News this week that J.C. Penney (NYSE: JCP) president Mike Francis is resigning “effective immediately” will leave new CEO Ron Johnson in control of J.C. Penney’s marketing and merchandising. Last year Johnson came to J.C. Penney to execute a turnaround, after developing the successful Apple (NASDAQ: AAPL) retail stores. With previous experience bringing exclusive designer lines to Target (NYSE: TGT), he seemed a natural fit.
But J.C. Penney is not like Apple; or even like fellow discount retailers Target or Costco (NASDAQ: COST). Since February, it has shed about half of its value trying to be. Johnson’s strategy seems to hinge on being able to change J.C. Penney’s brand overnight, or at least before alienating its core customer base.
Under Johnson, J.C. Penney has rolled out a new logo, implemented a “store within a store” concept, and drastically changed their pricing strategy. That last move has attracted the most criticism. Announced in a series of commercials that were themselves widely found to be unclear, J.C. Penny has declared the array of coupons, sales, and deals it used to rely on to be too confusing to continue. Instead, everything will just be one low price, called “fair and square,” except for some things that are sold at a discounted “month long value,” which isn’t a sale because it’s all month long, and then some other discounts that take place on the first and third Fridays of each month, but also aren’t sales, just better values, and all of these things are clearly differentiated with red, plum, or blue tags, respectively. A victory for clarity and simplicity!
Shoppers reacted negatively. Despite broad price reductions that ate into gross margins, customers surveyed actually felt that prices had increased, according to a Morgan Stanley analyst. Foot traffic, which was supposed to improve due to the new prices, actually fell 10%, and sales dropped 20%. Ron Johnson has acknowledged some missteps, calling the company’s communication strategy “kind of confusing” and pledging to reintroduce the word “sale” to the firm’s vocabulary. He remains committed, however, to the fundamental strategy of weaning customers off of coupons and getting them to support his “everyday low price” campaign. By doing so, J.C. Penney wastes an advantage that its brand does confer, and counts on a branding power and loyalty that it doesn’t possess, hasn’t earned, and doesn’t look likely to gain.
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