If you read the news reports or what J C Penney’s new CEO Ron Johnson said at a recent interview and you came away saying to yourself “WOW, the retailer is adopting a whole new pricing strategy, the every day low pricing”, you could not be faulted. But you would have missed the real story. JCP is in trouble because fewer customers are coming to its stores, and when they come their purchases are smaller. That is the story of many retailers during this recession and now slow economic recovery. But JCP has not participated in the recovery as well as some of its competitors. Meaning it isn’t just the poor economy but rather some other things have changed and the retailer needs to adapt.
Retailers must bring people to stores first and then have them buy at the store. Prices are absolutely crucial for the customer to spend her dollars at the store. Too high a price relative to competitors and the customer walks out faster than she came in. And that is why JCP insists that its prices now will be 40% lower than what “regular” prices were in the past. So, the customer will pay close to what they paid in the past when the stores ran sales or promotions. Will it be lower than all competitors? Probably not, but then once you are in the store you might decide not to walk out unless the price was so high that a trip to another store would be worth the trouble. But will the new price be attractive enough to get customers to JCP in the first place?
And here is where Mr. Johnson is hoping to score one by going for “something old, something new, something borrowed…”. He is borrowing from his tenure as Senior VP of Retail Operations at Apple. People are attracted to Apple stores not because of low prices but because of an experience that is unique.* And Mr. Johnson hopes to create a unique experience with his Town Square and specialty shops. This is smart because it gets away from using price as the main tool to drive store traffic. And competitors can’t match quickly or completely. But will customers value this experience? Don’t know. We have to see the concept at work and see the execution. So it remains a challenge for JCP management but one that will pay off big if done right. I say that because not only must customers value the experience but also JCP must create it at a cost that makes it more profitable than periodic sales to attract customers. Yes, it is new to JCP. But as an idea it is old. Professor Lal of Harvard Business School and I made the point back in 1997 that Every Day Low Pricing (EDLP) can be a smart positioning strategy. JCP’s is a positioning strategy because just as customer experience at Apple stores makes them unique and different from competitors the new format of JCP is meant to show it in a different, and more exciting light, than competition. That should drive store traffic. I think Mr. Johnson’s action carries some risk but one that I deem worth taking and whose outcome I will watch with anticipation.
1 comment:
It was really interesting to see my undergraduate students debate over the J.C.Penney re-positioning issue. Given that it was only their 3rd week into the semester, I was impressed when the "loyal customers" of J.C.Penney pointed out that they would feel less motivated to go into their store than before, more suspicious of their product quality, and overall would just feel bad that the store image would be closer to WalMart. Those who do not frequent J.C.Penney, however, said they would be more willing to check it out, whenever they want to or whenever they need something, due to the new strategy. In the end both sides agree that whether this is a smart move for JCPenney is yet to be seen.
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