JC Penney’s structural shift

The company, which had long survived by offering hundreds of sales and coupon promotions throughout the year, suddenly decided to stop them all and instead switch to an everyday low pricing structure. Not surprisingly, this new strategy has not been well received by JC Penney’s core consumer group, deal shoppers.

The company’s new CEO, Ron Johnson, originally announced the revamped strategy about a month before the changes took effect. Both shareholders and market analysts were initially optimistic about the proposed changes, largely due to Johnson’s background. He was instrumental in helping Target, another retail giant, to develop its corporate branding theme of offering style, along with savings. During his time at Apple, Johnson also came up with the idea of creating retail stores specifically for selling Apple products, which have been extremely profitable. Naturally, investors were convinced that Johnson could turn JC Penney around.

A prime concern is the seemingly complicated pricing structure, which may be turning off customers. Items are marked with as final price, a monthly special or an everyday price. Blue-tagged items are marked down the most, but are only available on two Fridays per month; monthly specials get a different coloured tag each month, while red tags are for items in the everyday pricing plan.

The market audience for JC Penney is very different from that for Apple products. Most JC Penney shoppers are big discount hunters and are willing to clip coupons. Speaking about the mindset of the typical American bargain shopper, a consumer research specialist said, “Consumers want deals and they’re willing to wait for them. When you train customers to shop at big discounts, that customer is not going to change.”

The abrupt departure from offering sales and coupons by mail or email literally turned off many of JC Penney’s consumers. The company reported a big first quarter loss of $163m, overall revenue in stores is down nearly 19 percent and internet sales are down nearly 28 percent. Several economic experts directly point the finger at the new pricing plan; one HR consultant said that the steep decline in sales is most probably “a direct result of a huge combination of those changes. This was just too drastic of a step…coupons are a point of pride with many people”.

Speaking to investors, Johnson admitted there were issues, saying, “The transition has been tougher than we anticipated.” Company COO, Mike Kramer, was more blunt, calling coupons themselves a “drug” and adding, “We did not realise how deep some of the customers were into this. We have got to wean them off this.” Johnson’s overhaul plan for JC Penney is supposed to take four years. The question is whether he will be given that long to complete it.