Investor's Business Daily, March 13th, 2007
James Cash Penney's first business was a fast flop.
But the reason wasn't a flawed plan, poor execution or too much competition.
It failed because of his conscience. Yet this attitude of doing the right thing helped Penney immensely as he later built one of the largest and most respected retail chains in America.
After finishing high school in Hamilton, Mo., and taking a few jobs, Penney moved to Colorado in the late 1890s and spent his savings on a small butcher shop. The chief meat cutter told Penney he had to give the chef of the local hotel a bottle of bourbon every week. If he didn't, he risked losing his biggest client.
Penney gave a bottle to the chef once, then regretted it. After refusing to do it again, the hotel canceled its orders. The butcher shop went under.
The young man from Missouri didn't give up.
With hard work, dedication to outstanding service, smart hiring practices and keen decision making, Penney turned a humble chain of three dry-goods stores in the West into a giant with 1,033 stores across the U.S. and Puerto Rico.
The company logged $19.9 billion in sales in the latest fiscal year ended in January. "Penney obviously is an icon on the order of a Sam Walton (of Wal-Mart) or a Stanley Marcus (of Neiman Marcus)," said Ed Fox, an associate professor at the Cox School of Business at Southern Methodist University and director of its J.C. Penney Center for Retail Excellence.
Religious Road
Penney (1875-1971) grew up on a small Missouri farm. Penney's father, an unsalaried Baptist minister, and mother taught their son to have abiding faith in God, self-reliance and self-discipline.
Young Penney learned these principles fast. When Penney was 8, he was told he would have to buy his own clothing. He needed new shoes right away. So Penney bought pigs with his $2.50 in savings, sold them at a profit and had enough for shoes.
Penney's parents also preached the Golden Rule: Do unto others what you would have them do unto you. This lesson served Penney well in the retail business.
In 1898, Penney worked for a pair of dry-goods stores named the Golden Rule in Colorado and Wyoming. The chain's partners liked the young man's energy and work ethic so much that they offered him one-third ownership of a new store. At age 26, Penney opened a third Golden Rule shop in Kemmerer, Wyo., in April 1902.
Back then, many store owners had little or no thought of protecting the patron. They treated customers rudely and often sold poor-quality goods. Prices were not the same for every visitor. "Usury was the order of the day," Fox said. "Store owners usually charged poorer people higher prices because they thought they were ignorant."
Then there was Penney. He gave each visitor friendly, reliable service. He clearly marked the prices of items and pledged "one price to all."
In Kemmerer, miners were paid in coupons instead of cash. They used the coupons to shop at the mining-company-owned store. The workers tended to spend their income instantly and later rely on mining company credit. Due to these loans, miners stayed put.
Penney made his store cash-only. Many thought he would shutter the store in little time. But shoppers liked the quality of goods at Penney's store. To provide exciting items, he joined a buying syndicate and traveled to the East Coast in 1903 to catch the latest trends.
"We took our slogan 'Golden Rule Store' with strict literalness. Our idea was to make money and build business through serving the community with fair dealing and honest value," Penney said.
Penney sought to keep costs lows so he didn't have to raise prices. He opened his own envelopes and used the blank side for scratch paper. Penney used old packing crates as shelves and counters in the stores.
Happy customers told their friends and neighbors about their positive shopping experience. The Kemmerer store earned $8,514.36 in its first year on sales of $28,898.11, a profit margin of 29%. "The store that sells its wares for less but pays little attention to the service it renders does not meet with the success of the store with courteous employees," Penney said in 1954. "The public is not greatly interested in saving a little money on a purchase at the expense of service. Courteous treatment will make a customer a walking advertisement."
To ensure long-term growth, Penney chose his staff shrewdly. In 1903, a year after his instant success in Kemmerer, Penney was asked to manage another store in Rock Springs, Wyo. Penney discovered that the clerk often closed the store early so he could perform an instrument in local dances. Penney let him go and found a replacement who worked hard.
By 1907, Penney had bought out the ownership stakes of his employers and set off on a rapid growth plan. In 1909, he moved from Kemmerer to Salt Lake City to be closer to banks and railroads. That way, he could stay on top of product buying, distribution and financing.
In 1911, the chain grew to 22 stores and topped $1 million in sales. The next year he had 34 Golden Rule stores, with sales topping $2 million.
In 1913, Penney changed the Golden Rule store name to J.C. Penney Co. The next year, Penney moved the firm's headquarters from Salt Lake City to New York City to stay near major manufacturers and other sources of merchandise.
Two years later, he opened his first two stores east of the Mississippi River. By 1951, total store sales eclipsed $1 billion a year.
To ensure each store had excellent and motivated managers, he offered clerks the chance to become manager-partners. Penney gave the same opportunity that was given to him as a young man in Wyoming -- a one-third ownership in the new store.
In the 1920s, Penney turned down offers by bankers to merge the company with Montgomery Ward and Sears Roebuck. He felt such deals weren't worth it if they resulted in laying off some of his personnel.
After the stock market crash of 1929, Penney used his company stock as collateral for loans. But the Depression of the 1930s lasted long, and his fortune was wiped out. He had to close some of his charity organizations, but continued to work hard to keep the company going.
On The Go
Despite stepping down as president in 1917 and becoming the firm's first chairman of the board, Penney traveled constantly to visit stores and meet managers. At age 85, he trekked 80,000 miles and reached 67 stores from 1960 to 1961.
Penney showed younger employees how to wrap items carefully to prevent damage upon arrival. He gave pep talks, peppering the crowd with sayings such as "No man can climb the ladder of success without first placing his foot on the bottom rung" and "The profit is in the last shirt in the box."
He also often stopped help a customer, encouraging the store manager to do the same.
"The friendly smile, the word of greeting are certainly something fleeting and seemingly insubstantial," Penney said. "You can't take them with you. But they work for good beyond your power to measure their influence. It is the service we are not obliged to give that people value most."
Copyright 2007 Investor's Business Daily, Inc.
