May 31, 2006, 12:00 AM

J.C. Penney: The newest member of the billion-dollar club

Behind department store chain J.C. Penney`s commitment to online retailing.

By Mark Brohan

When J.C. Penney Co. Inc. opened an online channel in 1994 with just a bare bones web site and some Power Rangers toys as inventory, the idea that annual e-commerce sales would one day top $1 billion hardly seemed plausible. After all, first-year web sales barely topped $1,000 and the new e-commerce site seemed better suited for liquidating excess inventory than as a dynamic new sales channel.

What’s more almost nobody in 1994, not even one of the biggest retail chains, could predict with any certainty that customers would seriously use the Internet to shop online and then electronically pay for their order with a credit card.

Next goal: $2 billion

But after 12 years of pioneering, persevering and taking a longer view of business-to-consumer e-commerce than most other chain retailers, J.C. Penney (No. 13) reached a significant milestone. For the first time, web sales topped $1 billion. Today, J.C. Penney is on track to achieve $2 billion in annual Internet sales possibly as soon as 2010. That projection is based on J.C. Penney’s annual growth in web sales, which in recent years has ranged from 28% to 50%. The retailer won’t release any specific dates about reaching the $2 billion mark, but does expect to keep growing annual sales around the industry average of 20% to 25% per year. “It took us 11 years to hit $1 billion, but we’re going to surpass $2 billion online in the foreseeable futur e,” says John Irvin, president of JCPDirect, the company’s Internet and catalog division. “The web will become the hub of our multi-channel strategy and the repository of all things J.C. Penney.”

J.C. Penney credits a number of factors in helping JCP.com, its newly re-branded web site, evolve from a basic site with limited technical features into a mass merchandise destination that frequently draws more than 9 million unique visitors per month, according to comScore Networks Inc. Some companies such as Amazon.com Inc. (No.1), Office Depot Inc. (No. 2), Staples Inc. (No. 3), Dell Inc. (No. 4), OfficeMax Inc. (No. 6), CDW Corp. (No. 8) and Newegg.com (No. 10) topped $1 billion in annual web sales sooner. That’s because books, electronics and office supplies are easier to sell online than apparel, accessories and home furnishings, which constitutes J.C. Penney’s web inventory.

But J.C. Penney also knew its core customers-women 30 to 50 with annual household income of around $50,000-are loyal shoppers who like buying direct from the J.C. Penney Big Book or using the catalog order desk at a store and picking up their merchandise later. With an established base of stores, catalogs and loyal customers, J.C. Penney knew its shoppers would eventually embrace online shopping-provided that Penney devoted the time and resources and built an appealing web site with the right mix of merchandising, pricing and technical features. “We know who our customers are and we understand their shopping behavior across multiple channels,” Irvin says. “Our customers had been shopping with us across two channels since 1963 when we first published a catalog. We knew if we did the job right they would embrace our web channel as well.”

Surpassing catalogs

Today J.C. Penney is a long way from speculating whether its customers prefer shopping online. They clearly do and in 2006 the web will surpass J.C. Penney’s catalog operation, which includes 94 editions and almost 400 million copies, as the company’s biggest direct marketing channel. “The web caught hold with our customers because we could bring significant development resources to bear,” Irvin says. “The web was new in 1994, but we were doing multi-channel retailing long before it became a buzzword. We already had suppliers, fulfillment hubs and customer contact centers. We had an infrastructure we could leverage and build on.”

J.C. Penney is able to consistently grow its web sales at a rate higher than the industry average of about 25% because it thinks of e-commerce in ways that extend the retailer’s brand across all channels, says Jim Okamura, senior partner with retail consultants J.C. Williams Group. “They’ve been at this longer and they’ve thought harder about using the web to drive sales across all channels than many other chains,” he says. “They aren’t just big and can commit resources to e-commerce. They think of using the web in ways their competitors won’t.”

E-commerce still only represents about 5.5% of J.C. Penney’s total 2005 sales of $18.8 billion, compared with 4.4% on total sales of $18.2 billion in 2004. But J.C. Penney’s average monthly sales conversion rate at JCP.com is about 10%, which is double or triple the 3% to 5% conversion rates of many other mass merchant and department store sites. “They made it easy to shop online and their higher conversion rate speaks volumes about what their customers think of the web site and the brand,” Okamura says. Not to mention the $1 billion in sales.

J.C. Penney began promoting its e-commerce site across multiple channels early on. It first mentioned e-commerce in 1995 on the customer service pages in its catalog. The first store promotion started in 1998 when J.C. Penney adopted a new logo and the theme “Come in, Call In, Log On.” The theme was featured on signs and other print materials posted in more than 1,000 stores. And the JCPenney.com URL was part of the cover art for the 1999 fall/winter Big Book. “Other chains talk about using the web to create a seamless shopping experience, but J.C. Penney is now a $1 billion web player because they’ve been executing on that strategy for more than a decade,” Okamura says.

Not an isolated business

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