J.C. Penney is not Apple -- the Power and Peril of a Brand
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
News this week that J.C. Penney (NYSE: JCP) president Mike Francis is resigning “effective immediately” will leave new CEO Ron Johnson in control of J.C. Penney's marketing and merchandising. Last year Johnson came to J.C. Penney to execute a turnaround, after developing the successful Apple (NASDAQ: AAPL) retail stores. With previous experience bringing exclusive designer lines to Target (NYSE: TGT), he seemed a natural fit.
But J.C. Penney is not like Apple; or even like fellow discount retailers Target or Costco (NASDAQ: COST). Since February, it has shed about half of its value trying to be. Johnson's strategy seems to hinge on being able to change J.C. Penney's brand overnight, or at least before alienating its core customer base.
Under Johnson, J.C. Penney has rolled out a new logo, implemented a “store within a store” concept, and drastically changed their pricing strategy. That last move has attracted the most criticism. Announced in a series of commercials that were themselves widely found to be unclear, J.C. Penny has declared the array of coupons, sales, and deals it used to rely on to be too confusing to continue. Instead, everything will just be one low price, called “fair and square,” except for some things that are sold at a discounted “month long value,” which isn't a sale because it's all month long, and then some other discounts that take place on the first and third Fridays of each month, but also aren't sales, just better values, and all of these things are clearly differentiated with red, plum, or blue tags, respectively. A victory for clarity and simplicity!
Shoppers reacted negatively. Despite broad price reductions that ate into gross margins, customers surveyed actually felt that prices had increased, according to a Morgan Stanley analyst. Foot traffic, which was supposed to improve due to the new prices, actually fell 10%, and sales dropped 20%. Ron Johnson has acknowledged some missteps, calling the company's communication strategy “kind of confusing” and pledging to reintroduce the word “sale” to the firm's vocabulary. He remains committed, however, to the fundamental strategy of weaning customers off of coupons and getting them to support his “everyday low price” campaign. By doing so, J.C. Penney wastes an advantage that its brand does confer, and counts on a branding power and loyalty that it doesn't possess, hasn't earned, and doesn't look likely to gain.
A brand is built through every interaction between a customer and a company. For many customers, the most important connection they have to J.C. Penney is the coupon-cutting and deal finding. The discount prices do two things for J.C. Penney. First, they can be a fun experience. People who don't want to cut coupons don't have to, but many people enjoy feeling like they've found a special deal. J.C. Penney has employed a bargain-hunting strategy more so than its peers, and naturally people who enjoy bargain-hunting have gravitated to the brand. The sudden, complete discontinuation of this pricing strategy is a thumb in the eye to those with the deepest connection to the J.C. Penney brand.
Second, the discount prices let people believe they have a good price, because the sticker price is established as a psychological anchor. This is how retailers have trained consumers to think. Despite low prices, Target still employs coupons and sales. Even legendary cost-cutter Wal-Mart (NYSE: WMT) displays “base” prices next to a winking smiley face, assuring customers they're not going to have to pay that much. J.C. Penney wants customers to take their word for it about prices, but why should they?
Costco customers believe that they're paying a fair price because Costco has worked relentlessly to deliver products that are consistently cheaper than comparable goods, while maintaining high quality standards. This required steep investments in logistics and in-house product development. Apple customers believe they're paying a fair price because they find the Apple brand worth a premium. This brand loyalty was built on years of exceeding customers' expectations, resulting in a conception of Apple products as status symbols and fashion pieces. J.C. Penney hasn't put in this kind of work.
At both Target and Apple, Ron Johnson could implement new programs by leveraging the cachet of the brand. Critically, in both cases he was also only given limited control in rolling out his ideas, starting small and building on success. At J.C. Penney, Johnson is working against the brand, not with it, and nobody had the power to limit his sweeping reforms to small test markets. Now, the entire chain will live or die based on whether Johnson can convince customers that he should be trusted to say what's fair to them. Sales will continue to fall until and unless J.C. Penney figures out how to earn that trust.
Daniel Ferry owns shares of Apple and Costco Wholesale. The Motley Fool owns shares of Apple and Costco Wholesale. Motley Fool newsletter services recommend Apple and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.