JC Penney prices cause profit fall
Department store conglomerate JC Penney made headlines this week but not for a reason that any company would want: The department store chain reported quarterly results that were so shockingly bad, they might have been the worst numbers in retail history.
The reason for the company‚Äôs rapid decline is its recent implementation of the revolutionary pricing strategy known as ‚ÄúFair and Square Every Day.‚ÄĚ The brainchild of CEO and former Apple executive Ron Johnson, the strategy was designed to eliminate sales and focus on a rebranding of JC Penney as a quality brand that offered low prices every day.
Ultimately, however, the shift in strategy was detrimental to the company‚Äôs core consumer base and a poor decision. For the company to regain its former success and avoid bankruptcy, Johnson will most likely be forced to reevaluate JC Penny‚Äôs corporate priorities and company vision.
The once-beloved brand had been struggling for quite some time, but when retail guru Johnson was hired out of Apple‚Äôs top executive branch, it seemed that the tide was turning for JC Penney‚Äôs company image.
‚Äú[Johnson] immediately set about to reorganize the stores, and imported Apple concepts, most notably a ‚Äėno discounting‚Äô policy geared around convincing customers that the everyday price is a great price,‚ÄĚ said Matthew Yglesias, a business analyst from Slate.
Yet almost immediately, this strategy proved to be ineffective. Sales dropped a staggering 32 percent, the worst in the company‚Äôs 111-year history. Ironically, in order to make up for its loss in inventory, Johnson was forced to take JC Penney back to the tactic that made it popular: sales.
‚ÄúSince merchandise was not selling, [JC¬† Penney] had to offer bargain basement clearance prices to move inventory, thus reducing gross margin. Over the last year the best deals in retail have likely been at J.C. Penney‚Äôs clearance rack,‚ÄĚ wrote Rafi Mohammed of the Harvard Business Review.
Most analysts agree that the mistake in JC Penney‚Äôs revamped image was a misunderstanding of its consumer base. By eliminating sales, Johnson‚Äôs strategy unintentionally alienated his client bases and changed the company‚Äôs core values. Johnson might be a genius, but he‚Äôs a genius at building shopping experiences for young, hip, upwardly mobile professionals. JC Penney‚Äôs target audience is older, less hip, lower-middle class moms and kids,‚ÄĚ writes Derek Thompson of The Atlantic.
Accordingly, one of the key features to JC Penney‚Äôs ‚Äúrevamped‚ÄĚ image was the inclusion of free Wi-Fi at each of the store locations. While youths and working professionals might appreciate the value of such an addition, parents and lower-income individuals are unlikely to take advantage of such a feature.
‚ÄúInstead of building on what the people who like JCPenney liked about JCPenney, he undertook a series of essentially arbitrary changes that alienated some without drawing anyone new in,‚ÄĚ Yglesias argued.
Such a change is uncommon and unnecessary in retail locations and outlets in the industry. As Yglesias noted,¬† ‚ÄúMacy‚Äôs surprised analysts on Tuesday with a 3.9 percent increase in same-store sales. It‚Äôs not the coolest company around, they‚Äôre not reinventing the retail experience, and there‚Äôs no Wi-Fi. But it seems to be working.‚ÄĚ
The only thing left to analyze is what approach the company will employ as it heads into another tough economic climate. Many predict the company will be forced to consider bankruptcy. ‚ÄúEither it further revises its pricing strategy to include sales on national brands or it heads to bankruptcy court,‚ÄĚ Mohammed wrote.
Still, others expressed hope that the company might be able to recover. ‚ÄúWe‚Äôll know by the end of this year,‚ÄĚ said activist hedge fund worker Bill Ackman. ‚ÄúThe company won‚Äôt pour billions into a strategy that‚Äôs not working.‚ÄĚ
No matter what the future of JC Penney turns out to be, one thing is certain: the company desperately needs to reevaluate their corporate vision and priorities, perhaps now more than ever. The elimination of sales, a major mainstay of the brand, was a risky decision at best and was the opposite image of the company‚Äôs core clientele.
In order to stage a truly effective comeback, JC Penney will need to rebuild the company image in the same light as its consumers and go back to the roots of what rendered it a success. Based on their recent financial history, it seems as though JC Penney will definitely have a sale in the near future.
Payal Mukerji is a junior majoring in business administration. Her column ‚ÄúRisky Business‚ÄĚ runs Tuesdays.