Wednesday, May 16, 2012

J.C. Penney's Woes And the Need for a Cost Competitive America

J.C. Penney is struggling to turn around its retail performance as a company.

With a new CEO recently hired from Apple, it's trying the ESDP (every single day price) model, which was attempted unsuccessfully by Sears two decades ago.  It failed Sears and it may well prove to be a failure for J.C. Penney as well.

The company's actual cost competitiveness and the perceived value of its offerings as judged by consumers will dictate J.C. Penney's fate---not its pricing strategy.

{In the interests of full disclosure, I own zero shares of Sears and J.C. Penney currently, and I plan to keep it that way. And I haven't owned any shares of either for the past several years.}

Meanwhile, Wal-Mart was and remains successful with its EDLP (every day low price) model.

What's the difference between ESDP and EDLP? Well, it's like night and day. And it's all about competitive costs and selling prices.

Wal-Mart's L stands for low as in every day low price. J.C. Penney's S stands for single as in every single day price. The night and day distinction between EDLP and ESDP is simple. Unlike Sears and Penney, Wal-Mart's every day prices are low and competitive.

Stated another way, Wal-Mart is on sale each day, and J.C. Penney is on sale no day. Hence, Penney's losing its customer base by trying to convert customers into going along with the retailer's pricing strategy. But customers are saying no and going elsewhere instead.

Penney's Stock Plummets on a Big Loss says this about Penney's weakened condition:

"Ron Johnson (newly appointed J.C. Penney CEO) is getting a taste of what it's like to run a retail operation without world-beating products, and so far it is not pretty.

Penney's shares plummeted 13% to around $29 in after-hours trading Tuesday (stock below $28 today) when the retailer reported a $163 million loss, more than twice what analysts were expecting.

The company also said it will suspend its quarterly dividend and not meet its previous annual earnings target thanks to additional restructuring charges and possible inventory write-downs as it jettisons certain lines of merchandise.

At an investor meeting in New York following the report, Mr. Johnson said the turnaround has been a lot harder than management expected. Company executives repeatedly referred to coupons as "drugs," and said the weaning of shoppers from their coupon addiction has hurt sales and store traffic more than anticipated. . . .Investors whispered to each other about the "bloodbath." The earnings report is a blow to Mr. Johnson . . . .

The company missed nearly every financial target analysts had set for the latest quarter. Total sales declined 20% to $3.15 billion, while analysts were expecting $3.41 billion. Same-store sales slid 19%, when analysts expected a 13% drop. Gross margin narrowed to 37.6% from 40.5% due to the sales weakness and the impact of deeper seasonal markdowns to clear inventory."

Discussion and Analysis

Sears and J.C. Penney at one time were the nation's two largest successful retailers.  Now each is struggling to remain a viable retailer, let alone a winning one. That's due to their customers taking their purchasing dollars elsewhere.

In simple language, customers always want the most bang for the buck. However, just like Sears before them, J.C. Penney apparently is fast becoming uncompetitive. At the least, they have lots of work to do to get things back on track, and their partially disguised price raising strategy appears to be a potential total failure. Penney's old customers may choose to buy from retailers such as Target and Wal-Mart instead.

Thus, Penney's sales are way down, its profits have disappeared and shareholders are heading for the exits.

The Bigger U.S. Story about Customers, Choice, Competitiveness and Success

There's a much bigger story to tell about what Penney's lack of competitiveness means to America.

You see, Penney's situation is a lot like the overall U.S. economy's competitive condition currently.

We aren't growing enough and neither is Penney. 

Perhaps it's because we haven't yet figured out that our private sector companies always have to be cost competitive to successfully do business in all corners of the world. You see, it's always all about cost competitiveness and the value of our offerings.

Value is the simple relationship between price and quality. If the customer perceives greater value even though the offering is at a higher price, he will buy the higher priced item. But if he doesn't see this greater value, he'll buy somewhere else at the lower price.

Pricing is important to customers, as is value. Thus, cost competitiveness is essential to retailers and other sellers in order for their offerings to be able to provide compelling value to customers.

Summing Up

J.C. Penney will either have to get its costs down so it can compete on price or it will end up like Sears and other companies that neglected that simple truth.

Cost competitiveness is not optional. It's a basic requirement of being and staying in business. Customers are in charge.

Thus, if Penney's pricing is higher than competitors, it is likely that its costs are higher than its competitors. They won't be able to run away from that.

Of course, how high Penney's costs are won't matter in the least to its current or potential customers. Nor should they.

Customers will just focus on price competitiveness and choose with which retailer to spend their hard earned money. But costs will matter to J.C Penney---very much.

Thus, Penney will either get its costs and pricing in line soon or continue to lose sales.

Finally, the Politics

So when you see the politicians attacking business leaders for keeping their costs low in order to stay in business, ask yourselves if the attackers believe what they're saying. And if they do, do We the People believe that garbage, too? If so, the future of our world leading free market and prosperous economy is in jeopardy.

And as for government entities, just remember that they're dependent on the private sector's success. 

If our U.S. based companies aren't competitive with others in the world, sales will weaken. When sales decline, profits will disappear.  When profits disappear, jobs will, too. And tax receipts as well. 

Then the monopolistic non-free market based government jobs will be at risk, since they are paid for by the success of the private sector.

Without low costs and high quality offerings relative to competition, there will be no successful long term future--for J.C. Penney-- or for the U.S. private sector.

And that's true regardless of how the progressive politicians, aligned union leaders and many "middle class" workers want to spin the story about a certain Kansas City steel company that failed

Customers will always buy where they believe they will get the best deal---the most value for their money. If companies don't provide that, someone else will.

Some will win and some will lose. That's competition.

For companies in market based economies, that means that a relentless effort to lower costs relative to competition is not just a good idea. 

It's a fundamental prerequisite to staying in the game.

And companies not in the game won't be hiring people, making sales, creating profits, paying taxes or staying in business.

Thanks. Bob.