Martha stewart court, Stewart’s name in bold type and photos of the namesake herself, frosted hair lacquered in place, arranging sunflowers or canoeing past russet-leaved trees. By 2004—the year Stewart began her five-month prison sentence, after being convicted of lying to investigators in an insider-trading scandal—her company, Martha Stewart Living Omnimedia, was beginning to deëmphasize its founder’s image. The latest cover of Martha Stewart Living marginalizes Stewart’s name in tiny block print; the photo shows well-organized closet shelves and a butterfly trapped under glass.
While M.S.L.O. struggles to find its identity and its business model beyond Stewart, who turned seventy-two earlier this month, J. C. Penney has multiplied its bets on the domestic artist and her company. Penney—whose sales dropped more than four billion dollars last year—has staked its turnaround, in large part, on remodelling its home departments to showcase new, Martha Stewart–branded merchandise: sixty-five-dollar serving bowls, thirty-seven-dollar muffin pans, thirty-dollar pastel-hued bath towels.
The Penney deal, signed at the end of 2011, infuriated Macy’s, which thought that its own deal with M.S.L.O. gave the company exclusive rights in the bed, bath, and kitchen categories. Stewart’s line is the biggest seller in Macy’s home section, and it wasn’t happy seeing similar products in a middlebrow chain like Penney. It sued Penney, arguing that it had interfered with Macy’s contract with M.S.L.O., and also M.S.L.O., for breach of contract. After hearing closing arguments for the non-jury trial on August 1st, Judge Jeffrey Oing said he would issue a decision soon. (The trial covers both lawsuits.)
Penney has defended itself loudly in court, even making the case that creating Martha Stewart departments within its stores didn’t breach Macy’s contract because the departments counted as “stand-alone shops,” which are allowed under its terms. (Macy’s insists the contract allows freestanding Martha Stewart boutiques, not a section of floor space within a Penney store labelled with a Martha Stewart sign.) Penney has also fought to develop workarounds to an injunction, from last summer, that prevents it from using Stewart’s brand within the product categories where Macy’s claims exclusivity, plastering her name on items not covered by the order, such as curtains, party favors, and olive oil. Meanwhile, the serving bowls and muffin pans, though designed by M.S.L.O., are being sold under the generic-sounding brand name JCP Everyday.
Yet, for all the time and legal fees Penney has invested in the case, the company actually might be better off losing it, and leaving Stewart behind. Penney agreed to a ten-year, two-hundred-million-dollar licensing deal with M.S.L.O., which requires payments to Stewart’s company for the merchandise it designs, even if the products don’t carry her name. At the time the deal was announced, in December, 2011, Penney had also purchased nearly seventeen per cent of Stewart’s company, for $38.5 million; the company has two representatives on the M.S.L.O. board.
Penney began stocking the Martha Stewart merchandise on Mother’s Day, so it’s too soon to tell whether her presence will improve sales in Penney’s home department, which accounts for ten per cent of over-all sales, a declining share in recent years. The retailer may give an update on the brand when it reports its quarterly earnings next week. However, many of the JCP Everyday items have been marked down, and some Martha Stewart lamps are already on clearance. Prices may be too high for the average Penney customer, analysts say; some of the rugs, for example, cost more than two thousand dollars.
Macy’s is the only big retail partner to find a comfortable fit between its customers and Stewart’s products. M.S.L.O.’s work for Kmart—which also sparked a lawsuit—ended in 2009. Since 2010, Home Depot has stocked a range of Martha Stewart items, but sales in categories such as flooring and paint have been weak recently, and this year Home Depot cut back its orders of patio furniture. Although M.S.L.O. hired an international merchandising head to work with retailers outside the U.S., the company hasn’t struck any deals so far.
Penney’s investments prop up the declining Martha Stewart brand. Since the deal with Penney was announced, M.S.L.O. shares have dropped nearly forty per cent. The company has lost money in nine of the past ten years. It recently discontinued two print magazines, Everyday Food and Whole Living; this year, the publishing frequency of the flagship magazine, Martha Stewart Living, is decreasing, from twelve issues to ten, amid declining newsstand sales and fewer advertising pages. And last year, Stewart’s television show on The Hallmark Channel was cancelled. As Stewart’s presence shrinks, her value to Penney also diminishes.
Penney is in worse shape, however. In the past two years, it has burned through nearly a billion dollars in cash. Its flamboyant former chief executive, Ron Johnson—who struck the licensing deal with Stewart and gloated about it in e-mails, which were read in court—was ousted in April, after a series of costly missteps, including banishing coupons, that drove down sales by twenty-five per cent and culminated in a loss of nearly a billion dollars last year.
Johnson doesn’t bear all the blame for the company’s failures. Turning around a major company such as J. C. Penney, especially in a fast-moving industry like retail, is a herculean challenge, as James Surowiecki wrote recently in The New Yorker. In any case, today, the company should be focussed on fixing its own problems rather than on keeping Stewart’s company afloat.
Penney’s seeming lack of urgency has sparked an embarrassing public struggle between the company’s board and its largest investor, William Ackman, the head of the investment firm Pershing Capital Management L.P. and a Penney director. On Thursday, Ackman publicly released a letter addressed to Penney’s board, complaining that the search process to replace the interim C.E.O., Myron Ullman III—who had been supplanted by Johnson, then rehired after Johnson was fired—only began three weeks ago, following a four-month delay. J. C. Penney “is at a very critical stage in its history and its very existence is at risk,” Ackman wrote in a follow-up letter on Friday.
The acrimony on Penney’s board emphasizes how much effort has been wasted on the distraction of the Martha Stewart court case. In going to such lengths to keep Stewart’s brand, Penney executives are succumbing to what economists call the “sunk-cost fallacy,” in which people justify escalating investment in a decision, even after it becomes clear that the cost of continuing the present course outweighs the benefits.
A classic example of the sunk-cost fallacy is the bidding war; often, rival bidders feel they’ve invested so much time in research and preparation that they escalate their offers beyond reason. Exhibit A in business-school case studies is Robert Campeau, who jockeyed with R.H. Macy & Co. in 1988 to buy Bloomingdale’s and other department-store chains. Campeau’s winning bid of $6.6 billion was considered well above the value of the stores. His company couldn’t handle the ensuing debt load from the leveraged buyout, and ultimately it had to file for bankruptcy. (The lesson here, then, might be that those who fight with Macy’s end up wounding themselves more grievously.)
Among the words of advice in “Living the Good Long Life,” Stewart’s new book on aging gracefully, is this line: “Life is a pile of problems that have to be solved one way or another, and the best way is to look at each one individually, figure it out, and move on.” Penney executives might consider whether it’s worth moving on from this battle and addressing the rest of their mounting pile of problems.
While M.S.L.O. struggles to find its identity and its business model beyond Stewart, who turned seventy-two earlier this month, J. C. Penney has multiplied its bets on the domestic artist and her company. Penney—whose sales dropped more than four billion dollars last year—has staked its turnaround, in large part, on remodelling its home departments to showcase new, Martha Stewart–branded merchandise: sixty-five-dollar serving bowls, thirty-seven-dollar muffin pans, thirty-dollar pastel-hued bath towels.
The Penney deal, signed at the end of 2011, infuriated Macy’s, which thought that its own deal with M.S.L.O. gave the company exclusive rights in the bed, bath, and kitchen categories. Stewart’s line is the biggest seller in Macy’s home section, and it wasn’t happy seeing similar products in a middlebrow chain like Penney. It sued Penney, arguing that it had interfered with Macy’s contract with M.S.L.O., and also M.S.L.O., for breach of contract. After hearing closing arguments for the non-jury trial on August 1st, Judge Jeffrey Oing said he would issue a decision soon. (The trial covers both lawsuits.)
Penney has defended itself loudly in court, even making the case that creating Martha Stewart departments within its stores didn’t breach Macy’s contract because the departments counted as “stand-alone shops,” which are allowed under its terms. (Macy’s insists the contract allows freestanding Martha Stewart boutiques, not a section of floor space within a Penney store labelled with a Martha Stewart sign.) Penney has also fought to develop workarounds to an injunction, from last summer, that prevents it from using Stewart’s brand within the product categories where Macy’s claims exclusivity, plastering her name on items not covered by the order, such as curtains, party favors, and olive oil. Meanwhile, the serving bowls and muffin pans, though designed by M.S.L.O., are being sold under the generic-sounding brand name JCP Everyday.
Yet, for all the time and legal fees Penney has invested in the case, the company actually might be better off losing it, and leaving Stewart behind. Penney agreed to a ten-year, two-hundred-million-dollar licensing deal with M.S.L.O., which requires payments to Stewart’s company for the merchandise it designs, even if the products don’t carry her name. At the time the deal was announced, in December, 2011, Penney had also purchased nearly seventeen per cent of Stewart’s company, for $38.5 million; the company has two representatives on the M.S.L.O. board.
Penney began stocking the Martha Stewart merchandise on Mother’s Day, so it’s too soon to tell whether her presence will improve sales in Penney’s home department, which accounts for ten per cent of over-all sales, a declining share in recent years. The retailer may give an update on the brand when it reports its quarterly earnings next week. However, many of the JCP Everyday items have been marked down, and some Martha Stewart lamps are already on clearance. Prices may be too high for the average Penney customer, analysts say; some of the rugs, for example, cost more than two thousand dollars.
Macy’s is the only big retail partner to find a comfortable fit between its customers and Stewart’s products. M.S.L.O.’s work for Kmart—which also sparked a lawsuit—ended in 2009. Since 2010, Home Depot has stocked a range of Martha Stewart items, but sales in categories such as flooring and paint have been weak recently, and this year Home Depot cut back its orders of patio furniture. Although M.S.L.O. hired an international merchandising head to work with retailers outside the U.S., the company hasn’t struck any deals so far.
Penney’s investments prop up the declining Martha Stewart brand. Since the deal with Penney was announced, M.S.L.O. shares have dropped nearly forty per cent. The company has lost money in nine of the past ten years. It recently discontinued two print magazines, Everyday Food and Whole Living; this year, the publishing frequency of the flagship magazine, Martha Stewart Living, is decreasing, from twelve issues to ten, amid declining newsstand sales and fewer advertising pages. And last year, Stewart’s television show on The Hallmark Channel was cancelled. As Stewart’s presence shrinks, her value to Penney also diminishes.
Penney is in worse shape, however. In the past two years, it has burned through nearly a billion dollars in cash. Its flamboyant former chief executive, Ron Johnson—who struck the licensing deal with Stewart and gloated about it in e-mails, which were read in court—was ousted in April, after a series of costly missteps, including banishing coupons, that drove down sales by twenty-five per cent and culminated in a loss of nearly a billion dollars last year.
Johnson doesn’t bear all the blame for the company’s failures. Turning around a major company such as J. C. Penney, especially in a fast-moving industry like retail, is a herculean challenge, as James Surowiecki wrote recently in The New Yorker. In any case, today, the company should be focussed on fixing its own problems rather than on keeping Stewart’s company afloat.
Penney’s seeming lack of urgency has sparked an embarrassing public struggle between the company’s board and its largest investor, William Ackman, the head of the investment firm Pershing Capital Management L.P. and a Penney director. On Thursday, Ackman publicly released a letter addressed to Penney’s board, complaining that the search process to replace the interim C.E.O., Myron Ullman III—who had been supplanted by Johnson, then rehired after Johnson was fired—only began three weeks ago, following a four-month delay. J. C. Penney “is at a very critical stage in its history and its very existence is at risk,” Ackman wrote in a follow-up letter on Friday.
The acrimony on Penney’s board emphasizes how much effort has been wasted on the distraction of the Martha Stewart court case. In going to such lengths to keep Stewart’s brand, Penney executives are succumbing to what economists call the “sunk-cost fallacy,” in which people justify escalating investment in a decision, even after it becomes clear that the cost of continuing the present course outweighs the benefits.
A classic example of the sunk-cost fallacy is the bidding war; often, rival bidders feel they’ve invested so much time in research and preparation that they escalate their offers beyond reason. Exhibit A in business-school case studies is Robert Campeau, who jockeyed with R.H. Macy & Co. in 1988 to buy Bloomingdale’s and other department-store chains. Campeau’s winning bid of $6.6 billion was considered well above the value of the stores. His company couldn’t handle the ensuing debt load from the leveraged buyout, and ultimately it had to file for bankruptcy. (The lesson here, then, might be that those who fight with Macy’s end up wounding themselves more grievously.)
Among the words of advice in “Living the Good Long Life,” Stewart’s new book on aging gracefully, is this line: “Life is a pile of problems that have to be solved one way or another, and the best way is to look at each one individually, figure it out, and move on.” Penney executives might consider whether it’s worth moving on from this battle and addressing the rest of their mounting pile of problems.
