I’ve never shopped much at J.C. Penney. They seem to have a store in most mid-tier malls, but there’s not anything distinctive about them — a reason to shop there when you can buy anything under the sun online. So I was intrigued to learn a few months ago that retailing guru Ron Johnson (of the Apple stores) was taking over the CEO job. How would he differentiate a mid-market retailer?
His big idea: wean J.C. Penney and its shoppers off discounting. J.C. Penney has long relied on an aggressive discounting strategy. Until recently, less than 1 percent of Penney’s products were sold at full-price. Yep, you read that right. A full 99 percent of Penney’s products were sold at a discount. In other words, the ticketed price wasn’t a real price. A pair of gloves marked at $39.99 wasn’t intended to be sold at that price. The real price was perhaps $25 or $30, and through a combination of regular sales and coupons (available at the store or in circulars), the vast majority of buyers got somewhere near the real price.
Why would a store do this? Penney’s had clearly studied human nature. Unlike Wal-mart, which sells groceries, personal products, diapers, and other things you really need, most people don’t need the vast majority of things sold at Penney’s. The mid-market shopper likes the vision of herself as being smart with her money. How do you reconcile buying stuff you don’t need with being smart with your money? You need to believe you’re getting a steal. You’re pulling one over on the store! A deep discount also creates an implicit scarcity (sales seldom last forever), which can move people to pull the trigger on stuff they’d be neutral about otherwise.
Of course, given that the “steal” is really the price the store intended the item to be sold at in the first place, you could argue that the Penney’s strategy was based on believing its customers are morons. That’s not the kind of belief that makes coming to work fun in the morning. And so Johnson set about trying to change the pricing. A $30 pair of gloves is marked at $30. There may be a few seasonal sales to get rid of products before new ones come in, but the chronic over-marking and then discounting is gone.
The result? Human nature, it appears, does not change quickly. According to an article in the most recent BusinessWeek, Penney’s sales are way down: the chain lost $163 million in the first three months of 2012. Sales at stores open more than a year fell 19 percent. It doesn’t matter if the effective prices are exactly the same as they were before. People want to believe they’re winning a game, with the occasional slot machine style jackpot of stacking coupons and store sales and getting those “$39.99” gloves for $10. The fact that you didn’t need gloves in the first place, and you’re also walking out with three pairs of jeans at discounted (but still profitable) prices doesn’t factor into the world view of being smart with your money.
We’ll see if Penney’s board allows Johnson to hold tight to his strategy. Over time, particularly if the store manages to pull in some enterprise brands, he could transform the customer relationship. But whenever you’re tempted to get excited about coupons, remember 1) that they’re issued by manufacturers and stores, who tend not to be in the business of losing money on purpose and 2) Penney’s 99 percent discounting rate. Personally, I’m trying to stay out of stores in general, and only buying an item on sale if I would buy it at full price. If not, then I probably don’t want or need it — and the store is winning one way or another.