The JC Penney Board of Directors fired CEO Ron Johnson yesterday after a year and a half of deteriorating results. The consensus during that time was that Mr. Johnson’s pricing strategy was a disaster. For me that is too simplistic an answer; and anytime we settle on a quick simplistic answer in pricing, we run the risk of making things worse or missing opportunities. JC Penney’s results were clearly poor, but there are many reasons for that, not just pricing strategy.
JC Penney’s stock price is about 1/3 of where it was 5 years ago, and it is slightly lower than the price 10 years ago. In the 5 years prior to hiring Mr. Johnson, JCP’s total revenue had declined and their stock price had dropped more than 50%, while during that same period competitors Kohls and Macys saw their stocks drop by only 13% and 20%. So, JCP was already struggling before Ron Johnson changed pricing strategies.
When we was hired, Mr. Johnson concluded that the Penney stores were tired and their merchandise lineup was stale. He also concluded that the JCP customers had been trained to wait for sales and coupons, and they seldom paid full price. I generally agreed with all those assessments. I am not an expert in store design or clothing and household product merchandising, but there was nothing about the stores or anything about their product lineup that made JCP a destination store for me. In addition, I received JCP flyers and catalogs in the mail, and coupons in the newspaper all featuring some price promotions; so although I have not seen the data, I am not surprised to learn customers primarily buy sale items.
I would like to focus on Mr. Johnson’s plan to improve the pricing structure, and let others write about store design and product selection. My first observation is the JCP pricing strategy was generally aligned with their business strategy. By that I mean they were trying to expand the target customer groups beyond just the price-sensitive customer to include customers who valued the store experience and wanted brands with a little more cachet. Their new strategy was not to compete on price, but rather the shopping experience and the better brands. Continuing their old pricing strategy of frequent promotional discounts and sales could have detracted from the message. Having said that, it is not clear that Mr. Johnson and his team contemplated that many of the existing JCP customers would always be price sensitive, and if successful the new business strategy could result in a different customer base more so than an expanded customer base.
The new Fair and Square Every Day pricing strategy could have enabled JCP to differentiate prices to different customer segments. For example, if certain stores were historically more price sensitive than others and less concerned with brands, the merchandising mix could be adjusted so that more of the Best Price (clearance) products were available in those stores. In addition, from the online activity and from the loyalty program, JCP should have been able to identify those customers who had decreased shopping at Penney, and sent them ads or coupons for the brands they had previously been buying. The point would be to maintain the business of the existing customers without sending the wrong price signals to the brand and store-experience conscious customers.
“How will existing customers be affected and how are they likely to react to any price changes?” is an important question to ask in any change of pricing strategy. Unfortunately we can tell from the sales numbers that existing customers did not like the new JCP pricing structure. Although Mr. Johnson said the average price customers pay would not increase under the three-pronged pricing structure (Every Day, Month-long Value, and Best Price), I am skeptical of that. I am convinced that part of the objective was appropriately to improve their overall margins. It appears that many customers were also skeptical of Mr. Johnson’s claim and left. It is clear that over the years, JCP had a large segment of the customer base that was comprised of price shoppers, and that segment interpreted that prices were going up.
This is an area where I would have done things differently. It is clear to me that customers react more to big price changes (think Netflix), and gradual implementation that reduced but did not eliminate some sales would have lessened the shock, and perhaps lessened JCP’s customer defection. Mr. Johnson and his team could also have tested the changes in certain markets before rolling out the new pricing structure nationally. Had they piloted the program, they would have captured critical information about what worked and what did not, and perhaps they could have made some adjustments elsewhere. Instead, the existing JCP customers perceived that prices would be going up substantially and they began to look for alternatives elsewhere, and that behavior happened quickly throughout the country.
Another benefit of a pilot as opposed to a complete implementation would have been more time to attract new customers. During the slower implementation, more stores could have been upgraded and new brands could have been added which was always going to be the key to attracting new customers. Unfortunately under the rapid implementation, not enough of the stores had been updated to provide the new shopping experience, and there were not enough new brands to attract new less price-sensitive customers to fill the holes of departing customers.
I don’t fault Ron Johnson and the JCP management team for trying a new strategy. The approach of his predecessor was delivering declining sales and a shrinking stock price and called out for change. New models occur in business all the time, and it’s possible that with a different implementation the new pricing could have succeeded. However, Mr. Johnson bet the farm with a big bold bet and no safety net. If it had worked, the board and investors would have applauded. But similar to most examples of significant pricing strategy changes in a short time period, Mr. Johnson lost the bet and his job.
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