Thursday, July 26, 2012

Yet Another J.C. Penney Update ... Another New Pricing Move

This post will further update our June 19 post (J.C. Penney Update ... More Turmoil) which updated our earlier May 16 post (J.C. Penney's Woes and the Need for a Cost Competitive America).

It's an interesting ongoing story and provides a clear contrast with the lack of a sense of urgency at government monopolistic entities that don't have to compete to survive. Change is ever present these days at J.C. Penney as newly installed management tries to turn a loser into a winner. The battle isn't over, and it's an uphill struggle for sure.

Penney Tweaks Price Strategy Yet Again says this about the latest maneuver at the company:

"J.C. Penney Co. is preparing to make deep price cuts across much of its merchandise, people familiar with the matter said, a significant shift in tactics for Chief Executive Ron Johnson as he tries to draw shoppers back into his stores.

Under the new policy, which kicks off in August, Penney will get rid of monthlong specials that cut prices of select items by 20% to 29% and instead will permanently mark down a large amount of merchandise in stores by similar amounts, the people said.

The move is an acknowledgment that the department store chain needs deeper price cuts to stem a dive in sales caused by the company ending its ceaseless sales and coupons. The strategy caused revenue in the company's fiscal first quarter to fall by one fifth. Penney executives expect second-quarter figures to be equally grim, according to people familiar with the matter.

It is also an attempt to clarify for consumers what Penney executives acknowledge has been a confusing pricing strategy. After the change, Penney will offer just two options: everyday low prices and clearance sales on certain items.

The company has repeatedly said it would take years to turn around the chain, but investors aren't showing much patience. Despite a small uptick on Wednesday, the stock is down nearly 40% since the start of the calendar year.

Penney's suppliers, meanwhile, are complaining that the new strategy has crushed their sales....

Mr. Johnson's plan for the 1,100-store chain was hailed when he laid out the details in January. The former Apple Inc. retail chief said Penney would eliminate the sales that had caused nearly three-quarters of its products to be sold at discounts of 50% or more, and laid out a vision of a department store full of vendor-branded and themed boutiques.

 The first of those boutiques debuted on Monday, when Levi's, Arizona and iJeans by Buffalo showed off their wares at Penney's Manhattan store. Expanding on that idea, Penney on Wednesday announced a partnership with Canadian retailer Joe Fresh to put that brand of boutique in 700 of its department stores. . . .

Vendors were hopeful the redesigned stores would boost their business. But Penney's customer traffic slowed and sales sank after the promotions dried up, leading to some caution among vendors considering opening boutiques. . . .

The new, deeper price cuts reflect the first major adjustment of Mr. Johnson's new pricing policy since it was rolled out in February. That policy set three tiers for pricing: Everyday low prices that were 40% lower than Penney's starting prices last year, "monthlong values" where certain items were put on an even deeper discount for an entire month, and "Best Price Fridays" that were clearance days starting on two Fridays a month.

The cuts that will take place in August will affect up to 20% of the goods in Penney's stores and will leave their prices as much as a third lower than the current everyday low prices, the people said.

In an interview last month, Mr. Johnson conceded that customers were confused about terms it used for its new pricing, but said the company was adamant about not moving back to coupons or sales."

My Take

Everyday low prices work when customers frequent the stores regularly and are confident that they will get low prices. That's the Wal-Mart "brand" strategy and accompanying low cost business model, of course. They save advertising money and put the savings in their prices. They also attract customers by offering groceries, now accounting for roughly 50% of their sales. At Wal-Mart there are lots of everyday visitors for everyday prices, in other words.

However, J.C. Penney does not enjoy the reputation for low prices that have worked so successfully for Wal-Mart. And its customers don't come as often as Wal-Mart's. Penney customers are used to shopping when heavily advertised items are on sale.

Further, Wal-Mart has a low cost mentality throughout its organization. Whether Penney will be able to fit into that "low cost and proud of it" mold is very much an open question.

Adopting an everyday price strategy is one thing; the ability to execute that strategy successfully across the company and each and every day is quite another thing. In the end, it's up to the customers. They'll decide the outcome at Penney's, as customers always do wherever free markets rule.

I've long been of the view that a poor strategy well executed will defeat a good strategy poorly executed. So is Penney's strategy in fact executable? Will it be well executed? Will the customers buy into it? All interesting questions.

In time we'll be provided the answers to those questions. For now, let's just watch from the distant sidelines.

That said, J.C. Penney is an interesting case study that we can watch as it unfolds in real time.

In the end, it's all about the customers and what they decide to do.

Stay tuned. Bob.

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