The department store model is broken, and malls are struggling—this is not news. The coronavirus shutdown of brick-and-mortar retail has added fuel to an already big problem. The result will be an enormous reduction in the number of stores and a permanent shift in the retail landscape and the relationships of brands.
On April 15, JCPenney skipped a $12 million interest payment, entering a 30-day grace period before a potential default is triggered. A skipped payment on a bond, to try to preserve liquidity, is typically a step that precedes a bankruptcy filing. Reuters first reported Tuesday that JCPenney was considering the bankruptcy filing to “rework its unsustainable finances and save money on looming debt payments” in hopes of continuing operations.
As the Plano, Texas-based retailer is exploring their options, Sephora is threatening to pull out of JCPenney stores. The retailer has filed a temporary restraining order against Sephora in an effort to prevent the retailer from leaving its stores as they begin to reopen. Sephora doesn’t want to reopen its 600+ shops inside JCPenney stores unless the retailer agrees to end its 16-year deal with Sephora early. Sephora was also upset that JCPenney decided to furlough full-time Sephora inside JCPenney (SiJCP) employees while stores were forced to close.
Modern Retail reported in an email dated April 26, included in court filings, that Sephora CEO Jean-André Rougeot said to JCPenney CEO Jill Soltau, “Under any scenario, (JCP bankruptcy or not) we can both see that SiJCP is at the end of the road. Due to JCP’s well-publicized financial struggles, brand partners will be very leery to continue to work with JCP and new brand launches will dry up for sure.”
According to The Dallas Morning News, in the lawsuit filed last week in Collin County District Court, Penney said: “Sephora has no right to demand an early exit from the parties’ contract.” An abrupt end to the relationship, Penney said, would “cause immediate and irreparable harm to JCP—which depends on Sephora as its only beauty partner and could not obtain a new beauty partner without reasonable lead time.”
Sephora’s “threats to terminate the agreement immediately are transparent efforts to gain negotiating leverage where Sephora has none,” Penney said in the lawsuit.
In 2006, when Sephora announced the partnership, it had just 120 stores in the US. JCPenney, with their roughly 1,000-door footprint, provided an opportunity for Sephora to scale their physical presence. Fast-forward to the present, JCPenney’s door count has shrunk to 850 stores while Sephora has grown to over 490 stand-alone stores, excluding the roughly 650 shops it has opened within the JCPenney locations.
The Dallas Morning News reports that insiders believe the deal has been mutually beneficial. “It’s been a strong revenue stream that fueled Sephora’s growth efforts. The luxury beauty brand was able to reach suburban and small town shoppers without the big expense of operating free-standing stores.”
Under the leadership of Jean André Rougeot, who joined Sephora Americas as President and Chief Executive Officer in February 2019, Sephora announced in February of 2020 that it was more than doubling the number of openings from the previous year. The real estate selection was an indication that they were taking the battle for the beauty consumer straight to Ulta’s front door.
The plan was to open 100 new stores across North America, moving with a strategy of meeting their consumers where they live and work. The new locations would include street and local centers as well as a mix of new and established shopping centers. While Sephora said it believed brick-and-mortar was more important than ever for client connection and long-term growth, under this new vision, the stores in JCPenney locations lacked the relevancy they once had for the business.
JCPenney spokeswoman Brooke Buchanan told CNBC in a statement that, “JCPenney filed a temporary restraining order so Sephora could not prevent JCPenney from reopening Sephora inside JCPenney locations,” and that, “We remain committed to working together to drive sustainable, profitable growth, as SiJCP continues to be a beauty destination that serves millions of customers each year.”
Meanwhile, a Sephora spokesperson said that, “Despite JCPenney’s claims, we did not threaten any action that would have impacted SiJCP operations in the near-term or JCPenney’s ability to sell beauty products in its stores. While we understand that JCPenney has put itself in a tough position in recent years, this is a very unfortunate development that we hope to resolve quickly. We will continue to work with JCPenney as stores reopen, while continuing to take action to support our people and our brand partners.”
Sephora and JCPenney have had a joint enterprise operating agreement since Feb. 1, 2009, according to the April 27 court filing. It would be a huge blow to JCPenney if Sephora were to exit the relationship while it’s trying to restructure its debt.
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