When attempting to navigate the rocky road that is department store retailing, maintaining status quo is not a viable strategy. The department store sector has been challenged for years by greater merchandise assortments of specialty stores and lower prices of mass merchandise discounters. One company caught in the fight for relevance has been JC Penney. Sales in 2010 were $17.8 billion, down from $19.9 billion in 2006. In addition to declining sales, the company faced a brand image problem as it was perceived as old and stale.
The response to the challenges faced by JC Penney was laid out this week by new CEO Ron Johnson, an Apple disciple. The boldest strategy change is a radical shift in pricing and promotion. The company is ditching the traditional high-low pricing model. Instead of frequent sales and discounts, a three-tier pricing strategy will be used. Products will be at an everyday low price, monthly values, and best price Fridays on first and third Fridays each month. Analysis of transactions revealed that only one in 500 items was sold at regular price, so the move to streamline the dizzying number of promotions (nearly 600 a year) to a more straightforward pricing approach is logical.
Let’s jump to the most important question: Will this strategy work for JC Penney? The key to its success will be convincing shoppers that the value-based pricing approach is better for them than sales featuring hot prices and coupon offers for additional discounts. A rational analysis of the pricing approaches would point to value pricing as a better deal for buyers. However, we do not always make rational buying decisions. The psychology of a sale suggests to shoppers that a bargain may be realized when a product’s price is temporarily reduced. Add an incentive like a coupon on top of the sale price, and buyers have been trained to expect value delivered in this way from retailers.
JC Penney desperately seeks to carve out a distinctive brand position. If it cannot position through products, service, or brand image, perhaps price is the final frontier. If this strategy succeeds, JC Penney can re-establish its relevance. JCP (as it is branded via its new logo) must deliver a great shopping experience to go along with its simplified pricing. If it succeeds, JCP shoppers may just be singing “It’s the end of the sale as we know it, and I feel fine.”