Learning from JC Penney: Their Transparent Pricing Debacle (So Far)
As you are probably aware JC Penney, struggling to find a sustainable market position, hired a high powered Apple executive as CEO. He got rid of all their sales and started offering everyday low prices in an attempt to regain some customer attention and loyalty. Based on their recent earnings release, it’s not working, though I hope everybody would agree that this kind of dramatic positioning change can’t be expected to turn things around in a quarter or two.
Now, here comes a gentleman named Bob Sullivan who looks at some research that might explain why it isn’t working and, worse, probably won’t work. Here’s a link to the article. I strongly suggest you read it.
Basically, the article says that we, as consumers, like complex pricing and believe, to paraphrase the article, that a pair of shoes from Macy’s at on sale at 25% off has to be a better deal than Penney’s everyday low price. It also says there are people who will spend hours to save $20 and people who will gladly fork over an extra $20 to get the hell out of the store, and you have to cater to both. Penney’s strategy does not.
If true, things don’t look good for Penney’s new strategy or its CEO’s job. It seems to me the same research, if true, is valid for any retailer no matter how small or how large and how many store fronts.
My conclusion after reading the article (which I hope you’ve done) is that if you believe the research it references, then running a retail store or stores is inevitably more complex than it used to be. By a lot. And retailers don’t have any choice but to participate in this competition with consumers over information and pricing because, strangely enough, consumers want it that way.
Obviously this has something to do with the internet, wireless devices, and the instant availability of information. But it’s more complex and longer term than that.
It wasn’t really that long ago where there were just a few retailers, a lot fewer products, and a lot fewer choices to make. Sales were maybe occasional. Go back just a little earlier and your only choice was to order it from the Sears Roebuck catalog and wait for it to be delivered in a month or two by stagecoach.
Product research was prohibitively time consuming if it was even possible and there were few products to compare. We’ve come a long way, I guess.
Now, a retailer apparently needs to create complexity in pricing. Customers, Mr. Sullivan says based on the research he references, prefer it.
Complexity in pricing creates complexity in retail management. One of the justifications for the changes at JC Penney was to eliminate all the cost this artificial complexity created. Think about the costs of having and tracking sales. Especially when you have to keep doing it, and doing it, and doing it just to keep the customers’ attention.
Here are some of the costs I can think of: designing, printing and running ads; changing store signs and layout to correspond to the sales, changing prices in your accounting system; keeping your sales staff informed; the impact on the sale of other products from putting certain ones on sale; coordinating with vendors. In addition, I’m sure there’s a certain friction from constant change that has a cost even if it doesn’t show up as a specific line item on your income statement.
I can think of two consequences to this. The first is that it’s even more reason to focus on gross margin dollars generated rather than gross margin percentage. That I think that way is not news to anybody who’s read my posts.
The second consequence (I’ll call it a hypothesis- I’m not quite sure of this one) is that perceived product differences may be more important than real ones except in the cases where the real ones are particularly significant. You’re trying to create differentiation in an environment where information moves at the speed of light (Okay, slightly less because we’re not operating in a vacuum, at least most of the time). If you wait to do that until there’s a real, fundamental, difference in the product you’re carrying, it won’t happen that often. Even when that difference appears, it won’t last long in our industry and it won’t be exclusive.
We’re kind of forced into what Mr. Sullivan calls “shrouding.” It sounds like the more we do it, the better off you are as a retailer.
Can it be that the only way to manage your store in a time of a rapid change is to try and change even faster? I hope not.
Hi Jeff. Thanks for sharing this valuable insight. I tried to consider how it would apply over here in Europe, where many markets (such as France) have legally imposed dates for going off-price. Short-term offers, limited in duration and value, are allowed, but no retailer in Paris (for example) can launch their Summer Clearance Sale before midnight on 26 June. Considering Bob Sullivan’s article, that means the benefit to retailers of reduced costs (one-off labelling, advertising, logistics, etc) and a level playing field for all. The surf shop on the beach has as much chance as the big box sports store in the mall. The downside is the impact on cash flow – more and more turnover is done in one month during the sales, so retailers don’t have a valuable tool to drive cash through the till in the other months. And as we know, cash flow is everything in retail. The benefit to the consumer is clear – they know the regular price, they know where it’s stocked, they’ve done their research, so go out and get a bargain – but not before 27 June. The price positioning and value structure of the store is clear. The consumer has a choice to buy now or wait till the sales. As long as the store can survive until then…
Hi Peter,
Thanks for talking about conditions in Europe a bit. It certainly does change the playing field some. And it reminds us of the law of unintended consequences. Whenever you take an action in a complex system, no matter how well meaning the action is, things happen you didn’t expect and couldn’t plan for. In your case, sounds like one of them is that the inability to discount before June 27 might put some retailers out of business. This is generally why I’m cautious about much government market interference. You just never know what’s going to happen no matter what the intent was.
Thanks for the comment,
J.