I own shares of J.C. Penney Company, Inc. (NYSE:JCP), but after Wednesday’s news, I’m seriously considering selling my stake. According to Reuters, the retailer will increase prices on its clothes, only to later mark them down — a strategy the company used to employ before CEO Ron Johnson took the helm in 2011. Evidently, management believes this strategy will help lure discouraged shoppers back to its stores.
Ron Johnson’s turnaround strategy has floundered
It’s no secret that Ron Johnson has been having a difficult time at J.C. Penney. On Feb. 27, the company reported a quarter some have characterized as the worst in retail history. Year-over-year, same-store sales dropped by nearly a third, while the company posted a loss of almost $1 billion.
Many have blamed J.C. Penney Company, Inc. (NYSE:JCP)’s problems on Johnson’s decision to embrace a strategy of “everyday low prices” — consistent, low pricing; no coupons or discounts.
Most retailers use discounting as a way to bring customers into the store. (Just yesterday, I received an email from Express, Inc. (NYSE:EXPR) urging me to come into the store, informing me that everything had been marked down by 40%.) By eliminating discounting, the impetus to shop is likewise eliminated.
Can everyday low pricing work?
That said, everyday low pricing can work: Wal-Mart Stores, Inc. (NYSE:WMT) is proof of that. In fact, the words “everyday low prices” are practically synonymous with the company, the world’s largest retailer. If it works for Wal-Mart, why can’t it work for J.C. Penney Company, Inc. (NYSE:JCP)?
Some might argue that Wal-Mart is primarily a grocery store chain with a large selection of other goods, and that when it comes to selling clothes, everyday low pricing can’t work. While it’s true Wal-Mart does rely primarily on grocery sales, the company does have a solid apparel operation. What’s more, on the company’s last earnings call, management cited apparel as a growth area.
Of course, Wal-Mart has stuck to this strategy for years. Consumers feel confident that when they go into a Wal-Mart, they truly are getting the lowest prices — no coupons necessary. Building that sort of image takes time.
Today, virtually no one questions Wal-Mart’s pricing strategy, even bears. Instead, Wal-Mart is seen as a direct play on the consumer: when JPMorgan downgraded Wal-Mart last month, analysts cited the payroll tax increase — not the company’s prices as reasons to be bearish on the stock.