Penney’s Business Model Experiment Goes Splat

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J.C. Penney just reported a bigger-than-expected loss and rapidly declining sales, as customers vote with their wallets and revolt against the new pricing plan that gets rid of hundreds of sales in favor of every day lower prices. Only six months ago, Penney’s launched this bold new business model. In light of this recent announcement, is it time to throw in the towel?

It seems like Penney’s strategy is one that should have worked- cut out the “BS,” treat the customer like an adult and price everything fairly every day. However, Penney’s poor results show how difficult it is for a company to change the way shoppers behave. In a tough economy, shoppers are still looking for racks of “70 percent off” sales signs and coupons. Apparently, the good feeling of an apparent deep discount works better than fair everyday pricing.

Penny's sales slide

Should Penney’s do an about-face and go back to the old system? For now, they are staying with the plan. At what point does CEO Ron Johnson change course? From the outside looking in, it appears that the Kohl’s strategy of everyday deep discounts (which everyone knows are not really discounts) works better than everyday low prices.

Is the issue that Penney’s is fighting basic human psychology? Does today’s consumer so value a good deal that they cannot bring themselves to buy something not on sale? Here are some options for Penney’s:

  1. Stay the course. Ron Johnson was a golden boy at Apple. Let’s see what his plan can do over time.
  2. About face. Penney’s needed a facial, not a face lift. Clean up the stores, paint the walls, get a new look and go back to the old pricing strategy.
  3. Overboard correction. Give consumers what they really want- great deals. Adopt the Shoe Carnival strategy of Monty Hall shopping. Have a Friday clothing auction or a spin the wheel for 99% off a random item.
  4. Best Buy strategy. Old-time mall big boxes are all getting killed. Stores are too big. Overhead is too high. Get out of the malls. Cut store sizes in half. Effectively, become Kohl’s Version 2.
  5. Go online only. This is probably not the best option, but it is certainly worthy of consideration.
  6. Costco strategy. Consumers want a great deal, fine. Members only can shop at Penny’s and the deals are spectacular.
  7. Stop being so bland. Is there any item for which you can say, “I HAVE to go to Penney’s for XYZ?” Nope! Some hard core product innovation would probably do more good than pricing tricks.

The tougher issue at hand for CEO Johnson may be Penney’s irrelevance. Perhaps the pricing plan did not work because shoppers have no real reason to shop at Penney’s, period. For all Sears’ problems, they have some destination brands like Craftsman, Land’s End, and Kenmore. Penney’s does not have any magnetic brands or must-have items pulling consumers into their stores.

What do you think Penney’s should do with their business model? Do you think Penney’s can compete in the tough retail marketplace?

2 COMMENTS

  1. Jim, count me as a fan rooting for JCP’s CEO Ron Johnson to succeed, because he’s trying something bold.

    The pricing change was just one element in a new business model. Perhaps he should have waited until other changes were more visible, like updated stores or unique merchandise.

    But from what I gather, Johnson is trying to re-invent JCP into something distinctive, and he says it will take 4 years. In the early goings, customers used to the heavy discounting approach will go elsewhere, so it’s not surprising to see sales drop.

    The $64K question is whether the new business model will woo back enough customers to over time. For that, we’ll all have to wait and see. One or two quarters is not enough, it will likely take 1-2 years.

    I think you’re right that a huge challenge will be overcoming consumer psychology of getting a “deal” vs. everyday low price. JCP is not Wal-Mart, but doesn’t want to be another Kohl’s, either. My guess is Johnson wants to build a brand more like Target. Clearly there’s more to Target than pricing.

    More thoughts in my recent post here: Why I'm pulling for CEO Ron Johnson to transform the J.C. Penney customer experience.

  2. Bob

    Thanks for the good thoughts. It’s tough to think of a 100 year old legendary institution like Penney’s having so many issues. I am with you that trying anything bold is better than the death by papercuts some choose.

    Much better to go down swinging, right. JC Penney’s has a lot of cards in their hand. Let’s hope they play them well.

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