Growth · Innovation · Leadership · Retail

JC Penney swings for the fences (Part 1)

New CEO Ron Johnson’s first big move to re-invent JC Penney was to eliminate their intensely promotional high/low pricing strategy. The key elements are:

  • Moving most products to “fair and square” every day pricing
  • Establishing month-long themed value pricing for certain key items
  • Simplifying and creating regular break dates for permanent markdowns.

To break-through the sea of sameness that envelops the slow growth moderate department stores space, Penney’s clearly needs to take bold action. And any student of retail knows that other needed changes to product assortments, in-store experience and digital strategy will take multiple years to fully implement. So what should we make of this “radical” new pricing initiative?

First, anyone who knows retail knows how foolish a high/low pricing strategy seems. The amount of money spent advertising events in weekly circulars and various broadcast media is enormous (and increasingly ineffective). The payroll and collateral costs of constantly changing in-store signing is a major line item. And “forcing” consumers to wait for a sale or have a coupon or get your store credit card to obtain the best price is seemingly a big customer dissatisfier.

So going to “fair and square” everyday pricing would seem to be a win for the consumer and a major improvement to any retailer’s earnings. Why not emulate Nordstrom and get both great Net Promoter scores and have an advertising to sales ratio that is the envy of the competition? It’s a slam dunk, right?

Well, not so fast Skippy.

First of all, unlike Nordstrom, every promotional retailer like Penney’s (and Sears and Macy’s and Bed, Bath & Beyond, etc.) has taught their customers–over many, many years–that their “regular” price is a sucker price. Reversing this perception will not happen quickly, no matter how creative your new ad campaign is and no matter how much money you throw at it in the first few months.

Second, every retailer has a customer segment that is intensely deal driven. This group refuses to buy unless they are convinced they have gotten the best possible price. And they believe they can ferret that out. They love the thrill of the hunt. Buying something without some special incentive is an anathema to them.

History shows–whether you are Sears, Macy’s or Saks–that when you pull back on promotions this segment’s business drops like a rock. If they are a tiny fraction (or an unprofitable piece) of your sales, it’s not a big issue. If, as I suspect is the case at JCP, they are a meaningful profit contributor, the short-term hit is significant and they will be hard to win back.

Third, like it or not, promotional marketing creates urgency to buy. Major events with limited time offers drive traffic. In-store messages that shout a great deal increase conversion. Over time hopefully Penney’s can teach their consumers that every day is a good day to check out their store and that there is no reason to shop around for a better deal. In the immediate term sales will suffer.

Lastly, and perhaps most importantly, the math on everyday pricing is tough. While it is true that most consumers buy at the lowest promotional price, it is also true that there are plenty of customers who pay full price (or receive a lesser discount). To achieve the same gross margin percentage would mean setting an everyday “fair and square” price that is above the lowest historical promotional price. But by doing that, you will be uncompetitive with your direct competitors.

An informal price check I did yesterday (at the mall closest to Penney’s corporate headquarters) revealed that Penney’s price on several key national brands was several dollars higher than Macy’s and Sears. For consumers that pay attention to such things, this will undermine JCP’s pricing integrity and cost them business. This also creates an opportunity for Penney’s competitors to attack them directly on the one major initial plank of their new strategy.

The other alternative is to set prices to be consistently competitive day in and day out. Doing so will drive Penney’s gross margin rates down, which will require a very significant increase in sales just to maintain the gross margin dollar productivity at last year’s levels–which weren’t at all impressive.

Penney’s has acknowledged that they expect to take a near-term sales hit as they implement their new pricing strategy. And everyone recognizes that pricing is just one piece of a multi-faceted, multi-year transformation.

My fear is that this pricing change is much more of a swing for the fences move then the new management team realizes and that the first few innings of this new game will be far more brutal than expected.

While unconfirmed, initial reports are that sales having taken a bigger hit than management anticipated, which could lead to inventory issues and a huge loss of momentum for the new leadership at Penney’s.

I applaud Ron Johnson’s willingness to go big and bold. However, I expect his credibility and tenacity will soon be tested.

***********

In Part 2 I explore what else Penney’s new strategy must entail.

 

18 thoughts on “JC Penney swings for the fences (Part 1)

  1. Very nice read Steve, Thanks. But curious if you can elaborate:
    “Third, like it or not, promotional marketing creates urgency … ” ; To compare to the gorilla in the room, Walmart seems to rely on ‘everyday pricing’, and this seems to fare pretty well with their customers. I realize that hey have more influence on their supply chains pricing than most retailers do, But still the same, why can’t they play this game?
    It seems like their ads with Ellen D. are pretty creative and have attracted my attention. Ellen is a trusted and well known spokes-person, (Hmm, bring Martha S back too for her sheets?).
    Also, I live in a rural town, and aside from Walmart, JCPenny and TJMaxx are the largest department stores in town. My personal impression is that I’ve become more curious about the store since seeing the new ad campaigns. (ED complaining about the $.99 at the end of every price, and pointing out the long and popular deception in marketing prices.)
    I’m curious to see how quickly the new CEO will be able to make a mark. To what extent do you think he played a role in their new marketing campaign with Ellen?

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  2. Thanks for commenting.

    Walmart is able to drive traffic at a high rate because they win compared to their competition on price authority and dominant selection. Consumers have learned over decades that Walmart is likely to have a really good price, so they have little reason to shop around (at least for price). Penney’s has none of those things right now, and needs to develop strong consumer preference.

    With regard to choosing Ellen that definitely happened on his watch and he would have played a key role–though I doubt it was his idea.

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  3. Steve, your assessment captures exactly what happened when Sears tried to venture down this path in the 1980’s. The severe short term hit in sales and profit caused Sears to reverse direction within days. However, the retail landscape has shifted significantly with the growth of the internet so JCP may have better results.

    Also, urgency/call to action may continue to plague JCP. Walmart built their everyday price strategy, not only on low prices, but on an assortment that includes consumables…their customers need to return to the store at regular intervals for detergent, diapers, toothpaste and food stuff at competitive prices. Clothing and housewares are shopped with significantly less frequency.

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  4. Cleaning up the pricing, and promotional cadence is all well and good…but they need the product to get people to open their wallets. You put some compelling product on the floor and people will buy it…and will pay more for it than you think They can’t ask, or expect people to pay slightly more for the same underwhelming product just because it no longer ends with a 99. They need to bring in some real merchants…who will get better product into the store…who will bring some focus to the assortments…who will create strong brand identities. What they currently have are buyers, who may be great at assortment planning, but know very little about product or merchandising.

    PS. I am continually amazed at how the Stonebriar Store can look so awful. You would think that a location that can be seen from their HQ would be a flagship…instead it always looks like sh#t. Which tells you that their buyers don’t really care.

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  5. Very nice read Steve, I agree with you that it was a very gutsy move and it will be a tough uphill battle. In regards to the Ellen commercials I feel that she is a great face to support the brand right now but find it interesting that there is no jcp product in the commercials. What is going to drive me to the store? As a shopper who defiantly pays attention to price points, with two growing boys I will not pay a higher price for the same Arizona jeans that I was able to get for at least $6 cheaper in December. I can find better quality, style, and a better price point at one of the competitors. Look forward to you future thoughts and findings.

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  6. I think it was a drastic move for them to make. This article backs that up too.

    In direct marketing, we test all facets of a program and then roll out with the winners, and get rid of the losers. If they’d tested this in one or two markets, they would have seen the results, rather than lose their whole “footing”. As a purely subjective opinion…I’d also have tested Ellen. Many of JCP’s prime target audience don’t like her for a variety of reasons.

    Anyway time will tell. Hope they don’t kill the brand and all their new execs that decided to go in this direction. It has certainly happened before.

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  7. Very interesting article. I was curious to see how things were going to launch with JCP considering the big Target/Apple influence now. I shop there a few times a year and I have to say that the quality of the clothing, shoes and accessories have really gone up in the past few years. I noticed their new everyday prices were slightly lower on many items and a little higher on a few things, but competitive compared to Macy’s – I’m in L.A. I thought their price tags with the red boxes around the price were a clever idea – it “feels” like you are getting a sale price – especially if the item is at a good price. They still have to do better price & quality wise than Target – where many people in the area buy clothes, shoes & other
    staples. I hate Walmart & the nearest one is several miles away anyway, Target & Macy’s are right next to JCP, so I view them as the competition for JCP. I think the new TV ad campaign is good with Ellen, but I see more of the other spot that looks exactly like the colorful Target commercials. That also gives me the impression they are in competition with
    Target in some way or have limited imagination. On another note, I’ve noticed that employee attitude and service has been upgraded a lot – which is a good thing.
    It remains to be seen how they fare, but I think as a consumer, I see more benefits than drawbacks so far. Their new online presence is very clean & easy to navigate as well. Macy’s, in comparison, clearly needs to be re-energized, it’s depressing walking into their stores (not quite as bad as Walmart). Their regular “sales” don’t fool me, even if a pre-print shows up in my paper, I’m not driven to go there. The quality is so-so, styles a bit dated, bland atmosphere & prices more than they should be. Ultimately, JCP could have a shot against some of these retailers if they find new ways to bring in foot traffic – as long as
    they incorporate new & fresh ideas, they might move past the complacent competition.

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  8. its simple…people don’t buy what you sell they buy what you stand for….when everything else is at parity, price will kick-in…know matter how clear and concise the hierachy is. until we know what Ron J is going to make JC Penney stand for we won’t know whether he’ll be successful. he was given a brand essence on a plate at Apple and very adroitly crafted one of the world’s most admired shopper experiences. but Apple had margin to play with….i suspect until JC Penney creates a brand that transends price he can only tinker at the edges – a dangerous place to play. for my latest book The art of being chosen i interviewed over 100 of the world’s retail leaders on success and i lecture on this around and there’s not one person who doesn’t hugely admire Ron J but equally not one person who is not holding their breath big-time – only prepared to breathe again when we hear a definative and cogent brand essence and strategy. seamless channels to market, clear discounting and fun product is not the answer i suspect…….martin butler

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  9. The problem is people do not seek out JCP. We have to buy food and household items, therefore Walmart and Target will always be on our radar. Apple is, well, Apple. We want Apple!

    JCPenney’s does not carry anything I have to buy, therefore you need to give me a reason to go in there. Add onto the fact that their stores are usually harder to reach, and I have even less of a reason to seek them out.

    So everyday lower prices on items that I may or may not need is not appealing.

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