Penney’s Pricing Problems
- by Anand Raghavan
It takes a brave soul to try and shake up the department store business. More so if the company has a history of seeing ups and downs in business cycles for 110 years and still staying afloat. One would think that creating the most profitable retail business in country (per square foot) would qualify as a solid credential. And so it was that seven months ago, Ron Johnson, the CEO of J.C. Penney, undertook a massive pricing revamp to convert J.C. Penney to an every-day low-prices (EDLP) vendor rather than a high-low (HILO) vendor with multiple sales through the months.
If you have the time, watching the launch video of this announcement is pretty fascinating. Ron Johnson was joined on stage by Michael Francis, who had performed well as the marketing guru at Target. In 90 minutes, they laid out a detailed plan of why their current strategy was flawed, why the consumer still on average paid the same price over the years even though the list price in retail for apparel kept going up, and how they want to help the consumer. Ron also spoke at length about adding higher value brands in the store and got Martha Stewart to make a quick appearance. Michael Francis spoke about the need to change their logo and branding and launched their new ad campaign, Ellen DeGeneres in tow.
What is the result? The stock is down 35 percent since the start of the year. Michael Francis left in a hurry as announced last month. The word “sale” is making its way back into the J.C. Penney marketing materials, despite being flogged mercilessly a scant seven months ago at the launch event.
What happened here? Many theories abound, centered around the basic premise that customers want to see that they are getting value out of their purchases and crave sales. J.C. Penney needed to communicate this better through an honest and direct marketing campaign and not the usual feel-good bland fluff. Maybe that explains Michael’s hasty exit. This reminds me of the early work of David Bell, Wharton’s Xinmei Zhang and Yongge Dai Professor and professor of marketing, around the trade-offs between EDLP pricing and HILO pricing. Though this was done in a grocery store context, his work tried to point out that among large-basket shoppers (those that buy several different things at the store), having an EDLP messaging would allow the retailer to achieve the same average price per item as a HILO store but at the same time increase its total revenues since now it is able to attract these larger basket shoppers through the EDLP messaging.
This works well in stores like Walmart that have managed to convince customers of its low-price street-cred over the years. The question is whether a department store like J.C. Penney can accomplish the same. More importantly, can it accomplish the same when not being necessarily perceived as a low-price leader? How does a loss-averse customer whose behavior has been conditioned by years of HILO strategy in the department store world deal with this new signaling from a vendor that wishes to differentiate itself from the crowd? If Ron was able to invent the Apple retail experience and silence the naysayers, can he work magic a second time in a much more price sensitive domain with a lot less differentiated market? Only time can tell. But one’s got to give it to the man for trying to keep the business honest through what appeared to be a wonderful strategy at talking straight to the consumer and wishing on their behalf that the era of random price markups was over. Alas, that remains to be seen.