What JC Penney didn’t understand about the role of price in business models
Wizard of Oz protagonist Dorothy captures the shock of her post-tornado world in the memorable line, “Toto, I’ve a feeling we’re not in Kansas anymore.” Ex-Apple retail wizard Ron Johnson, now CEO of JC Penney (JCP), must be saying “I’m not in Cupertino, California [Apple’s headquarters] anymore” as he discovers the challenges of transforming his new employer’s retail stores.
The first head has already been chopped: merchandising and marketing leader Michael Francis left JCP after less than a year on the job. We’ll now see if Johnson, who created the “shabby chic” value promise at Target and the stellar shopping and learning experience at Apple, has the chops to fix a troubled company in a category with excess supply.
I thought Johnson had a great idea – reinvent the department store, which had offered wonderful shopping experiences when local high-end stores dominated the retail scene. An afternoon in Washington D.C’s Garfield’s or in Chicago’s Marshall Fields was a true pleasure. But that was before retail stores consolidated into national chains and now every large city offers the same chains, copycat merchandise and brands, and the same store experience.
Johnson’s vision was to transform JCP into Main Street — a collection of boutique-like stores within a store, built around compelling and differentiated brands with events and experiences to attract families and shoppers. (Best Buy, are you listening?) One way to pay for the in-store extras was to wean Penny’s off its endless “coupon-based discounting,” which is costly on all kinds of levels: high campaign costs, lower average selling prices and higher operations costs due to more variable demand, and constant re-pricing of merchandise.
Johnson and Francis’s mistake was to start the transformation process by changing pricing tactics. They largely eliminated day-long or weekend-long discounts, replacing them with month-long discounted pricing and significantly reducing shorter-term pricing promotions and advertising behind them.
This move was a mistake on two levels. First, they didn’t learn from history. Macy’s tried to eliminate intense coupons but no other chains followed their lead, so the tactic failed. Second, business model thinking should have informed the dynamic duo with Target roots that pricing changes are only effective if the customer perceives a difference in value.
All customers buy on value, which is the gap in their mind between benefits and costs. The benefits and costs can be tangible (price paid) or intangible (the emotional thrill of finding a deal). All that matters is what the customer thinks, not what the seller advertises. And customers’ value calculations need not be rationale. In fact, the calculation is often unconscious, a process to which we then add after-the-fact rationalizations.
When customers see no difference between JC Penney, Kohl’s, Walmart, Sears, and Target, for example, highest value is driven solely by price. Consumers interpreted the elimination of coupons and sales by JCP as meaning the stores were charging higher prices (even if they were not). That reduced traffic in the aisles. And since JCP did not change its merchandise or shopping experience, there was nothing to draw in new customers. Result? Revenue shortfalls.
Harvey Briggs, a creative marketing talent who writes the “My View From the Shore” blog, said it well, “Making their sales events a month long and promoting them less won’t suddenly have consumers breaking down the doors. If the advertising doesn’t make the cash register ring on the first weekend of the month, it won’t magically become effective on the last.”
Johnson needed to first change the offering. Create a compelling and hard-to-copy value promise to his target market and then align everything to deliver on that value promise. Since coupons are what currently draws people to shop, he needed to find a replacement “draw” that would be even more compelling. The opportunity is there since most women have grown to hate managing coupons and only do so to avoid being duped into paying a higher price than necessary.
I wonder what drew Johnson into revealing his entire store strategy publicly before experimenting with different store concepts in one location or even in a virtual world? Apple kept its new store under wraps until Johnson and CEO Steve Jobs felt the designed experience was just right. Perhaps Johnson’s past success created a belief that he could easily change everything about soft goods retail. What a mistake! Shoppers are too fickle to ever believe you can have the entire answer before you start a transformation. Johnson should have known that experimentation and learning is mandatory in today’s intensely competitive and commoditized retail environment.