Associated Press, Published July 26 2012
JC Penney tweaks pricing strategy again
Just six months after the mid-priced department store chain got rid of the hundreds of sales it offered each year in favor of everyday lower pricing, it is reversing course.
Penney on Feb. 1 began using a three-tier pricing approach that called for consistently lower daily prices, month-long sales and periodic discounts on merchandise throughout the year. But starting Aug. 1, Penney will eliminate one of the monthly sales and bring back the word “clearance.” Penney also plans to tweak its advertising to better communicate the pricing plan to customers.
The moves come at a time when shoppers — and investors — have voiced confusion over Penney's pricing strategy, which was spearheaded by CEO Ron Johnson when he took the helm in November. In May, Penney's stock plunged nearly 20 percent in its biggest decline in four decades after the retailer posted a larger-than-expected quarterly loss and a 20-percent drop in revenue on poor reception from shoppers for its pricing strategy.
The change also calls into question how patient Main Street and Wall Street will be with Johnson, a long-time retail executive who has been lauded for being the mastermind behind the success of Apple's retail stores and Target's cheap-chic strategy. The pricing plan is presenting a challenge for Johnson because it's turning out to be a tough sale to shoppers who have come to expect deep discounts and investors who are looking for Penney to turnaround its business quickly.
Brian Sozzi, chief equities analyst for research firm NBG Productions, said since Johnson's strategy is long-term, investors likely will give him at least until 2013 to prove himself.
“With a visionary type of strategy like this you have to take a lot of painful medicine upfront,” he said, adding that Johnson “is essentially trying to change the consumer mindset.”
Johnson, who asked investors to be patient during a meeting with them in May, said he's confident that the pricing strategy will work. Johnson has acknowledged that Penney has a long way to go to convince shoppers that they don't have to wait for sales to get low prices at Penney, and he said this week that Penney's first-quarter sales drop is “the price we're paying to get integrity back.”
“We thought simplifying 590 unique sale events into three types of pricing would be easier, but it turns out ... customers and others found the pricing a little confusing,” he said. “Now we're going from 590 to 3 to 1: The first price is the right price.”
Under the new system, Penney is keeping “Every Day” low prices that are consistently 40 percent lower than regular prices before the company eliminated sales. That level of pricing has account for about 70 percent of sales since the company began the new strategy, Penney said
It also will keep its periodic discounting events, which make up 15 percent of sales, but increase their frequency to every Friday. The company will also change the name of them from “Best Price” to “Clearance.” And Penney will get rid of “Month Long” deals, which account for 15 percent of sales.
Johnson said the new approach should make the pricing plan easier for customers to understand.
“We thought: ‘Why are we trying to teach customers new language to shop?’” he said. “We're just trying to be straightforward.”
To go along with the new pricing, the company will tweak its ads. That will include inserts in newspapers every Friday during the back-to-school season that will highlight specific products like jeans. A TV ad will tout free haircuts that the stores will offer students during the back-to-school season.
The new ads are in stark contrast to the spots that Penney rolled out at first to introduce its new pricing plan. The “fair and square” brand campaign featured TV ads with dogs, kids and bright colors — but little explanation of Penney's pricing.
In one TV spot, for instance, a dog continuously jumps through a hula hoop that a young girl is holding. The text reads: “No more jumping through hoops. No coupon clipping. No door busting. Just great prices from the start.”
“In some ways marketing during the first six months entertained versus educated,” Johnson said. Now, “the most important thing is to educate consumers on the price changes and make sure the core customer understands J.C. Penney still has products they love, at exceptional value, every day.”
Penney, based in Plano, Texas, is hoping the tweaks to its pricing plan and advertising will help stem growing concern about whether Johnson's plan will help the retailer turn around its business.
The first sign that Penney's pricing strategy wasn't resonating with customers came in May when Macy's CFO Karen Hoguet told analysts that sales were rising at her company's stores that share malls with Penney stores.
A week later, J.C. Penney Co. reported that it lost $163 million, or 75 cents a share, in the three months ended April 28, compared with a profit of $64 million, or 28 cents a share, a year earlier. Revenue dropped 20 percent to $3.15 billion for the quarter as customer traffic slipped 10 percent. Meanwhile, revenue at stores open at least a year — a comparison used to measure a retailer's health — fell 18.9 percent. That's much steeper than the 11.4 percent drop Wall Street was expecting.
A day after Penney reported the disappointing results, its stock fell 19.7 percent, or $6.57, to close at $26.75. That's the largest percentage drop for the company since at least January 1972, when FactSet's daily stock price records begin.
Investors, who initially sent Penney shares soaring 24 percent to about $43 after Johnson announced the pricing plan in late January, since have pushed them down about 37 percent since the beginning of the year. On Thursday, shares rose 21 cents to close at $22.21.
And earlier this month, Standard & Poor's Ratings Services lowered the retailer's credit rating into junk status, saying changes have yet to take hold
J.C. Penney reports second-quarter results Aug. 10.
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