Article Link – Penney’s Pricing Strategy takes a Toll on Sales
Ron Johnson’s bet on JCP’s new retail strategy will not come without its costs. Analysts on Wall Street are expecting JCP’s revenues to drop by “seven percent this fiscal year”. This is worse than the previously forecasted two percent drop because analysts believe “shoppers accustomed to seeing big discounts [will] go to rivals like Macy’s Inc.”. Same-store sales are expected to drop nine percent – lower than the four percent drop that was originally anticipated.
Penney’s new strategy is simple – three tiers:
- “Everyday” prices that are 40% lower than what they were charging a year ago;
- Month-long sales on select items; and
- Clearance events during the first and third Friday of each month (to coincide with employee payroll distributions)
Though the street expects dire consequences for JCP’s stock in the short term, it also believes that Ron Johnson’s plan will pan out in the longer term by eliminating “unprofitable promotions and [improving] its profit margins overall”.
If successful, this will be a major change in retailing because suddenly the promotional activity will decrease and other retailers will also have to find ways to attract customers… but this is going to take time.
– Walter Loeb, New York-based retail consultant
JCP is expected to offer more details on its performance when it reports its quarterly earnings results in May.
My View: This is a long-term bet, not a strategy that will yield postive returns in the next six to 12 months. Ron Johnson is not trying to change his strategy – he is trying to change the rules of the retail game. His bet is riding on a revamp of the entire retail experience.
Disclaimer: I do not own, or plan to buy any JCP stock in the next 48 hours.
Lessons in Luxury 
Nice post, Edmund! I’ve also read that consumers are confused by the pricing: when is an item on sale? How long is it on sale? As you mentioned before: consumers are too smart to pay full price, so I like the fact that JCPenney decided to eliminate some of deep discounting and promotional tactics However, psychologically, there’s a huge portion of JCPenney’s target market that love to brag about the great deal they got with a coupon/promotion. Consumers love to tell others how much money they saved and how they worked the system to save X-amount of money. It should be interesting to see how the new pricing strategy works for JCPenney.
Kurt,
The negative impact of consumer psychological expectations are what I believe will really hurt JCP’s year-end results. However, I think Mr. Johnson is trying to aiming to more than just change the performance of JCP. Like his former boss, Steve Jobs, he is trying to make a dent in the universe by changing the way the retail business works – especially the retail experience.