Background on U.S. Department Stores and Background on J.C. Penney
Dr. Robert Tamilia (Marketing professor at the University of Quebec at Montreal) explains that the department store in America not only "…revolutionized the retail store," and the shopping experience, and the available of products and promotional techniques, the department store contributed in a major way to the evolution of "...hiring practices and inventory control procedures" (Tamilia, 2002, p. 3). Moreover, Tamilia writes that the department store was one of society's more "democratic institutions" and besides offering customer services that had previously been unheard of (restaurants, restrooms and reading rooms) the department store in America "…liberated women and gave women their rightful place in society."
In fact, the author continues, because of department stores, jobs became available for women that "opened career opportunities" in various professional fields and department stores "…changed society's values in accepting that women could go and shop on their own" (Tamilia, p. 3). Moreover, department stories contributed to the emergence of the "modern skyscraper" and importantly, department stores' innovation of offering credit for customers (in particular, Singer Sewing Company was offering installment credit in 1856) helped "democratize consumption" and greatly influenced American values and lifestyles (Tamilia, p. 4).
Author Jan Whitaker presents a slightly different perspective of the beginnings of the department store era. In the late 19th century small merchants were bitterly opposed to department stores and in order to fight back against the big stores "…aggrieved grocers" started rumors that "…the big stores intoxicated women customers with liquor by the glass" (Whitaker, 2006). At the time these rumors were launched (in the 1890s), the middle class in American "…abhorred the idea of public drunkenness," Whitaker explains.
Because of the public pressure small merchants placed on the managers of department stories -- and newspapers' coverage of attacks against the big stores -- "Citizen vice squads investigated the morals of underpaid store clerks" and some state legislatures passed laws in attempts to "regulated the stores through taxation" (Whitaker). By the turn of the century, most "punitive legislation had been overturned," Whitaker explains.
The JC Penney brand was launched in 1902 by twenty-six-year-old James Cash Penney, who was said to be a religious man who was "…disenchanted by a retail environment overrun by snake-oil salesmen, saloons and murky pricing" (Mattioli, 2012). Hence, Penney, who was born on a farm in Missouri in 1875, and who insisted on keeping prices at reasonable levels, built his first department store in an unlikely town, Kemmerer, Wyoming. This community was a coal-mining town that had brothels and saloons but because of Penny's approach to retail, it was a big success (Mattioli).
By 1906 Penney had obtained full ownership of his stores, and by 1913 he officially changed the name of his stores to J.C. Penney, Mattioli explains, adding that by 1917 J.C. Penney's had 175 stores in 22 states (with sales totaling $14 million). In order to make sure each manager of a new store was fully in line with James Cash Penney's "wholesome philosophies" and values, he took the time to carefully interview and groom those managers (Mattioli).
J.C. Penney's New Pricing Strategy -- will it work?
Will the pricing strategy that new CEO Ron Johnson is putting in place -- given the economic challenges in America, the competition and changes in consumer behavior patterns -- become as successful as other projects Johnson has taken on? This paper believes it will work, based on the smart strategies Johnson is instituting, on the Penny's iconic brand, and on the fact that the economic problems in the U.S. are being resolved and people are getting back to work. As regards the changing consumer behavior, because people perceive that the economy is improving, they are more willing to shop and to spend money that previously they may have been reticent to spend.
The fact that Johnson put a tremendously profitable plan in action to create Apple Stores for Steve Jobs -- which, according to Dana Mattioli in the Wall Street Journal, reinvented the retail experience -- certainly gives him the experience and credibility to succeed at J.C. Penney. His success with Target stores also bodes well for his ability to succeed in his newest challenge with J.C. Penney.
As to Johnson's overall strategy, the company has 1,100 stories and that alone is an enormous challenge. Initially Johnson wants to break the big box-store concept down to "…a warren of specialty shops" allowing for customers to enjoy entertainment, and providing a place for people to "hang out" (something like Starbucks stores' more relaxed, more inviting approach) (Mattioli). In some of those specialty shops (within the stores) Johnson plans to market "Martha Stewart's Kitchen," Liz Claiborne's line, and a new Nanette Lepore shop as well (Mattioli).
Having been "battered in recent years" by department stories like Macy's and Kohl's, J.C. Penney's was most certainly in need for a new plan, and Johnson was chosen as the leader to institute a new plan (Mattioli). Doing the profit-and-loss math shows a serious slump in sales: Mattioli's article reflects that sales at new Penney's stores rose "…a thin 0.7%" in 2011, which was a decrease from a 2.7% increase for new stores in 2010. Shares of Penney's stock did increase in 2011 (by 6.7%) but those gains are dwarfed by Macy's stock gains (47%), so some serious changes were needed.
As to the pricing, starting in February of this year (2012) all items at Penney's are lower by about 40% from what they were. Anne D'Innocenzio writes in the Associated Press that Johnson's approach is to offer "Every Day" low prices, a "Monthly Value" discount program on certain merchandise, and "Best Price" promotions the first and third Friday of the month (when most shoppers get their paychecks) (D'Innocenzio, 2012, p. 1). This three-tiered concept is very much like what Wal-Mart offers, but D'Innocenzio claims Penney's doesn't have a goal to necessarily undercut "all competitors" (as Wal-Mart apparently does), but rather, Penney's intends to "…take the guesswork out of shopping by offering more predictable pricing" (p. 1).
Moreover, two more generalized questions raised by D'Innocenzio are: a) will customers respond positively to a "single price point" versus a "perceived discount under the old strategy"; and b) will shoppers who "love to bargain hunt" be less than enthusiastic by Penney's consistent discounts? D'Innocenzio identifies the specific strategies that Johnson is pursuing: ONE: prices will be slashed 40% from the price offered last year (example, a St. John's Bay blouse regularly sold for $14.99 in 2011, but in 2012 it will have the "Every Day" price of just $7). TWO: the monthly sales items that don't sell will be marked "Best Price" and be on sale for the rest of the year.
THREE: when an item is marked down, it gets a new "red" tag (previously a new tag was stuck on the old tag to show the price reduction). FOUR: instead of a price of $19.99 Penney's will just make it $20.00. FIVE: fourteen million customers each month will receive a 96-page mailer listing all the items that are priced under "Monthly Value." SIX: popular television talk show hostess, Ellen DeGeneres, is the new spokesperson for Penney's (which shows that Johnson isn't shy about hiring a gay person for a very prominent position) (D'Innocenzio, p. 2).
How does the new pricing strategy complement Penney's merchandising and promotional strategies? The new pricing strategies that Johnson is launching meshes very well with his promotional innovations. First of all, as Jennifer Reingold writes in CNN Money, while the pricing strategy is "risky" it is also "ambitious," and it is Johnson's legacy to ambitiously take chances based on his uncanny knack of knowing what will work in retail environments (Reingold, 2012, p. 2). And by creating a "radically simplified pricing strategy" and a "slimmed-down but improved selection of brands" in a store that is configured like a mall with separate boutique-type stores within the main building, because the whole feeling in the store is new to traditional Penney's shoppers, the new pricing scheme will be accepted (Reingold, p. 2).
When a customer comes in who has never shopped at Penney's before, and sees a very well designed Martha Stewart's Kitchen boutique inside Penney's, that person will be impressed and word of mouth will carry the message as well as expensive television advertising can. Reingold is correct in suggesting that this is an era of online shopping during which motivating customers to shop at a store with a somewhat tired, faded brand image, like Penney's is problematic. However, the "town square" idea that Johnson is putting in place, which he hopes will "…reclaim the department store's long-lost identity" and become a new place where the shopper is drawn to the "…enchantment of discovering something new" (Reingold, p. 1).
Johnson believes that the previous Penney's strategy of offering items "…at a high initial price" but marking them down a few weeks later was "insulting," which is why he believes that his "simplified pricing"…