Defensive Strategy

J.C. Penney’s Predictable Stumble

15 May 2012  

Retail giant J.C. Penney reported some fairly grim results today. Fiscal first-quarter sales fell a remarkable 20%, the company lost $163 million and it suspended its dividend.

The news apparently caught many investors by surprise; the stock dropped more than 10%.

But if you’ve been following J.C. Penney the results are quite predictable. There is nothing surprising in the numbers.

In January this year J.C. Penney announced a major strategic shift. The company was moving away from its traditional emphasis on deep sales and embracing everyday low pricing. So J.C. Penney rolled back prices dramatically and scaled back the sales.

The move makes a lot of sense because J.C. Penney had become totally dependent on deep discounts. In a remarkable admission, the company said that it sold almost nothing at full price. Everything was on discount. This isn’t a healthy way to run a business.

The problem is that in the short run the promotion shift will lead to dismal results. Many people love sales; they find it simply thrilling to get a great deal. When Penney stops running sales, these people will leave; getting a reasonable price on a nice blouse isn’t anywhere near as exciting as getting it for 78% off. The deal shoppers are moving on.

And J.C. Penney doesn’t yet have a proposition to replace the losses with new shoppers. The company’s recent advertising is uninspired. It is pretty clear J.C. Penney is still work on the message.

So what happens?

Sales slump and losses pile-up. And the trends will continue as the deep discount buyers depart and J.C. Penney rebuilds its brand.

The only real question is whether the company will have the conviction, patience and financial resources to stick with the plan.

6 Responses

  1. This is not an issue of numbers, this is an issue of brand identity and how customers relate to the brand itself. The fact is that they don’t, which is why cost cutting became the dominant marketing tactic. J.C. Penny must do some soul searching and find an honest connection to their customer that they can amplify through their marketing strategies. Without an emotional connection, they have to resort to tricks, which as we can see through the data, is a terrible long term strategy. This is a company with deep roots and a distinct story that its not using to connect with consumers.

  2. Y. Shaban says:

    Thank you Prof. Calkins.

  3. Y. Shaban says:

    And what do you know? JCP brings back promotional pricing!

    CEO Ron Johnson tried to apply Apple’s high-margin one-price formula to JCP. What he didn’t (or maybe still doesn’t) realize is that Apple’s products have a very strong brand behind them. Apple can set one price and stick to it. JCP can’t do that. Apple sells high-end, expensive products, JCP has $20 dress shirts on the rack. High-end consumers care less about sales, but middle America cares greatly about stretching their dollar as much as possible.

    Buying a $20 shirt for $20 isn’t stretching dollars, that’s not shopping, that’s just buying. Buying a shirt that the consumer perceives to be worth $50 for $20 is a DEAL…one that will satisfy consumers. It’s not just deal hunters that JCP loses with its new pricing scheme, it’s almost everybody who used to shop there.

    What happened was that JCP got desperate during the recession and started offering crazy coupons which may have gotten rid of some old inventory but it got their customers used to steep discounts. I know my wife often was able to get a $30 item, marked down to $15, and then an additional 30% off, and then gave them a $10 off $10 coupon that she got in the mail, bringing the total down to 55 cents! I’m not exaggerating here.

    And since JCP doesn’t carry the quality or the brands she normally likes, she ONLY shopped there when she got those coupons (JCP must hate her). And then she went next door to Ann Taylor to spend $100s.

    JCP needs to figure out who their target customers are, shower them with the right number of coupons, and raise prices in general. Pretty soon customers will forget that they used to be able to get the $20 shirt for $20 and won’t mind paying $25 for that shirt if the initial price tag on it is $60 or $75.

    I see that Ron went to Stanford for his BA in Econ and Harvard for his MBA. I certainly respect the man and what he has accomplished in his life thus far. But you’ve got to wonder, how would things be different if he instead went to the number one ranked marketing program in the world. 🙂

  4. Peter Egan says:

    Do you think their promotional strategy is in any way related to the punishments the company incurred online at the hands of Google after being caught gaming the system? Could the bargains be a means of naturally getting other sites to link to their product pages?

    Just curious, as Penny reportedly made several tens of millions over a couple of weeks following their ascent to the top of search before having virtually all online revenue cut-off all at once with the “manual adjustment”, as Matt Cutts termed it.

  5. Y. Shaban says:

    I was just going to suggest a blog entry about JCP! Note that their gross margin is actually about 3% less this quarter than the year-ago quarter (40.5% to 37.6% in 2012).

    What I really want to see is an analysis of their new pricing scheme in terms of consumer psychology, consumer behavior, and overall pricing strategy. Like you mentioned, “everyday low prices” just doesn’t sound appealing to most, it’s not a “deal.” I’m not sure it will work when all their other competitors are still offering “deals” in terms of deep discounts. People may just stop shopping at JCP all together. However, combined with their “Town Square” strategy, maybe something will click. We’ll see.

    It definitely is a very bold strategy overall.

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