the margin you'll drop, but you get through one year and you're onto a new future.  So we just have to --

JENNIFER REINGOLD:  So you think this is just a transitional period?

RON JOHNSON:  It's a one year depromote, and then we've got a business based on integrity.

The other thing about retail stores, it's all about the friends you keep, the company you keep, the brands you carry.  In a discount promotional model, no great brand wants to be put into that environment, because you're devaluing the brand.

So the only way to sustain a promotional model was with your own private label.  So if you look at Penney's or Kohl's today, 60 percent of the products are designed by the in-house teams.  They're not designed by other partners who have real great design skill.  So this is going to -- fundamentally, the pricing strategy enables everything we want to do.  It transforms everything.

JENNIFER REINGOLD:  But it has not -- it has been even less successful than you anticipated?

RON JOHNSON:  A little bit less, yes.  So we plan to go backwards.  We'll go back a little more.  So the real fundamental question is when we end this first year, and I said that we're going to transform this company, not improve it.

We're going to treat it like a start-up.  We're going to create an entirely new retail model that's built for the next 100 years.  The only question is what size will the start-up be?  Is it $15 billion in revenue, is it 14, is it 13.5, is it 14.5?  We'll find out.  That's a pretty big --

JENNIFER REINGOLD:  But how low are you willing to get?

RON JOHNSON:  We're going to get to the right level.

JENNIFER REINGOLD:  And do you feel --

RON JOHNSON:  Well, it's going to be --

JENNIFER REINGOLD:  I mean the right level, just not zero.

RON JOHNSON:  What I mean by that, the right level is where you've honored the integrity of your vision.

JENNIFER REINGOLD:  But you need customers.

RON JOHNSON:  We have lots of customers.

JENNIFER REINGOLD:  You can have five very honest customers, but it's not going to help J.C. Penney as a business, right?  I mean I would just push back on the couponing thing a little by saying that unlike 100 years ago, when he was able to offer this, there are so many other options today, and so many other places you can go to get similar products, where they will trumpet this stuff.

RON JOHNSON:  Sure.

JENNIFER REINGOLD:  I don't think that your competitors are exactly unhappy that you're trying this strategy.  They seem actually to be thrilled.

RON JOHNSON:  Uh-huh, no problem.

JENNIFER REINGOLD:  But you're okay?

RON JOHNSON:  I'm totally comfortable with it.  The world's about thinking differently, and that's -- I learned that in spades working with Steve.  You know, Steve frequently took a contrary perspective, and he stuck to his vision, and that was the strength of it, and we're going to do the same here.

JENNIFER REINGOLD:  And good for you to stick to it, because there has been a lot of outside talk and nay saying and so forth.  Is your board fully supportive?

RON JOHNSON:  Yeah, they're totally supportive, you know.  Yeah, most people -- you know, what happens, what's been interesting to me is in the absence of information, there's a lot of misinformation, and as you know, we've chosen not to address everything that comes up in the press.

So when you don't react, it kind of runs with it, and there are a lot of people who love to do that.  But you've got to ignore all that.

Mickey Drexler said run; ignore it all, put your head down, do what you know how to do.  Yeah, that's great feedback, and so I'm focused internally, and with the teams I'm creating that next interface to retail, and we'll get there.

We're making so much progress.  As an example today, Oracle announced that we have transformed our entire retail platform to Oracle Retail Systems.  It's a big change.

JENNIFER REINGOLD:  Yeah.  This is news today, that Oracle and J.C. Penney have announced a deal.

RON JOHNSON:  As a company, one thing, you know, I discovered I got there.  Like many large companies, we had all these systems and then built up for the year, and 90 percent customized 490 unique applications, when you should run a company of our size with fewer than 100.

So we made the decision we're going to transfer everything to Oracle, you know, the core-based platform, and we can do that spending less money than we spent last year, and begin to invest in all of these customer-facing technologies, and it's going to be real exciting.

So we're trying to simplify internally, and transform externally, and you'll see massive change over the next six months and year in-store with technology.

JENNIFER REINGOLD:  So can you give some examples?   Will we be able to pay the way we are in the Apple store?

RON JOHNSON:  Yeah.  I'll give you a couple of examples.  We're rolling out right now WiFi networks, really advanced WiFi to all stores.  We'll have mobile checkout, you know, rolling out now and in the fall.  But we're also doing something that no retailer has done completely, is we are going 100 percent RFID with ticketing this fall.

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 cash route.  So you think of a physical store without a cash routing.

Can you imagine a Target store without a place to checkout?  You think of a Macy's store.  But what it does is we currently, about ten percent of all the money we spend, half a billion dollars a year, goes to transactions.  Well that can be done through technology.

So all of that investment in people goes into service, and that's part of the redesign of the platform, because you go to the Apple store, you feel the people, the connection.  You go to most retail stores, all you see is people doing work to execute the retail strategy.  It's stocking shelves and transacting business.

That's going to all change, because of how we use WiFi, RFID, mobile checkout.  You'll be able to check out anywhere anytime, from anyone including yourself, because we're going to roll out self checkout to our stores next year, and it's really cool and it's really easy because it's RFID-based.

You don't have to scan an item.  You just throw it down and there's the price.  You couldn't do that if you had coupons, and you couldn't do that in a promotional business strategy, because the customer has to figure out that every item had this unique price and was it right for this hour, you know.

So all of the strategy we're doing are linked together by a high integrity pricing strategy, and it's really complicated to see the future.  But you know, people will discover as time goes on.

JENNIFER REINGOLD:  So the way you roll it out, it sounds like, you know, why doesn't everybody do this?  Wal-Mart has tried and struggled with RFID.  It's very expensive; correct, right?

RON JOHNSON:  Yes.

JENNIFER REINGOLD:  I mean I understand you're saying that on the back end, you're going to end up saving if it this works.  But why do you think everybody else hasn't done this?

RON JOHNSON:  You know, I don't know.  I can't talk for someone else, but RFID clearly is a technology that's been waiting for prime time based on the cost of the ticket.  You know, I believe the ticket cost, the increase in the ticket cost versus UPC label is now at a point where the benefits way outweigh the cost of doing it.

JENNIFER REINGOLD:  So maybe Wal-Mart was too early of an adopter?

RON JOHNSON:  No.  I think it's good they're testing.  But it takes courage to go the full distance.  Most people try things, but they really don't execute courage, you know.  I'm just one, I've learned in my life that when I've fallen short it's when you don't let your imagination win.

You know, when we launched the genius bar years ago, nobody came.  I mean literally after a year and a half, a lot of people at Apple said why don't you close that down?  We had to put in Evian bottles of water in refrigerators to get people to spend time at the bar.

But we stuck with it, and today, you look at that genius bar.  Could you imagine an Apple store without a genius bar?  Could you imagine owning an iPhone without having a place to stop by and get that repaired or restored or fixed?  You couldn't.

But that was the perfect example.  Apple went through much tougher years then we're going through this year at Penney's.  I joined in 2000.  In 2002, Apple's revenues dropped 38 percent from 2001.  In 2004, the stock was below where I joined in 2000.  We all forget these things.

JENNIFER REINGOLD:  That's true.

RON JOHNSON:  But transformation takes time.  It's not a sprint, and when you're on a marathon, the thing about running a marathon, and I've never run one, but I've known people who have, is --

JENNIFER REINGOLD:  You are now.

RON JOHNSON:  What they tell me is that, you know, you can judge a sprint out of the blocks.  We've got the best start.  It's a short race.  In a marathon, people, every runner is their own strategy, you know.  Some like to start slow and have a strong kick.  Some like to put the pressure on.

We're in a marathon here.  It's going to be four years, and we've got a very precise vision of how we're going to get there, and we're going to stick to our plan, you know, because that's what it's going to take.  You know, that's what I learned at Apple; that's what it's going to take here.

JENNIFER REINGOLD:  On that note, I think it's a great time to turn to questions.  I'm hoping there are a lot here.  Yes.  If you could just identify yourself.

QUESTION:  Hi, Jason Hirschorn (ph).  I love to buy stuff, and I would walk into a Best Buy and all the sales people are talking about what they're going to do on a Friday, and there's tons of skews, and I don't really trust that they know what they're talking about.

I walk into Apple, I see the blue shirts.  They bring the register to me, and they know everything about every product.

RON JOHNSON:  Correct.

QUESTION:  How are you going to bring that to J.C. Penney with a million products, because that's -- the really big thing is like if you're going to get people to come from online to the physical store, you need that expertise.

RON JOHNSON:  Agree completely, and here's how I did it at Apple.  When we launched that first genius bar, let me tell you what the criteria was to hire a genius.  They had to do two things.  They had to be able to go toe to toe with Steve Jobs on technology --

(Laughter.)

RON JOHNSON:  And the Ritz Carlton would be fighting to hire them for their hotels.  That was it, very simple.  So these people had to have the confidence that they could debate technology with Steve, but they had the service skills you'd find at the Ritz.

If you look today at the Apple store, that's what you find, right?  You find kind, friendly kids, generally younger, not all, who love and have a passion for technology and know a lot about it, right?

So now what we're doing at Penney's is we're breaking the store into 100 shops, and for each shop, we'll set the criteria.  You know, so if you're going to work in the Martha Stewart store, you know, you've got to be able to go toe to toe with Martha and talk about how do you improve someone's life, how do you help them live better.

You've got to love cooking, you've got to love recipes.  You've got to have great people skills.  So it gets into -- they all exist.  I mean the world's filled with people who have a passion for home.  How many people do you know that have a passion for clothes?  You might be the one.  You love to shop.

JENNIFER REINGOLD:  Jason, we have a job for you.

(Off mic comment; laughter.)

RON JOHNSON:  But it's hard.  It's hard but it can be done.  It can be done.

QUESTION:  I never understood why you didn't put like cots in the Apple store, because it's nicer than most hotels.  I would have slept over.

JENNIFER REINGOLD:  Okay.  who's got another question?  In the back.

QUESTION:  It's Michael (name).  Jason asked the question I wanted to ask.  But I want to follow up.  You keep referring to Steve and your Apple experience.  But before that you were at Target.

RON JOHNSON:  Uh-huh.

QUESTION:  What do you really remember and have mapped back into your physical reincarnation, and what have you had to forget from your Target experience?  What's really changed so profoundly that it's a hindrance rather than an enhancement of how you're leading today?

RON JOHNSON:  That's an interesting question.  You know, I believe most of what we do is forward-thinking and you rely on your intuition, and your intuition comes from all your experiences.  I had a lot at Target, a lot at Apple, a lot of places.  Just immersing yourself in the world, and I always try to make decisions forward-thinking, based on what I think is going to be needed now, and not what worked yesterday.

So Target goes back to the 90's.  What I learned about Target, at Target, though, because I was involved with kind of the movement toward design, that really middle America appreciates good design, right?

They understand the stuff when it's presented well, and so I have great confidence that as we present a higher taste level product within our price points to our core middle America customer, that they'll respond.

When you do that, you actually earn their respect.  We had a really interesting dinner last night at the Murdochs when we were talking about design, and Jerry told the story about he had been, you know, helping with Mayan ruins and stuff, and he went back in time in civilization.

The Mayan culture defined design as design's purpose was for the love of humanity.  That was a really interesting thought.  You design things for the love of humanity.  You think about the Apple store was designed to make technology easy for people, to enrich their lives, right?

We've got to create an experience at Penney's that really honors and loves that customer, and it gets into everything you do.  At Target, it was really about building a business and executing transactions and a lot of marketing.  You know, a lot of marketing preceded the experience.

We want to do the opposite.  We want to under-promise and over-perform.  Under-promise and over-deliver.  You know, I want to take middle America, put a big bear hug around middle America, and slowly take them places where they didn't know they could get.

Because today, the middle America shopping experience is not like the upscale shopping experience.  I don't think they're treated with the same respect.  They don't think they have the same level of service.

We think, I really believe middle America deserves that, and so we're going to design a new interface for retail that's really inspired by that Mayan principle of a love of humanity.  And we'll do that.  It's just going to take time.

JENNIFER REINGOLD:  More questions?

QUESTION:  Hi Ron, Adam Lashinsky with Fortune.

RON JOHNSON:  Hi Ron.

QUESTION:  What's amazing to me about what you did at Apple retail is that you eliminated channel conflict.  My understanding is you really didn't care if I came in, soaked up two hours of your people's time and then went home and bought online.

But every other retailer in the world would have cared, because you didn't get the sale.  The online store got the sale.  How did you do that?  From a wonky business perspective, how did you reward the store manager for my purchase a mile away, and will you be able -- are you going to have an anti-showrooming strategy at Penney's?

RON JOHNSON:  Yeah.  That's a really good question.  It sounds silly, but if you put the customer first, you don't care where they buy.  But you do care that they buy, right.  You can't hurry someone to buy without putting pressure on them.

So at Apple, we just said just put yourself in the customer's place.  Look in their heart, not their pocketbook.  Spend whatever time it takes, and we already have the trust or confidence that they'll buy.  Most often, customers will honor the store that's delivering the service.

But if someone wants to leave, let them go, because Apple cared deeply about its channel partners.  We want them to be successful as well.  You know, as long as someone buys an Apple product, Apple's prospering.  Maybe not at the same rate, but in the long run, you'll earn better profits.

There's a great theory when you go to business school about good profits, bad profits.  Good profits come from really treating that customer well.  You know, bad profits to me are artificially inflating the price, trying to deceive the customer through a fake sale.  It's not sustainable.  Good profits are competing on earning loyalty through service and products and presentation, and honoring a customer in the store.  Does that make sense?

So that's one of those fundamental Apple beliefs, that the customer is at the center of the experience, whether it's in a product design or a store experience.  But that takes such pressure off the employee, because it's pretty easy to treat someone well.

When you have to earn a commission to earn your living, it's a whole different dynamic.  You know, it's like at Penney's.  We have eliminated commissions.  We've done a lot of work in the last six months.  Nearly 30,000 employees who were on a commission are now being paid every day and on a mission.

JENNIFER REINGOLD:  Are they being paid more?

RON JOHNSON:  They're paid more.  So what we did is we went and took everyone's what they earned last year, and paid them that rate, and then set new pay bands and said we want one team, one mission, because we want everyone to care about that customer.

I really believe in paying people in advance for the good work we expect them to do.  You know, it's pretty hard to be on a retail floor.  It's not a real high-paying job, and that's one of those core fair and square principles.  If we're going to be fair and square to the customer, you've got to be fair and square to your team.  So that kind of answers your question, Adam.

JENNIFER REINGOLD:  More questions?

RON JOHNSON:  Heidi.  Heidi's there.

QUESTION:  Hey Ron.  So one of the things that you did right out of the box, and I use "the box," is you rebranded J.C. Penney's.

RON JOHNSON:  Yes.

QUESTION:  And so what led you to do that  quickly, and also what was the thinking behind the new brand, and by the way, the ad campaign's fabulous?

RON JOHNSON:  Oh, thank you Heidi.  You know, our feeling was at some point, we have to modernize J.C. Penney.  J.C. Penney has this unbelievably great heritage we can draw on.  But it's kind of for a lot of their mom or grandmother's store, and they have memories from when they were a kid, but it's not a part of their everyday life.

So we've got to find a way to get it into the popular consciousness, you start thinking about it, and that's one of the things I learned in my time at Target and at Apple, that mind share always precedes market share.  You've got to get people thinking before they respond and come to a store.

So we rebranded Penney's pretty abruptly in February.  There were pros and cons to that, because of how we did it.  The pro was we got a lot of people thinking about J.C. Penney.  The con is that we didn't really communicate with our core customer like we need to.

JENNIFER REINGOLD:  Do you regret doing that?  Is there a mistake that you wish you hadn't done?

RON JOHNSON:  No, I regret.  I think our execution wasn't what we needed.

JENNIFER REINGOLD:  The execution of the marketing or the execution of the in-store experience?

RON JOHNSON:  We've made a lot of -- we've done a lot of things right; we've done a lot of things we could do better.  Our pricing's been kind of confusing.  Our marketing overreached, you know.  So we're going to bring that back as we move forward.

JENNIFER REINGOLD:  And what does that mean, bring it back?

RON JOHNSON:  We're going to simplify our pricing.  You'll hear about that really soon, and we'll really honor the everyday price in a stronger way.  As an example, we had a -- because we had 590 unique sales last year, and the price changed every hour.

We went to what we called three types of prices.  A great everyday price.  You might have a month-long value, a little lower for a month, and then best price when it's time to go away.  People found that very confusing, you know.

So we're going to eliminate the month-long value and just reinforce that every item is lower and priced every day.

JENNIFER REINGOLD:  That didn't quite come through.

RON JOHNSON:  Didn't quite come through.

JENNIFER REINGOLD:  That was your stated strategy, but when you went into the store, I mean I went in as well, it was hard to tell that you were sharing that this was a good price.

RON JOHNSON:  Yeah, and we've got to do a better job, yep.

JENNIFER REINGOLD:  And are you going to change anything about the actual marketing itself?  I mean it's very -- I mean if you guys are probably like living under the rock, if you haven't seen it, because you spent over a billion dollars on the marketing, right?

RON JOHNSON:  No, not this year.  No, no, no.

JENNIFER REINGOLD:  Okay.  How much?

RON JOHNSON:  Well, this year -- well, last year we spent a billion dollars.  We're only halfway through the year.

JENNIFER REINGOLD:  Okay.  So I'm not totally wrong.  But you also got yourself into a bit of controversy with some of the marketing.

RON JOHNSON:  Yep.

JENNIFER REINGOLD:  J.C. Penney hired Ellen DeGeneres as a spokesperson.  The group called One Million Moms launched a boycott because she's gay, and there was a lot of controversy over a gay, two dads, Father's Day thing.  Has that impacted your sales at all?  It's so political.

RON JOHNSON:  You know, our goal is to be neutral on all cultural issues.  You know, we don't want to be perceived as taking a stand, you know.  But we love Ellen.  She shares our values.  I like the marketing in many ways.  So the spirit of the marketing will be similar.  The messaging will be a little more direct.

So as an example, we'll focus much more on the products we carry, the great value, and not as much on the lifestyle we're trying to convey.  So you'll see an evolution in the marketing.  But it won't be a radical change, but I think it will be more productive.  It will help build the business while we build the brand.

JENNIFER REINGOLD:  I think we have time for one more question.  I can't see really.

QUESTION:  Hi.  Enrique Castro from Google.  In Apple, you were a vertical integration, where the stores were almost a continuation of your product and experience.  As we go to J.C. Penney and we see the conflict, the different channels to market, you don't have a vertical integration (inaudible) factors.

So how you see you become a great showroom for a great experience for the users, but they're going to shop around and get better prices somewhere else, and how you are going to avoid that being a real estate demo store or a showroom, and not a transaction room?

RON JOHNSON:  Well, that's a good question.  The beauty for like J.C. Penney, probably nearly 75 percent of the items we carry will be unique to J.C. Penney.  That could be --

JENNIFER REINGOLD:  That's a big shift, isn't it?

RON JOHNSON:  No, it's not a big shift, but it's what it will be.  So for instance, Michael Graves will be designing housewares products for J.C. Penney now.  It will be the only place in America you buy Michael Graves housewares.  He'll design, we'll source.

You know, there will be other products like Levis that you can buy elsewhere.  So we had to create a better experience for that like the Apple store.  You know, so it's very different when you're not vertically integrated, but that's what the art of retailing is.

It's really you're connecting a creator with a customer, and we are that interface, right?  So we've got to find a way to create that interface, be so special that people choose our interface versus someone else, you know.

JENNIFER REINGOLD:  And how are you going to do that?

RON JOHNSON:  Well, you'll stay tuned.  It's a long talk.

JENNIFER REINGOLD:  All right.  On that note, I think we will end it.  Thank you all (inaudible).  Thank you for coming.

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