By: Alex Edquist
When JC Penney hired Ron Johnson as CEO in November 2011, he seemed like the ideal candidate for the struggling retail giant. He had been working as Apple’s vice president of retail since 2000 and had overseen the development of the now wildly successful Apple stores. He promised to bring radical change and a turnaround of the retail chain, but instead of revitalizing JC Penney during his tenure, Ron Johnson’s overhauls nearly destroyed it. He was finally let go two weeks ago after sales fell by 25 percent in 2012, costing JC Penney $4.3 billion.
On the other side of the world, the Greek economy, like JC Penney’s revenue, is in free fall. Following a debt crisis, Greece was forced to accept harsh austerity measures in return for bailout funds from a troika of creditors – the European Commission, the International Monetary Fund, and the European Central Bank. These austerity measures were intended to achieve a number of goals – reduce debt to gross domestic product ratio and interest payments on the debt, slim the bureaucracy, and eventually strengthen the economy. However, in 2012, gross domestic product shrank by 6.4 percent and unemployment rates rose to 26.4 percent. In the past five years, Greece’s economy has shrunk 20 percent. Because of the tough austerity measures imposed by the troika, the Greek government cannot afford large spending programs that would cushion its citizens against its economic woes. Ten percent of elementary and middle school students are now suffering from food insecurity, and half of Greece’s citizens are now considered to be living near or below the poverty line.
Both of these cases are not necessarily examples of bad policy. The changes Ron Johnson proposed for JC Penney were similar to those he pursued at Apple with success. Before Johnson was hired, JC Penney was struggling as a low-end department store characterized by frequent sale events and a plethora of coupons to offset its marked-up prices. At Apple, Johnson helped to create a brand that sells high-quality products at equally high prices – a leader in industry style. In part because of this approach, Apple enjoys a following of young and wealthy loyalists, and has been able to make its stores the most profitable per square foot of any retail store. He attempted to bring the same success to JC Penney by bringing in higher-quality merchandise, substituting clearance racks for boutique-like atmospheres, and replacing the sales and coupons with everyday low prices. All of those proposals sounded promising, and initially, Wall Street rewarded Johnson’s attempts with higher stock prices. However, Johnson’s attempt to make JC Penney a hip, trendy place to shop ended up driving away its coupon-clipping customers, almost half of which are over 55, without attracting new customers. After just sixteen months, JC Penney’s stock has lost half its worth since Ron Johnson took over.
Similarly, the austerity measures that have done Greece so much harm seemed like a good idea at the time. The measures saw moderate success in other countries also dealing with the twin problems of a debt crisis and a prolonged recession. Latvia was one of the first Eurozone countries to pursue a policy of austerity after the global financial crisis. Housing market prices dropped by 50 percent, and the country found itself unable to sell any of its bonds. That policy did cause a temporary free-fall in gross domestic product of 24 percent in the two years after its implementation. But in 2011 and 2012, Latvia enjoyed more than 5 percent growth, the highest in the European Union. Its unemployment, at a high of 20.7 percent in 2010, fell to 13.5 percent by the end of 2012, and its six-year bond yields only 1.7 percent compared to Greek’s bond of 11 percent, which means it can once again borrow cheaply. In Ireland, too, austerity has enjoyed some measure of success. Ireland’s economy has seen much more modest growth than Latvia’s, but in 2012, its budget deficit fell to 7.6 percent of GDP, its households’ disposable income rose by 2.5 percent, and its ten-year bond yields fell to 3.48 percent – lower than before the financial crisis. In Greece, however, the same policies are causing economic malaise, with no end in sight.
Both Greece and JC Penney fell victim to the belief that a policy that is good in one instance is always effective. Their leaders endorsed paths that had certainly worked in other settings, but because of differences in circumstances, failed in their own arenas. JC Penney made the mistake of tailoring their business to Apple’s customer base rather than their own. JC Penney’s pre-Johnson customers, who were generally older and had less money to spend, were part of a culture of coupon-clipping and finding deals. When Johnson replaced the sales and discounts with everyday low prices, they simply went to other department stores, and JC Penney was unable to draw the customers Ron Johnson envisioned from other retail chains. The troika imposed austerity measures on Greece to which its government was ill-suited. Greece is the most corrupt country in the European Union, so when austerity measures were first imposed, its excessive number of civil servants continued to enjoy high wages and other benefits. Greece has finally started to cut down on its bureaucracy, but its democracy now faces threats from extremist and neo-Nazi groups. Both Greece and JC Penney caution that what is good for one individual, corporation, or country may be disastrous for another.
