Chapter 11: The Memo

America changed in the 1950s. There was a migration from towns to cities and, with many collars changing from blue to white, from cities to the new suburbs. Tastes and interests were changing as well, with people making more money and spending more money. With all this, shopping obviously changed. By 1957 Mil Batten was vice president, a board member, and vice chairman under Al Hughes (the former Latin scholar). Batten saw the changing demographics with a clarity perhaps unmatched in the retail industry. His response was to write "The Memo."

It summarized the Penney business at the time. It accurately forecast the future. It concluded that vast changes had to occur in the company. It provided a plan for doing so. It became the most famous communication in Penney history beyond The Body of Doctrine (The Penney Idea). And it hastened Batten's appointment the next year to president/CEO as Hughes, past retirement age, remained as chairman.

Leading Up to an Emotional Vote

The Memo made these points: The Penney Company profile was basically a soft goods store primarily in small and medium- sized towns selling for cash. This was largely a shrinking market.

It concluded that capital should be concentrated in metropolitan suburbs and other growth areas. As opposed to the old pinpointing, the company should also serve an increasingly widespread and increasingly demanding consumer with an increasingly expanded assortment of merchandise in increasingly convenient locations. This was a transformation of such scope that it would require special verve, imagination , and controls. Plus adroit use of "other people's money," particularly in new store development. ^[1]

If all this seems somewhat routine today, it was absolutely revolutionary at the time. And four revolutionary implementations had to accompany the plan:

1. New, bigger, and newly located stores. Batten identified the emerging shopping-center moguls ”the DeBartolos and Simons ”and figured they might be interested in an anchor-store partner whose leases they could take to the bank. It became a marriage made in heaven.

2. Committing to the expensive and protracted project of starting a catalog. Batten bought a small catalog operation, the General Merchandise Company of Milwaukee, primarily because of its technology. Its fully automated warehouse made anything at Sears and Wards look archaic.

3. Even farther out was developing a way to recover data at the point of sale in the new stores. Nobody else had ever thought about doing it. Not Federated, not IBM, not anyone ”and therein lies a story (coming up).

4. Emotionally at least, the most seismic change of them all: consumer credit. The Penney Company had sold for cash and cash only since its inception in 1902. The founder, in his eighties and still quite active, was a devout believer in cash. Next to God, he feared the ravages of debt that credit portended (for good reason).

But The Memo anticipated moving to the suburbs, where consumers consumed ”including expensive hardlines like appliances and electronics ("brown goods") ”and there the operational sine qua non was selling on credit. Every other major retailer sold on credit. Nevertheless, Mr. Penney actually became ill and had to go home when he heard what was afoot.

The credit issue came down to a boardroom vote. The special occasion called for tallying all directors plus some key Penney executives who were not on the board. Twenty votes in all. Batten, with mixed feelings, laid the appropriate groundwork . To every director he sent a new, cogent, and convincing brief reaffirming the need for sales on credit. A copy went to Mr. Penney, of course, to which Batten added a handwritten note:

Dear Mr. Penney,

I know how egregious this development must seem to you. It does appear, however, to be the prudent way to go.

”Mil

Batten began the meeting by changing the rules. He looked around the table as he spoke. "Gentlemen, given the importance of the issue at hand, I will ask each of you to state your vote, yea or nay, and then add your reason for it. In order that Mr. Penney have the last word, I will start and then ask that we go around clockwise." He drew a loop in the air with his forefinger, starting with the man on his immediate left and ending with the founder on his immediate right. Then he continued briefly .

"All of you I trust have read the brief I mailed to you, which sums up my feelings. I vote yea." He nodded left and the next man rose. When it was time for Mr. Penney to speak, 19 yea votes had been cast.

"I congratulate you," said the old man. "Serving as representatives of our shareholders, you have voted wisely as you must." There was a hitch in his voice as he continued. "For myself , on the other hand, I must respond at a different level ”token as my vote will be. I am opposed to the move for fear that credit would impose hardships upon our customers." He hesitated again, looking from man to man. Many averted their eyes, knowing what was coming. "You see, I knew the hardships of debt firsthand, and I would not wish the company to contribute to this state in any fashion. For those reasons, I am compelled to vote against the proposal." He waited for a breath , said "Nay" and "Thank you," and sat down.

^[1] Penney had deep pockets, a conservative balance sheet and still paid real dividends in dollars. But nobody had the kind of capital needed to pay for everything in the new plan.