By Kelli B. Grant
J.C. Penney’s new pricing strategy led to losses last quarter, but experts say it may eventually be a hit with consumers.
The retailer reported an $87 million loss today, in part due to heavy costs tied to its new pricing strategy. Fourth-quarter revenues fell about 5% to $5.43 billion, its second consecutive quarter of declining sales. Earlier this month, J.C. Penney moved to a new three-tier pricing model, discounting all merchandise by at least 40%. In addition to those baseline discounts, shoppers will see special monthly deals and clearance offerings the first and third Friday of each month. The plan was the first major initiative from former Apple executive Ron Johnson, who took over as Penney’s chief executive in November. In the earnings call, Johnson called the new strategy a “blueprint for becoming America’s favorite store,” and said 2012 would be a year of transformation for the retailer.
It’s too early to tell how consumers are responding, says Paul Swinand, an equity analyst for Morningstar. “January is such a slow month in that segment of retail,” he says. “Consumers aren’t really doing more than browsing for bargains.” But retailers have been trying to wean consumers off discounts for months, with little success. J.C. Penney’s strategy is likely to be a tough sell for customers facing rising prices on staple goods, a lackluster job market and other economic woes — especially when there are still splashy sales from competitors including Kohl’s, Target and Sears. “Consumers have come to rely on sales as a marker of good deals,” says Kit Yarrow, a professor of psychology and marketing at Golden Gate University in San Francisco. “They use the original price to calculate the value. Without a sale, there isn’t that trigger to make a purchase.”
That may shift as J.C. Penney continues to remake its image, says Jim Bieri, an independent retail analyst based in Detroit. According to the latest American Customer Satisfaction Index, released earlier this week, Penney’s is second only to Nordstrom in customers’ perception of service and item quality. The brand is likely to try to continue to create excitement around its selection, he says, with more in-store partnerships along the lines of Sephora, Martha Stewart Living and Liz Claiborne, as well as low-priced lines from popular designers. And early reports indicate that those “every day” prices actually are pretty low, which could win business from smartphone-toting shoppers using price-comparison apps.