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Ron Johnson: Retail’s New Radical

March 7, 2012, 10:00 AM UTC
Ron Johnson, J.C. Penney
Photograph by Mark Peterson—Redux for Fortune

It’s been a long time since Manhattan’s Pier 57 has seen this much action. Once home to ocean liners, the decaying structure is filled with headset-wearing workers toting ladders and stage lights. The mottled walls have been hidden by bright white fabric. Neon squares with a lowercase “jcp” bring to mind a postmodern art show. It’s night but it feels like day has broken as puffy white clouds move on a blue sky projected against the walls.

Or perhaps it’s just the relentless optimism of Ron Johnson, J.C. Penney’s new CEO. To hear him tell it, it’s morning again at the company. “Love the clouds!” exults Johnson, who is inspecting the preparations. In just 36 hours he will host 1,200 reporters, analysts, vendors, and retail celebrities such as Calvin Klein and Martha Stewart as he unveils his radical reinvention of the century-old department store company, which has $17.3 billion in annual revenue.

“Wow! This is going to be great,” Johnson says, sounding simultaneously giddy and calm. He’s like a chipper, empathetic version of his old boss Steve Jobs, as he checks detail after detail. He ponders the speed of the clouds, re-pins the clothes on a mannequin, inquires about the food, vetoes a Q&A for the vendors (“We’re here to present a vision”), and even admires the porta-potties. This is his coming-out party, and he wants it to be perfect.

Ron Johson, J.C.Penney Johnson Adjusting a mannequin before J.C. Penney’s New York launch event in January 2012.Photograph by Mark Peterson—Redux for Fortune

Johnson has spent years in the shadows, hatching two of the most significant retail concepts in a generation. At Target (TGT) he made the deal with Michael Graves that helped the company meld good prices with great design. At Apple (AAPL) he worked with Jobs to create the most profitable retail store in the world.

Now Johnson, 53, is embarking on his toughest challenge. In front of those clouds at Pier 57 a day and a half later, he proclaimed that he would turn J.C. Penney (JCP) — a dowdy brand aimed at the middle class at a time when the middle class itself is in peril — into “America’s favorite store” by the end of 2015. Not America’s favorite department store, mind you; America’s favorite store of any type.

To attract customers, Johnson unveiled a radically simplified pricing strategy, a slimmed-down but improved selection of brands, and a change in the store’s layout, which will consist exclusively of mini-boutiques arrayed around a “town square.” His goal is to reclaim the department store’s long-lost identity as a place shoppers visit not only for the goods but also for the enchantment of discovering something new.

Rendering of Johnson's new retail look. Rendering of Johnson’s new retail look.Photo: Courtesy of J.C. Penney

The new pricing strategy is ambitious — and risky. Customers have been trained by Penney’s and others to hold out for massive discounts. In the era of online shopping, few have the inclination to visit a store with a faded brand like J.C. Penney’s. Johnson knows all of that and seems to relish the challenge. Behind his preppy, earnest exterior beats the heart of someone who is out to change the experience of today’s shopper — one $4 towel at a time.

People want to belong to something deeper,” says Johnson. Since childhood he has had a near-messianic ability to lead people and make them feel as if they belong, as if they’re part of a great cause. He’s almost cartoonishly wholesome and nice, a Sunday-school teacher, Little League coach, husband, and dad whose upbringing was pure Norman Rockwell: He grew up in Edina, Minn., a well-heeled suburb of Minneapolis, the son of a General Mills (GIS) executive and a nurse turned homemaker. Johnson was a good student and a great athlete, captaining the baseball and soccer teams. Says childhood friend Chuck Mooty: “What people loved more about him than his talent was his persistence. He was just relentless.”

Relentless — and, it seemed, deluded when he announced, upon becoming co-captain of his high school soccer team, that the motley bunch would qualify for the state tournament. The team had won just a single game the prior season. “If we all just commit to this now,” he told his teammates, “we could become the best team in the state.”

The Cougars tied their first game. Then they won 17 straight, made it to the state tournament, and lost in overtime in the semifinals. The only reason they didn’t win the whole thing, Johnson believes, was they didn’t aim high enough. “Our goal was to go to the states,” he says, “and unfortunately, we accomplished the goal.”

1970's era Penneys 1970’s era PenneysPhoto: Courtesy of J.C.Penney

After graduating from Stanford, Johnson worked briefly in accounting before heading to Harvard for his MBA. Unlike most students there in 1984, he turned down lucrative offers from Goldman Sachs (GS) and Salomon Bros. to work at Mervyn’s, a mid-priced Midwestern retail chain owned by Dayton Hudson. “I thought, I want to be really good at something,” he says. “I want to run a company one day, and I need to learn the business from the ground up.”

Learn it from the ground up he did. Johnson spent his first day at Mervyn’s Glendale, Calif., store on his knees, scraping gum and other detritus off the men’s department floor with a razor blade. He rapidly advanced to a more vertical role, rising quickly. In 1990 he moved to the faster-growing Target in his home state, where, as head of housewares, he developed an interest in design on his trips overseas to scout out trends. A visit to the Frankfurt housewares show, where Italian company Alessi presented its pots and juicers as works of art, was a breakthrough. “It was like walking through a museum,” he says. “They weren’t there to make money; they were there to make great products.” Shortly afterward he hired Michael Graves to create low-cost versions of his designer teakettles and toasters for Target.

Johnson believed they would be hits. So rather than stocking just a few to start, he gambled on 140 Graves-designed products and placed them at the front and back of each aisle. “The math was simple,” he says. “If I didn’t sell one piece but people looked differently at the other 96% of products, we’d win. It’s always about mindshare, not market share.”

The Graves line was such a smash that Target’s image changed from a ho-hum discounter to a store that sells stylish but affordable products. The lesson? “Improvement merely lets you hit your numbers,” says Johnson. “Creativity is what transforms.”

Transformation on the speed and scale Johnson was interested in, however, was not happening at Target, which worried about becoming too upscale. So when a recruiter invited him to meet with Steve Jobs about starting a retail operation, he went.

Today it sounds like a no-brainer: Who wouldn’t want to work with Jobs at the most innovative company of its era? Yet in 1999, when Apple approached him, the company seemed as risky as Penney’s does today. It was a niche player a few years removed from a cash crisis, and Gateway’s computer store experiment was failing. Johnson didn’t care. He saw Jobs as a kindred spirit. “I just could tell I could work with him,” Johnson says. “And I wanted to help him fulfill his dream, which was to change people’s lives.”

Even before Johnson signed on, he challenged Jobs over a fundamental aspect of Apple’s new outlets. “He said it’ll be a store for creative professionals,” Johnson recalls. “I said, ‘Well, then I’m not coming. If you want to be a store for all Americans, sign me up.’ ” Johnson envisioned a place where the experience was as important as the products themselves.

That would involve a change in corporate DNA. Apple’s attitude had always reflected Jobs’ outlook: Customers should feel lucky just to own an Apple product. By contrast, Johnson wanted the stores to feel welcoming. He began by flying the original 10 members of the team to two soon-to-open Ritz-Carlton hotels, where they immersed themselves in the Ritz’s respected approach to customer service.

Johnson launched a series of innovations that put customers at ease. There was the Genius Bar, where Apple customers can go for free help, and “personal training,” in which users can pay $99 for a year of classes on how to use Apple products.

Johnson even persuaded Jobs to nix commissions for salespeople, arguing that they should give customers the best advice, not the advice that earns them the most. “You can motivate by a mission or motivate by money,” he says. “The mission will work.” To find those mission-driven employees, Johnson devoted enormous effort to hiring: Not only did potential employees endure as many as eight interviews, but Johnson interviewed every store manager personally.

Johnson’s formula worked, and throngs flocked to the stores. Says veteran Apple board member Bill Campbell: “Steve wanted happy customers. Ron knew how to get them.”

Ron Johnson, J.C.Penney Johnson with Steve Jobs in 2006 at the opening of Apple’s store on Manhattan’s Fifth Avenue.Andy Kropa—Redux

Jobs and Johnson meshed, with Johnson’s calm demeanor balancing his boss’s emotional intensity. Apple’s CEO taught him to “just do the right thing,” he says, which sometimes meant admitting mistakes. In September 2000, after construction had begun on the first store in McLean, Va., Johnson had a gut-wrenching realization. Just as Apple was beginning to push the idea of the digital hub, he had organized the store around individual products. It was the wrong message. The next morning, just before a regular team meeting at 8:30, he went to Jobs. “I think we’ve got it wrong,” he said. “The stores are fundamentally flawed.” Jobs was furious: “Do you realize how much time I put into designing this store?” After an excruciating silence, Jobs spoke again. “You might be right, but don’t talk about it to the team today.” Then, he says, Jobs entered the meeting. “The first word out of his mouth is, ‘Ron thinks this store is all wrong, and he’s right. We’re going to start over.'”

Today Apple is the most profitable retailer on the planet, averaging some $6,000 in revenue per square foot (compared with $156 at Penney’s, $194 at rival Kohl’s (KSS), and $171 at Macy’s). “The reason it worked was Ron,” says Michael Kramer, Apple Retail’s former CFO and now Penney’s COO. “Even in the face of bad numbers or challenges, he was always inspiring you.”

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Johnson was now a star. Many other companies tried to pry him away. Though he was loyal to Jobs and has a net worth in the hundreds of millions, Johnson eventually felt his role at Apple had become a bit too easy. He harked back to something a friend’s father, a musician, once told him: Everyone has a violin concerto to play in life. If you figure out what yours is, your career will never feel like work. Johnson still had never run a company; he loved department stores. He wanted his violin concerto.

It would come in the form of J.C. Penney, which has been stagnating for years; its revenues and profits were lower in 2011 than they were 15 years ago. Bill Ackman, the activist value investor who, along with real estate magnate Steven Roth, amassed a 37% stake in the company, began wooing Johnson early last year. “I just believed in the guy,” says Ackman.

By the middle of 2011, Penney’s board offered Johnson the CEO position, and he broke the news to Jobs, who dismissed Penney’s as “a B- or C company with B- people.” Johnson told Penney’s board he was in — but that the ailing Jobs had asked him to stay until November. The board agreed, and the news of Johnson’s appointment (including word that he was investing $50 million of his own money in J.C. Penney warrants) sent the stock soaring 17.5% in a day.

Johnson spent the next few months crafting his strategy and sharing his plans with retail giants such as J. Crew CEO Mickey Drexler, Diane von Furstenberg, Topshop’s Philip Green, Ralph Lauren, and even his favorite designer, Ermenegildo Zegna. Each had advice — Lauren and Zegna cited the need for a store that emphasizes the American experience; Green stressed the importance of presentation; Drexler reminded him that it’s always, in the end, about product. (That was certainly true in the case of Johnson’s triumphs at Apple and Target.) Not everyone agreed with his plan, says Johnson, but they all saluted his daring. “It’s so exciting that someone’s rolling the dice, putting their own money in, and doing something that hasn’t been done in the department store for 30 years,” says Drexler.

Ron Johnson, Michael Francis, J. P. Penney Johnson with company president Michael Francis prepare for the New York launch in January 2012.Photograph by Mark Peterson—Redux for Fortune

Johnson also moved quickly to build his own team — most of whom were on his old teams. New president Michael Francis left his job as Target’s head of marketing and creative visionary not long after Johnson told him he couldn’t imagine doing the job without him. Kramer, who had departed Apple to become CEO of Kellwood, jokes that his wife was upset — not because he took the job with Johnson, but because he didn’t even try to play hard to get. Penney’s new CIO, Kristen Blum, once worked at Apple, as did chief talent officer Dan Walker. “They want to come,” says Kramer, “because of the transformation of something.”

J.C. Penney needs transformation — that much is clear. A visit to its location in New Jersey’s Palisades Center in December made it obvious. It was two months before Johnson would unveil the new JCP, and the store was a wreck. Floors were dirty; clothes were strewn about, unfolded; cheap jewelry and toys were stacked in half-opened boxes in the middle of aisles. The only place with decent traffic was the clearance section.

Seeing that uninviting mess, it’s easy to understand that last year the company spent $1.2 billion — almost 7% of sales — on a stunning 590 promotions just to get customers inside its 1,100 stores. The result: Just 0.2% of sales were made at full price. Some 72% of goods were purchased at a discount of 50% or more. List prices were effectively fiction, and no one knew that better than customers, who shuttled among competing stores like teenagers with multiple suitors.

Johnson promises a more appealing experience. He plans to improve the mix of Penney’s offerings, partly by reducing the number of items and also by partnering with brands (including some that are new to Penney’s) to create a sort of mall within a store. By the end of 2015, every store will host 100 or so discrete shops, including Martha Stewart, Izod, Arizona, and Sephora. The concept isn’t original. Many department stores already have branded mini-boutiques; the difference is that all Penney’s will consist solely of such mini-stores.

The shops will be laid out along pathways, with a square in the center. The square might offer, say, free ice cream in the summer or balloons for kids. The idea is to lure visitors, who will then shop.

Johnson’s new pricing strategy offers only three categories: “everyday” (about 40% off the old retail price); a monthly sale on certain items; and a final, “best” price. Forget serial discounts; Johnson insists people will come because the prices are “fair and square.” He’s pitching it as a return to the company’s original values. James Cash Penney saw his store, founded as “The Golden Rule” in 1902, as a morally upright place. “Fair and square” is now the tag line for much of the $1 billion the company will spend this year on its new message, with witty, high-profile TV ads, visible during the Oscars and elsewhere, featuring Ellen DeGeneres.

A Golden Rule Store in Kemmerer, Wyoming, started by James Cash Penney in 1902. A Golden Rule Store in Kemmerer, Wyoming, started by James Cash Penney in 1902.Photo: Courtesy of J.C.Penney

In early February, I visited Penney’s store in New York’s Manhattan Mall. It hasn’t been redesigned yet, but change was afoot. The space was clean and visually appealing. Color was everywhere — from rows of perfectly folded men’s polo shirts to the huge pink neon squares placed throughout to brand February as the “pink” month — with pink price tags showing the monthly sale items. Gone were the clearance racks, replaced by a few “best price” items that you actually need in February; a group of $20 puffy coats was attracting a lot of attention.

Yet customers seemed oblivious to the changes. They looked at me blankly when I asked about them. “There’s no more clearance?” said one. Retraining customers to trust that prices are, in fact, fair and square, after decades in which endless discounts rendered them effectively meaningless, is no easy feat.

Ron Johnson, J. C. Penney Johnson at Penney’s in Fairview, Texas.Photograph by Mark Peterson—Redux for Fortune

Penney’s stock soared following Johnson’s January presentation (at $41 per share, it trades at a relatively lofty forward price/earnings ratio of 26). But skepticism abounds. On Feb. 21, ratings agency Fitch downgraded the company’s debt to junk level, citing worries over the new strategy. Many concerns center on the simplified pricing, which has been tried in various iterations by everyone from Macy’s (M) to Saturn, only to be abandoned when competitors amped up their own discounts. Johnson argues that those companies simply didn’t stick to the plan. “What you can’t do is chicken out,” he says. “If you had looked at the data on the Genius Bar after a year and a half, we should have taken it out of the store. But it was something I believed in with every bone in my body.” Others fear that Johnson’s sunny predictions — delivered years before many key changes occur — will breed disappointment.

Johnson laughs off the criticisms. He knows he’s risking his reputation by proclaiming “transformation” rather than incremental change. But he won’t admit even the possibility that his plan might not succeed. “The only things that haven’t worked for me are when I’ve held back,” he says. “There’s no reason to sell an idea short. The only risk would be to not fulfill the dream.”

It’ll be a while before we know whether his dream will come true. Johnson has delivered the locker room speech. Now all his team of scrappy underdogs has to do is take 17 straight games and get to the state championship. This time Johnson is sure they’ll win it.

A version of this article appears in the March 19, 2012 issue of Fortune with the headline “Retail’s New Radical.”